The Memorandum of Incorporation (“MOI”), Shareholders' Agreement, and Rules of a company can all be described as instruments forming part of the same orchestra: the regulating documents of a company. However, each of these documents contributes a unique sound to the ensemble, as they have different legal statuses, binding natures, and functions with regard to the relevant company.
Memorandum of Incorporation
The Memorandum of Incorporation (MOI) is the sole governing document of a company incorporated under South African law. Section 15(1) of the Companies Act, 71 of 2008 (the “Companies Act”), provides that the MOI of a company is subject only to the Companies Act and will be void to the extent that any article therein is inconsistent with or contravenes the Act.
A company is obliged to file its MOI with the Companies and Intellectual Property Commission (the “CIPC”), making it a public document. All South African companies are required to have an MOI. A company has the option to either use the standard MOI template obtained during the company registration procedure with the CIPC (CoR 15.1) or to procure a bespoke MOI. There are many benefits to having a unique MOI, as it can be drafted to cater to the specific needs of the company and its stakeholders.
The MOI derives its binding force from the Companies Act, specifically section 15(6), which states that it will be binding among the shareholders of the company and between the shareholders and the company. The MOI also binds the company, on the one hand, and each director, prescribed officer, or member of a committee of the company's board, on the other hand
Shareholders' Agreement
A Shareholders' Agreement can be described as any agreement entered into by and between the shareholders of a company concerning any matter relating to such company. Section 15(7) of the Companies Act, however, provides that a Shareholders' Agreement must be consistent with the Companies Act and yields precedence to the MOI. If any clause in the Shareholders' Agreement is inconsistent with the company's MOI or the Companies Act, it will be regarded as void to the extent of such inconsistency.
A Shareholders' Agreement is, contrary to the MOI of a company, a private document that is not required to be filed with the CIPC. It is therefore not available for public perusal. The shareholders of a company are not obligated to conclude a Shareholders' Agreement, but it can be useful to regulate certain aspects amongst the shareholders that ought not to be in the public domain. Shareholders can include specific private matters in the Shareholders' Agreement as opposed to the MOI, which is a public document.
Recommended provisions to be included in a Shareholders' Agreement include clauses that govern shareholders' rights amongst the shareholders, such as come-along and tag-along provisions, the terms and conditions regulating shareholders' loans, provisions regarding the company's accounting policy and budget, and the applicable terms if one or more of the shareholders of the company gives a suretyship, guarantee, or indemnity on behalf of the company.
A Shareholders' Agreement derives its binding power from the law of contract, not the Companies Act, and only binds the shareholders who are party to such a contract. It is therefore important that any new shareholder signs the Shareholders' Agreement, as it will not, by operation of law, bind such an additional shareholder otherwise.
Company Rules
In addition to the MOI and Shareholders' Agreement, the board of a company is allowed, in terms of section 15(3) of the Companies Act, to make, alter, or repeal any incidental or necessary rules relating to the company's governance in matters not addressed in its MOI or the Companies Act. Both the Companies Act and the company's MOI take precedence over its Rules and must therefore be consistent with these documents.
The Rules of a company must be published in the manner prescribed by its MOI and filed with the CIPC. Accordingly, the Rules of a company, together with its MOI, are public documents. A company is not obliged under South African company law to adopt Rules, but they can be used as a tool to regulate its governance in a flexible manner.
The Rules of a company have the same binding power as its MOI, as per section 15(6) of the Companies Act.
The MOI, Shareholders' Agreement, and Rules are similar in some ways. However, these three documents are distinctively different, especially regarding the role and inherent benefits they each present to the company and its stakeholders. Ensuring that all three documents are properly and expertly drafted is of paramount importance to ensure they are synchronized and contribute to the company's harmonious and successful performance.
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.
