In the realm of South African company law, two crucial documents, the Memorandum of Incorporation (MOI) and the Shareholders Agreement (SHA), play a pivotal role in governing the operations and functions of a company. Although they share the objective of regulating the company's affairs, there are subtle distinctions between them. This article delves into the essence of MOI and SHA, examines their significance under the Companies Act 71 of 2008, and explores considerations in drafting SHA’s.
The MOI and SHA are legal documents in South African company law that outline the rights, duties, and responsibilities of shareholders, directors, and other parties involved in the company. While the MOI is specifically defined under the Companies Act, the SHA is an agreement governing the operation of a private company and regulating shareholders' rights and obligations.Under the previous Companies Act 61 of 1973, a company's constitutional documents consisted of the memorandum of association and articles of association. The SHA was a private contract enforceable only between shareholders and often held precedence over the articles of association in case of conflicts. However, the introduction of the Companies Act 71 of 2008 brought significant changes to the form, content, and application of the constitutional documents and SHA’s.
Section 15(7) of the Companies Act establishes a hierarchical order of documents, placing the MOI above the SHA. This means that if a SHA or any of its provisions conflict with the Companies Act and/or the MOI, those conflicting provisions become void. It is essential to note that a SHA cannot alter any "alterable provisions" of the Companies Act, as those changes can only be made in the MOI. The application of Section 15(7) has been elucidated in significant cases, such as Verso Financial Services (Pty) Ltd v Burger and De Freitas v Chamdor Meat Packers.
In this case, shareholders were negotiating a new MOI when the majority shareholders appointed additional directors, complying with the articles of association but conflicting with the SHA. The court ruled that after the transitional period, the Companies Act and MOI took precedence over the SHA. As long as the provisions in the articles of association adhered to the Companies Act, the election of additional directors was deemed valid despite conflicting with the SHA.
In this case, shareholders sought to declare a shareholders agreement of full force and effect despite adopting a new MOI that contradicted the SHA. The court held that adopting a MOI through a special resolution effectively amended any existing SHA that clashed with the Companies Act or MOI.
The promulgation of the Companies Act has indeed diminished the practical benefits of SHA’s. However, they still hold significance due to certain advantages:
When drafting a SHA, it is crucial to avoid conflicting provisions with the MOI and Companies Act. There are several ways to ensure compliance:
By following these tips, parties can align the SHA and MOI effectively, minimizing the risk of future conflicts.
The MOI and SHA are integral documents in South African company law that define the rights and responsibilities of shareholders, directors, and others involved in a company. While the MOI holds precedence over the SHA under the Companies Act, the latter remains relevant due to its privacy and contractual nature. By carefully considering drafting considerations and avoiding conflicts with the MOI and Companies Act, parties can create a robust SHA that aligns with the company's goals and safeguards shareholder interests.
Louwrens Koen - Practicing Attorney, Conveyancer and Notary Public
