New Companies Act MOI Deadline: What’s the Fuss?

Fracking: The Challenge facing our Lawmakers
February 14, 2013
Legal Brief LSSA Weekly
April 12, 2013
Show all
Caryn-Leclercq

New Memorandum of incorporation in place of Articles of Association
The new Companies Act, No. 71 of 2008 (‘Companies Act’), which came into effect on 1 April 2011, has fundamentally changed the form and content of the constitutional documents of a South African company.

The constitutional documents of a company under the previous Companies Act (being the memorandum and articles of association) have been replaced by a single document, a Memorandum of Incorporation (‘MOI’), which will be binding between the company and its shareholders, amongst all the shareholders, and between the company, each director and prescribed officer and any person serving on a board committee.

2-year Transitional Period to Expire on 1 May 2013
Companies that were in existence when the new Companies Act took effect have been given a 2-year transitional period (which expires on 1 May 2013) to bring their constitutional documents into line with the provisions of the new Companies Act, during which they may file their new MOI’s with the Companies and Intellectual Property Commission without charge. During this period, in principle, if there is a conflict between the new Companies Act and a pre-existing company’s constitutional documents, the latter will prevail, subject to certain exceptions.

It seems that the granting of this 2-year transitional period has lead to a degreee of complacency in the market, with many companies not realising that there are compelling reasons for attending to the conversion sooner rather than later. Most importantly, the prevailing provisions rule referred to above, which applies during the transitional period, is not as absolute as it appears at first glance. This is due to the exceptions that the provisions of the new Companies Act dealing with the duties, conduct and liabilities of directors, rights of shareholders to receive notices and have access to information, meetings of shareholders and directors and the adoption of resolutions and approvals required for any distributions, or financial assistance, amongst other things, over-ride the provisions of a company’s constitutional documents. Lack of awareness of this distinction, and its implications, means that a company could unwittingly be affecting the validity of its material corporate actions.

Change in Document Ranking on 1 May 2012
The expiry of the 2-year transitional period on 1 May 2013 will have further implications for companies which have not attended to the conversion. The expiry will bring an end to the common practice of providing, in a Shareholders’ Agreement, for the provisions of the Shareholders’ Agreement to prevail, in the event of a conflict between those provisions and the provisions of the company’s articles of association. Because shareholders have always been able to regulate conflicts contractually, the Shareholders’ Agreement became the primary document regulating shareholder rights and relationships, with the articles of association often left untailorred and ignored. This contractual ability of shareholders will be curtailed on 1 May 2013, from which date any provision of a Shareholders’ Agreement which is inconsistent with the company’s MOI (or with the new Companies Act itself) will be void to the extent of the inconsistency. This may lead to a company which has not attended to the conversion by the expiry finding itself in the unwelcome situation of having its untailorred articles of association suddenly out-ranking its carefuly negotiated Shareholders’ Agreement.

Process of Conversion
The new Companies Act allows a company to use one of the standard forms provided in the Regulations or to tailor its own MOI. Although the market practice seems to be favouring the latter approach, this is not a simple process. The new Companies Act distinguishes between alterable and non-alterable provisions. First, one must be sure that the substance and effect of any unalterable provision is not altered, limited or qualified. A company then needs to be guided through the identified alterable provisions, to decide on the best way to talior them to the company’s particular requirements, and those of its shareholders (for example, the new Companies Act now allows companies to adjust the approval percentages for ordinary and special resolutions, within certain stipulated parameters). A company can also include matters in its MOI which are not covered by the alterable or non-alterable provisions (provided of course that they are consistent with the new Companies Act). In doing this, one has to assess the extent to which provisions of any existing Shareholders’ Agreement can be retained, adapted and moved into the MOI.

Once this process has been completed, one needs to turn to the new Shareholders’ Agreement itself. While the focus should be to move as much shareholder regulation provisions into the MOI, without repetition of those clauses in the Shareholders’ Agreement (due to the rule that the MOI will out-rank the Shareholders’ Agreement in the event of inconsistency), there is still a place for a separate Shareholders’ Agreement (although it may not be the comprehensive single-source of shareholder regulation it used to be). This is because, for example, a MOI will be a public document, while a Shareholders’ Agreement will not, meaning that shareholders will continue to regulate matters such as company funding and restraints outside of the public domain. In addition, a Shareholders’ Agreement can sometimes offer better protection for a minority shareholder, as the minority shareholder’s consent would be required to any amendment to the Shareholders’ Agreement which would affect its rights, irrespective of its level of shareholding in the company. If the right were protected only in the MOI, the minority shareholder could simply be outvoted by the majority shareholders passing a special resolution. A careful assessement of the repetition of provisions in both the MOI and the Shareholder’s Agreement therefore needs to be done.

Experience also shows that the process can further be complicated by shareholders finding, during the conversion process, that certain aspects of their shareholding relationship have become outdated, leading to a requirement for some re-negotiation during the conversion process.

The conversion process can be complicated, and it is important to realise from the considerations set out above, that, unless the company in question is a wholly-owned subsidiary of a non-listed company or has a single shareholder (in which case a standard-form document could be used), it is not simply an administrative process and requires appropriate expert input and diligence.

© Caryn Leclercq
Caryn has a BA and LLB from Stellenbosch and was admitted as an attorney in 1998 after having completed her articles at Bowman Gilfillan. At Bowmans, she rose to the level of director in the corporate commercial department where she specialised in M&A work, before moving to Werksmans in 2005. At Werksmans, Caryn worked as a director in its corporate commercial department specialising in M&A and banking & finance work. Caryn left Werksmans earlier this year to focus on consulting.