The Companies Act, 61 of 1973 (“Old Act”) was replaced on 1 May 2011 by the Companies Act, 71 of 2008 (“New Act”). Amongst many other far reaching changes brought about by the New Act is the introduction of the memorandum of incorporation (“MOI”). Under the Old Act, a company’s constitution comprised of two documents called the memorandum of association and the articles of association (“Memorandum and Articles”). Under the New Act, the Memorandum and Articles have been replaced by the MOI.
The MOI differs in several material respects from the Memorandum and Articles. Amongst other things, in terms of the MOI, companies have been given considerable discretion with regard to how they regulate their affairs. This includes the rights, duties and responsibilities of shareholders, directors and other company stakeholders. This is in line with the stated purpose of the Act, which is to create “flexibility and simplicity in the formation and maintenance of companies”.
To give effect to this flexibility, the New Act makes provision for “alterable” and “unalterable” provisions. Unalterable provisions are those provisions of the Act which cannot be altered by the MOI, i.e. they apply equally to all companies. An example of such a provision would be section 36(1)(a) of the New Act which provides that the MOI must set out the classes of shares and the number of shares of each class that a company is authorised to issue.
The alterable provisions are those provisions of the Act which a company can alter through its MOI. Examples of alterable provisions are sections 65(9) and (10) of the New Act, which deal with the requirements for a special resolution. Section 65(9) provides that a special resolution requires at least 75% support of shareholders in order to be passed. However, section 65(10) provides that a company can make provision for a different percentage of voting rights to approve a special resolution, as long as there is a 10% difference between the percentage required for a special resolution and an ordinary resolution. Accordingly, if a company does not alter this default position through its MOI, the 75% threshold will apply.
Of equal importance is section 15(1) of the New Act which provides that a company’s MOI must be consistent with the provisions of that Act. Because the MOI is such a materially different document from the Memorandum and Articles, the provisions of many companies’ Memorandum and Articles will not be consistent with the New Act.
It is therefore important that all companies update their MOIs in order to take advantage of the flexibility introduced by the New Act, make sufficient provision for the alterable provisions and bring their MOIs in line with the New Act. The deadline for companies to update their MOIs is 30 April 2013.
As with MOIs, the New Act also requires shareholders agreements to be in line with that Act. Obviously shareholders agreements must also be in line with the new MOIs. Accordingly, it is advisable that, when updating the MOIs, companies simultaneously also update their shareholders agreements.