Companies Act - Dealing with the Memorandum of Incorporation (MOI)

THE CREATION of a document known as the Memorandum of Incorporation in Section 15 of the new Companies Act, to replace the 1973 Companies Act’s Memorandum and Articles of Association (Articles), is vital for effective corporate governance, says Ewald van Heerden, partner at audit, tax and advisory firm Mazars.

“Effectively, Section 15 places a burden on companies to rewrite their founding documents, which in many cases have remained unchanged for years, even decades.”

Companies are able to issue their MOI immediately after the effective date of the Act, which is 1 May 2011. The Act allows a grace period of two years for companies to adopt their new MOI. During this period, any provision in the founding documents that is in contravention with the Act will be upheld if the company does not make any changes to the current version of the shareholders agreement or Articles. Should it do so, however, its grace period will expire immediately. The new MOI would have to be accepted by way of special resolution at a shareholders meeting, prior to the expiration of the two-year grace period.

“The new Act has made significant changes to the way the relationship between shareholders and directors works. In general, directors are given much more power, but are also faced with a much greater risk of liability.

For example, under certain conditions, directors have the ability to issue shares without shareholder consent,” he says.

To keep the balance between shareholder and director powers, the Act contains an innovation known as the alterable provision. Several provisions, such as the one dealing with share issues, can be altered by way of a restrictive provision in the MOI. In light of this, it is essential that adequate consideration be given to the content of the MOI prior to issuing and voting on the document.

Larger companies are urged to obtain legal advice before drafting a new MOI. Smaller companies that could benefit from adopting the standard long- or short-form version of the MOI that has been released with the Act, should certainly consider, as a minimum, whether any provisions should be included to alter any of the more than 50 alterable provisions in the Act.

“We would also recommend that companies start working on their new MOIs as soon as possible, to allow adequate time for debate and changes before the final version is adopted,” concludes van Heerden.