Abigail Reynolds | Founder and Principal Attorney | Reynolds Attorneys | mail me |
The Memorandum of Incorporation (MOI) is a cornerstone document for any company, laying out the rights, responsibilities and duties of shareholders and directors. It is obligatory that every company has an MOI filed with the Companies and Intellectual Property Commission (CIPC) and it is available for public viewing at a small fee.
However, it is not obligatory for a company to have a Shareholders Agreement because it is a private document and not filed at CIPC. It is useful if there are truly confidential matters that the shareholders and the company want to agree on. In our experience there are rarely terms that are truly private or confidential, and as such there is little need to also have a Shareholders Agreement on top of the obligatory MOI.
Since the Companies Act of 2008 came into effect in 2011, MOIs should contain much more detail than their predecessor (memorandums and articles of association). This has led to the decrease of content in Shareholders Agreements. The MOI stands as the most important document of the two, and trumps the Shareholders Agreement if the two conflict.
As such, the Shareholders Agreements need to align to the information contained in the MOI. Any inconsistencies in the Shareholders Agreement could lead to that conflicting clause not being implemented. There are also differences in how the documents bind new shareholders. The MOI automatically binds new shareholders without their explicit agreement, while a Shareholders Agreement needs to be agreed to before being binding.
Lastly, the MOI requires at least a shareholders special resolution in order to be amended, while the Shareholders Agreement requires unanimous agreement and approval in writing (all shareholders and the Company) before amendment. This however may mean that a minority shareholder who cannot block a special resolution being passed may prefer more detail to be included in the Shareholders Agreement so that those terms cannot be amended without its consent.
CIPC Templates
CIPC does offer free MOI templates, but they are very basic and we would not recommend that they are used. They leave out many important clauses that we can draft into a bespoke MOI to protect minority or majority shareholders, or even just one particular shareholder.
The default Companies Act provisions in the template MOIs can also be amended to suit one or some of the shareholders, and so at the very least the template MOI should be carefully amended by an attorney to suit the client, and not just adopted as is. It is advised that an attorney is consulted in drawing up a tailored MOI to include protection of the shareholder that such attorney represents.
Additional clauses to consider adding
The following clauses are not provided for in the CIPC templates, nor in the Companies Act, but may be important to include in an MOI:
- a pre-emptive right in favour of the remaining shareholders if one shareholder decides to sell its shares;
- a drag along right in favour of the majority shareholders – so if they find a buyer for 100% of the shares in the company, they can force the minority shareholders to sell their shares to that buyer;
- a come along right in favour of the minority shareholders – which says if the majority shareholders sell their shares, the minority shareholders can demand that their shares are also sold to that buyer, so they aren’t left as minority shareholders in a company with an unknown majority shareholder;
- restraint of trade and non-compete clauses that apply to all shareholders, or only some, as relevant;
- a deemed offer of shares clause – which forces a shareholder to offer their shares for sale to the other shareholders if certain trigger events occur – such as a shareholder’s death or incapacity, a shareholder materially breaching the MOI, or a shareholder’s employment by the company ending;
- a funding clause recording where funding will be sought if the company needs it, and whether shareholders are obliged to advance funds to the company, and if they do not, if their shareholding can be diluted in favour of the shareholders that do advance funding. And if shareholders advance funds to the company, what interest will they accrue and when will they be repaid;
- a no encumbrance clause – prohibiting shareholders from encumbering their shares or loan accounts against the company in favour of any 3rd party (for example, they will be prohibited from ceding and pledging their shares to a bank as security for their repayment of a personal bank loan);
- a dispute resolution clause which obliges…
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Read the full article by Abigail Reynolds, Founder and Principal Attorney, Reynolds Attorneys, as well as a host of other topical management articles written by professionals, consultants and academics in the October/November 2020 edition of BusinessBrief.
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