The Companies Act 71 of 2008 (“the Act”) came into effect on 1 May 2011 bringing with it a number of significant changes.  The Act introduced, amongst other changes, the Memorandum of Incorporation (“MOI”) as the sole governing document of the company to replace the existing Memorandum and Articles of Association. Companies had a two year “grace” period until 30 April 2013 to align their existing MOI to the provisions of the Act. On 1 May 2013, the Act took full effect and the transitional provisions fell away.

For companies that are yet to amend their MOI this may have unintended consequences.  Although the Act explicitly recognises the Shareholders Agreement, the Act states that any provision in such a Shareholders Agreement that is inconsistent with the Act or the MOI is void to the extent of the inconsistency. As a consequence, the MOI of a company takes precedence over a Shareholders Agreement. This is especially significant where the company has more than one shareholder. In the event of a conflict between shareholders, the shareholder relationships are placed under significant pressure that makes resolution difficult without the added burden of conflicting documents or an unclear dispute resolution procedure. Further complications may arise where the company is financially distressed and urgent measures need to be taken without incurring the additional costs of taking legal advice, going to arbitration or litigating along with the resultant delays.

Private companies which are not required by the Act or the Regulations to have their financial statements audited should amend their existing MOI to remove the requirement for audit and to voluntarily elect to have the financial statements audited pursuant to the Shareholders Agreement or by a Shareholders’ or Directors’ Resolution. If the MOI provides for an audit of the company then the audit is compulsory, and the company is required to comply with the enhanced accountability and transparency requirements detailed in Chapter 3 of the Act.

To address these and other issues, private companies must determine whether to amend the MOI to remove the compulsory audit (if appropriate), or to incorporate the provisions of the Shareholders Agreement into the MOI or to amend the Shareholders Agreement to the extent of any inconsistency with the Act or the MOI. The necessary changes to the MOI include adopting either a long form MOI (particularly in the case where the company has par value shares), or a short form MOI, or a unique form MOI, depending on the requirements of the company and the share capital structure.  The amendments will be effected by a special resolution of Shareholders.  Although the failure to do so will not invalidate the existing MOI or the Shareholders Agreement, the result may lead to undesirable consequences.

Should you require any assistance in navigating the requirements of the Act and any amendments to the MOI and the Shareholders Agreement, we recommend that you consult our legal team.

Liz Pinnock - [email protected]

Phillip Kruger - [email protected]