Explained: The Memorandum of Incorporation and Shareholder Agreement

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BUSINESS NEWS - In terms of the Companies Act 71 of 2008 (‘the Act’), a company may only be incorporated by the filing of a signed Memorandum of Incorporation (‘MOI’) along with a Notice of Incorporation upon payment of the prescribed fee with the Companies and Intellectual Property Commission (‘CIPC’).

A company’s MOI sets out various provisions that regulate, amongst other things, the company’s powers, the processes by which the MOI may be amended and by which various company rules may be created or amended, the makeup of the company’s securities or its capital structure, the composition of the board of directors, the provisions regulating meetings of the board and shareholders, and the percentage of voting rights required to make various decisions.

A company’s MOI may either be in the prescribed form (available on the CIPC’s website) or in its own unique form. While the use of prescribed form MOI’s may seem easier and oftentimes cheaper, one must always consider the several alterable provisions that the Act allows in a company’s MOI. Such alterable provisions may need specific consideration depending on each company’s unique circumstance or set of facts.

Furthermore, where the provisions of the Act and those of a company’s MOI are at odds with one another, the Act will always take preference and the inconsistent provisions of the MOI shall be rendered void.

It is therefore important that a company’s MOI is drafted in a manner which ensures the needs of its shareholders are given effect to.

As a company’s MOI is a public document, it is advisable that shareholders’ confidential internal arrangements are not recorded therein (as far as permitted in terms of the Act), but rather be set out in a standalone shareholder agreement.

The Act permits the shareholders of a company to enter into any agreement with one another concerning any matter relating to the company provided that the provisions of such an agreement comply with the company’s MOI and the Act. Any inconsistency between a shareholder agreement and the MOI or the Act will be void.

The goal of a shareholder agreement is to regulate the relationships between the shareholders generally, the manner in which to deal with a voluntarily sale of shares and confidentiality and restraint provisions.

Other matters generally covered may also include deemed offers, forced sales and/or forfeiture of shares, dispute resolution and deadlocks. Subject to the Act and the company’s MOI, the agreement may contain a number of unique and varied provisions and its structure will depend on the intentions of the shareholders concluding the agreement.

Although the conclusion of a shareholder agreement is not a requirement for the incorporation of a company, it can be an extremely important tool by which shareholders can ensure that their interests are catered for and protected.

Effective regulation of the shareholder relationship can ensure continuity in the structure of the company’s shareholding while also protecting the shareholders against certain adverse or unexpected events.

At Strauss Law we offer bespoke solutions to all our clients’ corporate and commercial needs and are available to draft unique MOI’s and shareholder agreements according to our clients’ instructions, ensuring compliance between the two documents, as well as with the Act.

Contact us today via email on admin@strausslaw.co.za for all of your corporate and commercial legal needs or visit our website at www.strausslaw.co.za.

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