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The Memorandum of Incorporation – should I use the Standard form?

On 20 August 2013, the Minister of Trade and Industry amended the Companies Act Regulations in order to effect vital improvements (and correct very obvious errors) to the standard form Memorandum of Incorporation (“MOI”). The Regulations, which contain a much improved standard form MOI for private companies can be found here.

Is the Standard Form the right form?

Is the Standard Form the right form?

Significantly, the new standard form restricts the transferability of securities. This was a major flaw in the previous standard form MOI because that omission resulted in all companies that were incorporated in terms of that MOI not meeting the definition of a private company. This, in turn, means that such companies are not private companies and are subject to the sections of the Companies Act that apply to public companies! If your company was incorporated in terms of the erroneous previous standard form MOI you should take steps to amend your MOI in terms of these new Regulations, or you should consider customising your company’s MOI.

Much has been said on this blog (here and here) regarding the importance of a company adopting a custom-drafted Memorandum of Incorporation – whether a brand new company or one incorporated for decades. The latest amendments greatly improve the short-form and long-form MOIs – but excellent reasons remain to have a Memorandum of Incorporation custom-drafted.

 

The Short Standard Form MOI for Private Companies

The Short Form gives you no options to have the document most fundamental to your company, tailored according the specifics of your company. The default provisions of the Companies Act are merely applied without variation. This becomes very problematic where the default provisions do not suit your company, or worse yet, where there is a conflict between your Memorandum of Incorporation and (custom drafted) Shareholders Agreement. In each instance, where there is a conflict, the provisions of the Memorandum of Incorporation will take precedence – which may be to the detriment of the company and/or its shareholders.

The Long Standard Form MOI for Private Companies

A great improvement on the Short Form MOI – it enables you to choose what provisions suit your company best in a ‘tick box’ sort-of approach. This approach, though much better than adopting the Short Form MOI, fails to address questions of what is most suitable to a company and its shareholders. It asks you to make a choice, much like a Flight Attendant would ask what meal you would prefer, “Chicken or Beef?”, and leaves you to decide. The question must be asked, however, what if your company has specific dietary requirements?

Having a Memorandum of Incorporation drafted by a specialized attorney has many advantages. Importantly, it will allow you to ask the questions that address your company in particular. It allows for the specific dietary requirements of your company to be considered, and due content to be given to them. Some of the provisions to be discussed may concern:

  • Pre-emption provisions;
  • Different classes of shares and the rights attached to the different classes;
  • The determination of a record date (the Act and the standard forms remain unclear in this regard);
  • Who appoints the Directors and what votes do Directors have at Board meetings;
  • In certain instances, the powers of the Directors, or whether powers are subject to Shareholder approval;
  • Instances (in addition to that specified in the Act) where Shareholder consent is necessary – and the percentage of Shareholder consent required;
  • What percentage should be required for an ordinary resolution, and what for a special resolution.

Should you use the Standard Form Memorandum of Incorporation? Perhaps, and perhaps not. It largely depends on whether you want to carefully consider the health of your company.

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