Your Memorandum of Incorporation may not fit your company
Most business owners are now aware that the Companies Act, 71 of 2008 has changed the law which regulates the relationship of directors and shareholders to each other and to companies themselves, and has introduced the term “memorandum of incorporation”.
Some of these fundamental changes, which will be in full force from 01 May 2013, are as follows:
- The rights and obligation of shareholders and directors contained in shareholders agreements will be subject to the terms of the company’s memorandum of incorporation;
- Anything contained in a shareholders agreement that is inconsistent with the memorandum of incorporation will be void to the extent of the inconsistency;
- Anything contained in the memorandum of incorporation that is inconsistent with the new Companies Act will be void to the extent of the inconsistency.
The articles of association of a company incorporated under the old Companies Act is deemed to be the memorandum of incorporation under the new Companies Act. Thus, if your company was incorporated under the old Companies Act, it is likely that your current memorandum of incorporation, so deemed under the new Companies Act, will be inconsistent with the requirements of the new Companies Act. If a shareholders Agreement is in place there is an extra risk that some of its provisions will become void and therefore unenforceable for the reasons set out below.
A tailor made memorandum of incorporation to “fit” your company
In order to ensure that the rights of shareholders and directors are not at risk, it is necessary to adopt a suitable, and tailor made memorandum of incorporation in terms of the new Companies Act. Merely adopting the standard form memorandum of incorporation, or a memorandum of incorporation template may not solve the problem, especially if a shareholders agreement is involved. Adopting a “one size fits all” approach with a standard form memorandum of incorporation or memorandum of incorporation template is tantamount to expecting that one suit will be suitable for all people. However, in the same way that people come in all shapes and sizes, companies also have different aspects, dynamics and requirements. It is therefore necessary to ensure that a company’s memorandum of incorporation is correctly “sized and tailored” so that it correctly fits the company. Adopting the standard form memorandum of incorporation or a memorandum of incorporation template may result in a company, shareholders and directors being caught with their “pants down” so to speak!
The new Companies Act actually affords companies a great deal of flexibility to choose which law applies to the them and to adopt a shareholders agreement and memorandum of incorporation that is a perfect fit. A company should take advantage of these provisions in its memorandum of incorporation to ensure that the memorandum of incorporation serves the company and not the other way round! The provisions relating to the calling of meetings and percentages for resolutions to be passed as well as whether the decision making powers should lie with directors or shareholders are some provisions where the company will need to be “sized” in order for a suitable memorandum of incorporation to be adopted.
The Gunstons company law department has developed what we refer to as “suits” or “off the rail” memoranda of incorporation. Having anticipated that different companies will require different types of memoranda of incorporation, we have developed a range of different types of memorandum of incorporation. Once the requirements of the company have been “sized up” the relevant “of the rail” memorandum of incorporation can be selected for tailoring, specific legal drafting that will ensure that the Company is well set up, and that shareholders and directors are not prejudiced by having an ill fitting memorandum of incorporation.
by Garth Watson