Memorandum of Incorporation “deadline” is looming
Since the new Companies Act, 71 of 2008 came into force in 2011, we have emphasised the need for directors and shareholders of companies to ensure that each company’s memorandum of incorporation is “in line” with the new Companies Act.
The new Companies Act has changed the way that the relationship and rights of shareholders and directors with respect to companies are regulated. Under the New Companies Act, the Memorandum of Incorporation is the document in which the rights and duties of directors and shareholders are to be set out. This document, along with any shareholders agreement, must be carefully scrutinized by an experienced attorney to ensure that all the rights and duties that shareholders and directors think that they have, are actually valid.
Now the memorandum of incorporation will trump the shareholders agreement
Significantly, the new Companies Act makes rights and duties set out in shareholders agreements void and unenforceable to the extent that they are inconsistent with the Memorandum of Incorporation and the Act itself. In the past, deals and transactions, including mergers, acquisitions and joint ventures were typically negotiated and contained in shareholders agreements. Now, many rights of shareholders, including those which have been carefully negotiated and contained in shareholders agreements may be at risk if the Memorandum of Incorporation is not immediately amended. If the Memorandum of Incorporation is not immediately amended its provisions in the un-amended, and usually standard form will prevail over provisions in even carefully negotiated shareholders agreements where important rights are contained. This may leave shareholders in a tricky position when seeking to enforce their rights, including when trying to exit a company. Seeking to enforce invalid rights may lead to disputes with fellow shareholders as well as costly and lengthy litigation. It is far better to ensure that all rights are secure ahead of seeking to exercise them.
It is essential that the harmony between the New Companies Act, a company’s Memorandum of Incorporation and any shareholders agreement is maintained by undertaking a review and amendment of the latter documents by an experienced attorney. The provisions in the New Companies Act discussed in this post will take full effect on the so called “memorandum of incorporation deadline” of 1 May 2013, accordingly, it is recommended that such a review be conducted immediately.