The Companies Act 71 of 2008 has heralded some very significant changes to the way you manage your business.
Under the Companies Act 61 of 1973 (the ‘Old Act’), each company had to register its Memorandum of Association and its Articles of Association. The previous Act imposed various requirements on the form and content of the memorandum, but it did not prescribe the content of the articles. That said: Table A or Table B (in terms of the Old Act) could have been used and would apply, unless excluded or specifically modified.
In terms of the 1973 Act, the memorandum and articles could also be altered independently of one another by special resolution of the shareholders. Furthermore, the two were binding between the members (shareholders) of the company and the company itself.
However, the Companies Act 71 of 2008 (the “new Act”) has changed this position quite drastically. Now, pre-existing companies (before the enactment of the new Act) must align their existing articles and memorandi with the provisions of the new Act. Furthermore, the new Act has set a window period within which this is to be done.
The window period closes at the end of April 2013. Accordingly, companies should consult their attorneys sooner rather than later to determine the impact this may have on their financial year-end and to reconsider their strategies.
The legal nature of the Memorandum of Incorporation
A Memorandum of Incorporation (MOI) is defined in the new Act as an instrument:
‘that sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to the company, and other matters as contemplated in section 15; and by which:
- The company was incorporated in terms of this Act, as contemplated in section 13; or
- A pre-existing company was structured and governed before the later of:
aa) the effective date; or
bb) the date it was converted to a company in terms of schedule 2’.
Accordingly, the MOI now combines the Articles of Association and Memorandum of Association in one legal document and amplifies its purpose. Currently, the articles and memorandum of companies registered before the enactment of the new Act will automatically form its MOI. However, these companies should ensure that their existing articles and memorandum conform to the provisions of the new Act.
Furthermore, under the old Act, it was common practice to override a company’s articles and memorandum (in terms of the old Act) by execution of a shareholders agreement. In terms of the new Act, this will no longer be allowed (Section 15(7)).
Therefore, the MOI is binding between the company and its shareholders, the shareholders themselves, the company and each director/prescribed officer, the company Board committees and the auditor’s committee. Accordingly, the MOI is significantly different to its predecessors.
Generally, the MOI can only be amended by a special resolution by the shareholders. Meanwhile, the governance rules that deal specifically with day-to-day governance and management matters are usually easier to amend and generally do not deal with matters that are referred to in the MOI or the Companies Act.
As a result, it is important that each company understands or seeks advice to understand the specific function of each new document created by the Companies Act of 2008.
Alterable and unalterable provisions
The Company’s Act of 2008 prescribes alterable and unalterable provisions. Alterable provisions are the sections that state: ‘Unless provided for otherwise in the company’s MOI’.
Examples for alterable provisions include:
- Conditions for the Board and making governance rules
- Amendment of the MOI
- Powers and capacity of the company to be other than that of a natural person
- Voluntary audit
- Voting rights associated with shares etc.
Special conditions may be added to the MOI. In this case, in terms of Section 19(5), the letters/suffix ‘RF’ must follow the name of the company.
As a result, in addition to the alterable provisions listed above, any provision may be included that:
Relates to any matter not addressed in the Act that imposes a higher standard, greater restriction or similar onerous requirements that would normally apply; contained restrictive conditions and the greater requirements for the amendment of the MOI other than that prescribed in Section 16 of the Act; or may even prohibit the amendment of the MOI.
In terms of the unalterable provisions (provisions that cannot be amended by executing a MOI), the following – among other things – may not be altered:
- The Board’s power to issue shares
- Shareholders’ rights to execute round robin resolutions
- Indemnification of directors against claims of breach of fiduciary duty, conflict interest, care and skill etc.
(This list is not exclusive.)
Practical examples of alterable provisions that should be considered by most companies include:
In terms of Section 36(2)(b), the Board of directors may authorise the issue and to classify shares. This right may not be waived, but may be limited. Practically, this may be amended by either special resolution to amend the MOI, by decision of the Board or in terms of the MOI as it provides otherwise. This is a particularly useful amendment that should serve to protect shareholders and ensure better management control.
In terms of Section 44(2), financial assistance for subscription or purchase of securities. Except to the extent that a company’s MOI provides otherwise, the Board may authorise the company to provide financial assistance by way of a loan, guarantee, the provision of security or otherwise to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or interrelated company, or for the purchase of any securities of the company or a related or interrelated company. Again, this is a particularly useful amendment that should serve to protect shareholders and ensure better management control.
In terms of Section 66(8), a company may pay remuneration to its directors for their service as directors. This is a contentious issue which has been abused by directors in the past. This is a particularly useful amendment that should serve to protect shareholders and the company as a whole from directors who regulate matters that are in their sole interest and not always in the best interest of the company.
The MOI is no longer a document only binding between selected parties. It is a vital, practical document that regulates the duties of all important role players in a company and should actually be applied. As such, it should be carefully tailored by an attorney to meet the specific needs of a company and promote its growth.