South Africa: Companies Act 2008

Last Updated: 15 July 2011
Article by Jan Bouwman

The Companies Act 71 of 2008 (Act) came into force on 1 May 2011 and with this, the dawn of a new era for corporate SA has arrived. The Act constitutes a major overhaul of many aspects of corporate law, such as new rules governing corporate finance, new business rescue provisions and a new statutory merger mechanism.

One of the most important of these changes, which will affect most companies, is the manner in which the relationship between the shareholders in the company is governed.

Constitutional documents

Historically, the relationship between the shareholders and the company was governed by the memorandum and articles of association, which is a "statutory" agreement, signed and registered at the incorporation stage of the company. This created the company's constitution which thereafter contractually bound all of the shareholders of the company and regulated their rights and obligations, whether they had signed it or not.

Shareholders agreements

In time, commercial practice developed for shareholders to regulate their relationship in shareholders agreements and to agree that if there was any conflict between the shareholders agreement and the memorandum and articles of association, the shareholders agreement would prevail. This practice was sanctioned by the courts with reference to the contractual nature of the memorandum and articles of association. Accordingly, little attention was normally paid to the memorandum and articles of association of a company where a shareholders agreement exists.

Position under the new Act

The memorandum and articles of association will henceforth be called the "Memorandum of Incorporation" (MOI). The Act provides that each provision of a company's MOI (save for the so-called "Alterable Provisions" which can be amended in the MOI) must be consistent with the Act and is void to the extent of inconsistency.

Regarding shareholders agreements, the commercial practice referred to above will no longer be possible under the Act. The Act provides that shareholder agreements must be consistent with the provisions of the MOI and the Act.

In order to assist companies to get their house in order, the Act does provide that a two year grace period will apply from 1 May 2011, during which period such conflicts in the MOI and shareholders agreement will not be void and continue to apply. Companies will therefore during this period need to ensure that the provisions of their MOI's and shareholders agreements are appropriately amended to address such inconsistencies.

The important conclusion to draw from the aforegoing is that certain issues, if not addressed in the MOI, will disturb the relationship between shareholders as it may have been agreed to in a shareholders agreement, and to the extent allowed by the statutory framework, these imbalances must be addressed in the MOI.

It is however important to note that the 2 year grace period only applies to inconsistencies as between the documents as aforesaid and all of the remaining provisions of the Act apply with effect from 1 May 2011.

To complicate matters even further, even where there are such conflicts and the 2 year grace period would therefore ordinarily apply, the transitional arrangements in Schedule 5 of the Act provide otherwise in certain instances, as set out below.

Transitional Arrangements

The transitional arrangements provide that despite anything to the contrary in the MOI, the provisions of the Act respecting the following matters applies as from 1 May 2011 to every pre-existing company –

(a) the duties, conduct and liability of directors apply to every director of a pre-existing company;

(b) rights in terms of the Act of shareholders to receive any notice or have access to any information;

(c) meetings of shareholders or directors, and adoption of resolutions; and

(d) certain provisions regarding fundamental transactions, takeovers and offers.

The transitional arrangements further provide that approval of any distribution, financial assistance, insider share issues, or options, are subject to the Act, even if any such action had been approved by a company's shareholders before 1 May 2011, despite anything to the contrary in the MOI.


The Act generally presents a great improvement to the existing legislation and will assist in modernising SA corporate law. During the transitional phase (and rather sooner than later) companies will be well advised to undertake a compliance review of the documents referred to above and to ensure that they are amended appropriately.

Over and above that, companies, directors and their stakeholders must take the appropriate steps to familiarise themselves with the Act in order to ensure not only compliance with the Act, but also the validity of corporate actions taken.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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