Schwenn Inc

The Shareholders Agreement and Memorandum of Incorporation (MOI) are two similar documents that often cause confusion. While there are a few subtle differences between the two, the ideal way forward is to have both in place to protect yourself fully.

Before the new Companies Act in South Africa, a Shareholders Agreement was considered the holy grail when entering into any new business relationship. In more recent years, however, after the terms of the MOI were changed so that they override all other terms, many companies assume that they can skip the former in replacement of the latter. Your agreement documentation for shareholders will not replace or alter your MOI. Instead, this document should complement your MOI in a way that covers all of your bases.

What exactly should you be considering when finalising your Shareholders Agreement, and why is it so important to have both this document and an MOI in place? Let’s take a look.

Shareholders Agreement, MOI or Both?

Ideally, you want to create and sign a Shareholders Agreement that is relevant to South Africa. Shareholders of every company need to sign an agreement at the start of the relationship that outlines factors such as community of property and anything else that may potentially result in dispute at any given time. Originally, before the Companies Act, shareholders would sign an agreement stating clauses such as:

“If, at any time, it becomes apparent that the terms of the memorandum or articles of association conflict with or fail to record the terms of this Agreement, among shareholders, the terms of this Agreement will prevail; and any shareholder may require the memorandum and articles of association to be amended to conform with the terms of this Agreement; and shareholders will vote in favour of any special resolution of the Company necessary in order to amend the memorandum and articles of association of the Company.”

With the new act, this type of clause is no longer feasible. That means that agreement templates crafted before 1 May 2011 are no longer valid. As the agreement can no longer prevail over the new Companies Act or the MOI, this document may not seem worthwhile at all. In fact, this type of document still has its use. While it may not be quite as important, it will still help to cover any issues that are not handled by the Companies Act or MOI. Issues such as shareholding, alternative dispute resolution and pre-emptive rights can all be protected under your agreement for shareholders.

Section 15(7) of the Companies Act states that shareholders may still enter into agreements, as long as the agreement falls within the provisions of both the MOI and the Act. Officially, the purpose of the MOI is as follows:

“Set out rights, duties and responsibilities of shareholders, directors and others within and in relation to a company, and other matters as contemplated in section 15; and by which: the company was incorporated in terms of this Act, as contemplated in section 13; or a pre-existing company was structured and governed before the later of: the effective date; or the date it was converted to a company in terms of Schedule 2;”

If there is ever a conflict between the MOI and your agreement, the MOI will always take precedence. If there is any clause that conflicts with the guidelines of the MOI, only that clause can be voided. This will have to be voided by a court application with the assistance of your lawyer. The aim of this is to create a culture of transparency. It prevents companies from adding additional criteria in the agreement that may not have been in the public domain. This, in turn, protects those buying shares in the company. It also prevents abuse.

We know that corporate agreements such can be challenging and sometimes confusing. To help you find the ideal way through the confusion, we can assist with MOI as well as various other documents. Get in touch to find out more about arranging Shareholders Agreements in Durban and surrounds, and let us simplify the process as best we can.