Memorandum of Incorporation in South Africa
A company that existed prior to 1 May 2011 must replace their Memoranda and Articles of Association with new Memoranda of Incorporation (“MOI”) before 1 May 2013.
Sanctions for non-compliance include but are not limited to:
- The Companies Act (No. 71 of 2008) (“the Act”) will override the Memoranda and Articles of Association and the company may be governed by rules of which Directors, Shareholders and Management may be blissfully unaware;
- Directors’ personal liability has been extended and Directors may be jointly and severally liable along with Co-Directors for prohibited actions and criminal sanctions may be imposed in certain circumstances. It is important to outline directors’ liability in the MOI to ensure proper protection for Directors’. To read more on this topic visit the following article page: Directors’ personal liability and the Companies Act, No. 71 of 2008;
- Compliance notices may be issued which may result in administrative fines being imposed for non-compliance;
- Registrations after the cut-off date of 1 May 2013 will necessarily incur additional costs.
There is however some relaxation from the legislature in that a private company now has the option to decide whether they wish to hold annual general meetings and private companies can elect not to have their financial statements audited.
The new Companies Act, 71 of 2008, has been under the magnifying glass since its introduction despite it being put into force on 1 May 2011. Many critics still believe that it finds insignificant relevance in South Africa due to its North American origin.
Without discussing the fact whether these accusations are founded, it has to be mentioned that the previous legislation has been outdated since 1973. The new Act addresses transparency, corporate governance, accountability, modern merger methods and minority shareholder protection. From now on the concept of Memorandum of Association and Articles of Association is taboo and is substituted with a Memorandum of Incorporation (“MOI”).
The difference between the Memorandum and Articles of Association and Memorandum of Incorporation
Under the previous Act the constitution of a company consisted of two separate documents being the Memorandum of Association and Articles of Association. The former regulated the external affairs of the company and the latter the governing of internal affairs. The provisions in the Memorandum of Association were unalterable but the Articles of Association permitted alteration of its regulations by way of resolution between the directors. The contrasting characteristics of the two co-existing documents meant that their existence often caused confusion and, in some companies were even somewhat superfluous.
The purpose and aim of the new Act is to create flexibility and simplicity in the formation and maintenance of companies. By introducing the MOI, companies can achieve exactly that. Even though the MOI contains certain unalterable provisions as prescribed by the Act which are designed to protect the interest of shareholders and creditors, other alterable provisions can and should be built into the MOI to characterise a particular company. These will vary, depending on the type of company and the particular needs thereof.
More about the Memorandum of Incorporation
In short, the MOI should deal with aspects like the ability to create rules of the company; shareholders’ meetings and procedures; composition of the board of directors; the powers of the company; authority of directors and other aspects of the like. This will be the constitution of the “new age company” and each and every company will need one.
Even though the new Act supports flexibility which creates some leeway for companies, each provision of the company’s MOI will need to be written in accordance with the Act and be consistent therewith to prevent that certain provisions are void. This will be the case when those provisions do not correlate with the aim of the new Act and not be adaptable with those unalterable provisions and regulations.
Where a company restricts its MOI and/or the concomitant regulations to be amended, the company’s Notice of Incorporation should indicate such restriction with the letters “(RF)”, which means “ring-fenced” by adding it after the company’s name for the attention of third parties. This can mean that any third party would for instance take note that a company’s MOI is restricting the authority of its directors and assume lack of leadership within the board of directors. Subsequently companies need to consider before incorporating such restrictions into the MOI.
When forming a company, the persons who form it, deliver a signed basic document together with the Notice of Incorporation to the Companies and Intellectual Property Commission (CIPC), the new (CIPRO). Amendment of the MOI will be effected by way of a special resolution between the directors. Subject to the different proposals for amendment in the MOI, amendment may be proposed either by the board of directors or by shareholders holding at least 10 percent of the voting rights in the matter. The new Act now allows for other amendments and adjustments by identifying guises thereof such as the correction of patent errors in the MOI or Rules; Translations of the MOI; consolidations of the MOI and determining the authenticity of versions thereof.
The relevance of the Memorandum of Incorporation
Since this document is nothing less than being the constitution of the company, it binds and regulates all relations within and outside the company. Even the content of a company’s shareholders’ agreement will be determined by its MOI and any part thereof which is inconsistent with the MOI will be void to that extent.
The fact is that each and every company in South Africa needs to adopt a MOI, at least before 1 May 2013. If a company neglects to do so, all regulations and provisions within its current Memorandum of Association and Articles of Association which are in conflict with the new Act will be of no force and effect and overridden by the provisions of the new Act. However, the sooner a company acts and converts their current constitution to a MOI, the easier it will be to familiarise itself with its new provisions before the deadline.
All South African companies should be proactive and consult with an attorney who understands the new Companies Act and can assist in drafting a sufficient Memorandum of Incorporation reflecting the true meaning and characteristics of a certain company, before being caught “empty-handed” with a constitution of no force and effect.