The Memorandum of Incorporation and Shareholder Agreement

The introduction of the Companies Act 71 of 2008 (‘the Act’) brought many changes to the business landscape of South Africa and the manner in which corporations were regulated under the previous Companies Act 61 of 1973 (‘the old Act’).

In terms of the Act, a company may be incorporated by the filing of a signed Memorandum of Incorporation (‘MOI’) along with a Notice of Incorporation upon payment of the prescribed fee with the Companies and Intellectual Property Commission (‘CIPC’).

What exactly is the MOI?

The MOI is a prerequisite for the incorporation of a company and the CIPC will not accept the registration of a new company in its absence. The MOI is invariably a company’s constitution.

A company’s MOI sets out certain provisions (either as prescribed by the Act or otherwise), and which provisions may include the Company’s powers, the process by which the MOI may be amended, the process by which various company rules may be created and amended, the makeup of the company’s securities or capital structure, the composition of the board of directors, the provisions regulating meetings of the board and shareholders, percentage of voting rights required to make various decisions, pre-emptive rights on the issue of new shares and, in case of non-profit companies, the manner in which the company’s assets will be disposed of at its dissolution.

The Act allows a company’s MOI to either be in the prescribed form – which is available electronically on the CIPC’s website – or in its own unique form. The use of prescribed forms may make it easier and oftentimes cheaper for companies to be formed. It is however important to note that, whilst the Act provides for certain unalterable provisions that are included in the prescribed forms and which cannot be opted out of or amended in a company’s MOI, there are several alterable provisions. Such alterable provisions may need specific consideration depending on each company’s circumstance or set of facts. As a result, and due to the fact that most companies are unique in their nature and makeup, it is important that a professional is employed to assist with the drafting of or even amending a company’s MOI so as to ensure that the needs of shareholders are given effect to.

Furthermore, in cases where the provisions of the Act and those of a company’s MOI are at odds with one another, the Act will always take preference and those provisions of the MOI that are inconsistent with the Act shall be void to the effect of their inconsistency.

As a company’s MOI is filed with the CIPC and thus a public document, it is advisable that shareholders’ confidential internal arrangements need not be recorded therein (as far as permitted in terms of the Act). What then would one be able to do if the shareholders of a company want to regulate their internal relationship in a manner that is confidential? This is where the shareholders agreement comes into play. 

What is a shareholder agreement?

The Act specifically makes provision for shareholder agreements by stating that shareholders of a company may enter into any agreement with one another concerning any matter relating to the company. Such an agreement is binding in so far as its provisions are compliant with those of the company’s MOI as well as the Act. Any provisions that are inconsistent with the MOI or the Act will be void to the extent of their inconsistency. In other words, the MOI and (more importantly) the Act supersede the shareholder agreement wherever there may be a conflict. As there is no obligation to file the shareholder agreement with the CIPC, it is a private document and not accessible to the public.

The goal of a shareholder agreement is to regulate the relationships between the shareholders generally, the manner in which to deal with a voluntarily sale of shares and confidentiality and restraint provisions. Other matters generally covered by such an agreement may also include deemed offers, forced sales and/or forfeiture of shares, dispute resolution and deadlocks to name a few. Ultimately, subject to the Act and the MOI, the agreement may contain a number of unique and varied provisions and its structure will depend on the intentions of the shareholders at the time of concluding the agreement.

Although the conclusion of a shareholder agreement is not a requirement to the incorporation of a company, it is an extremely important tool by which shareholders can ensure that their interests are catered for and protected. Effective regulation of the shareholder relationship can ensure continuity in the structure of the company’s shareholding while also protecting against, for example, an aggressive takeover either by an individual or group of other shareholders, or an outside party.

Conclusion

The MOI, being the company’s public constitutional document, should be aimed at statutory compliance whilst setting out how both internal and external matters are to be dealt with by the company. This document is a prerequisite to the incorporation and registration of a company at the CIPC, it must comply with the provisions of the Act, and is accessible by any member of the public.

The shareholder agreement on the other hand is an internal confidential agreement between the shareholders of the company regulating, amongst other matters, their internal relationship, which is not accessible to the public. The shareholder agreement will at all times remain subject to the provisions of the Act and the MOI.

At Strauss Law we offer bespoke solutions to all our clients’ corporate and commercial needs and are available to draft unique MOI’s and shareholder agreements according to our clients’ instructions, ensuring compliance between the two documents, as well as with the Act.

Sources

• The Companies Act 71 of 2008.
• Cassim FHI et al ‘The Law of Business Structures’ 2012 Juta, Cape Town.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE)