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.
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.
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
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
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.
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
(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
(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
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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The Act has brought about fundamental changes in the manner in which shareholder resolutions are passed.
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