A Memorandum of Incorporation (herein after referred to as the MOI), as defined in the new Companies Act 74 of 2008 (hereinafter referred to as the Act), is a document that sets out the rights, duties and responsibilities of the Shareholders, Directors and others within and in relation to a company, and any other matters as contemplated in certain sections of the Act. The MOI is the founding document by which a company is incorporated and provides for the structure and governance of the company.
The MOI is compulsory when incorporating a new company and is the only instrument that can change some default positions of the Act.
The new Companies Act’s MOI replaced the Articles of Association and, it further prescribed that all Articles of Association was to be converted into a MOI by way of filing amendments on or before 30th April 2013. The Articles of Association was to be amended in so far as any clauses therein may be conflicting with the provisions of the new Companies Act. If these conflicting provisions were not amended by 13th May 2013, the provisions ceased to be of any force and effect and the default provisions of the Act became automatically applicable.
The Companies and Intellectual Property Commission has made available certain standard MOIs. Although these forms are a useful tool when preparing a MOI and checking that certain necessities have been dealt with, it is important to take note that certain companies may require a tailor-made MOI. There are also some issues with the standard forms which may also inspire the need for a specialised MOI. It will also be more assuaging to the business owners if they can rely on a customised MOI.
I will hereinafter discuss some of the problems, shortcomings and potential pitfalls with the standard forms made available to the public. This is not an exhaustive list. It is not my objective to negatively criticise these forms, however, I will merely attempt to inform the readers hereof of the gaps for which they should watch out.
It is advisable to consider each specific company’s needs and objectives. The purpose of the company and the required governance and structure are most important when preparing the MOI.
Having a specialised MOI may eliminate the risk of the MOI conflicting with the shareholders agreements. Should such conflict exist, the MOI will take preference. This would be detrimental to the company and its shareholders and may result in costly legal action.
The Standard MOIs may not deal with some clauses which may be necessary for a specific company and/or its needs. In some cases, the failure to deal with specific issues in the MOI, may lead to the default clauses of the Companies Act being automatically applicable. This may again result in unwanted consequences and legal action. To avoid these consequences, it is better to have your MOI made to specification.
The MOI, being the most important document regulating the company and its and working, should be a drafted with care and be of a good format, making it easy to read, and, easy to reference. The structure of the MOI should be logical and clear. Although brevity is preferred by most, it should not cost your MOI its efficiency. The standard MOIs has certain imperfections as it relates to the formulation thereof, and, may not fit the needs of the company and its specific people.
Having a tailor-made MOI, will allow you to control the overall format and, allow you to make it more user-friendly. The MOI can then be prepared around the companies needs, and not the other way around.
Especially when making reference to unalterable and alterable provisions of the Act, the standard form MOIs refer to the provisions of the Act its body. The Directors and Shareholders (who are not always legal persons) are tasked with cross referencing the Act when consulting the MOI. Although this is acceptable, it may be advisable to rather repeat the said provisions of the Act in the actual MOI. This will not only ensure transparency but will allow the users to have an “all-in” or a standalone document.
Whilst on the topic of format, it is also worthy to state that, the standard forms allow the users to make general provisions and/or additional articles at the end of the MOI. This means that meetings will for example be dealt with in one section, and further dealt with at the end of the MOI. This is certainly not preferable if you desire sensible order in the MOI.
For the general person, who is not familiar with the Companies Act and the applicable law, the standard MOI forms are not great with informing the user of all the options and may cause some confusion.
The first point to be dealt with in the MOI is the company’s name, however, the company is also allowed to be incorporated under its registration number and the standard MOI only makes provision for a name to be inserted.
Furthermore, the long form for a profit company makes it possible to edit the number of minimum directors. This is confusing as a profit company’s minimum amount of directors must always be two; however you are allowed to select to appoint a larger minimum amount of directors should you so require – say six.
Why would the standard form allow the user to edit an aspect that is not allowed to be amended in the MOI? Some forms also make it possible for its user to edit the date on which the company was incorporated. The date of incorporation will always be the date of registration and the user may not choose any random date.
The standard forms provide that the type of company should be stated in the MOI. The standard form provided for a private company does not make provision for the restriction on the transfer of the company’s securities. In terms of Section 8(2)(b) of the Act, unless a company restricts the transferability of its securities, it will not be a private company. It appears that the amended form did attempt to cure this shortcoming by placing restrictions on the transferability of shares, however, the act requires that the transfer of all securities be restricted.
Another example is that the long form makes it possible for the user to elect between two options with regards to how the securities of the company are issued. This is confusing as the user will only have one option available if the company is not a JSE listed company. Further, the forms allow the user to edit the percentage of votes required for an ordinary resolution and a special resolution. It does not mention to the editor that there must always be a 10% gap between these two percentages. Further, Section 65(7) of the Companies Act requires that for an ordinary resolution to be adopted, it must be supported by more than 50% of the voting rights. The standard form wrongfully states that a minimum of 50% is necessary.
The standard form states that the user may edit the right of a company’s directors to requisition a meeting of the board. This is not in line with the provisions of the Company Act. Section 73(1) dictates that, if you have a board, 2 (two) may call a meeting, unless you have 12(twelve) or more, then 25% must call for a meeting.
Considering the above, it is highly recommended to have Company’s MOI prepared by an Attorney, specialising in the field to have it custom made to the specification of your companies needs and requirements. As they say, better safe than sorry.#