By Noelle Snyman (Candidate Attorney at Hayes Incorporated)
1 SO, YOU HAVE STARTED A COMPANY, NOW WHAT?
When registering a company, the Companies and Intellectual Properties Commission (“CIPC”) provides you with a stock-standard memorandum of incorporation (“MOI”) as the company’s founding document. Most incorporators leave it at that, because they started a company to do business, and everything else seems like excessive paper work. You might convince yourself that you do not need an MOI, or a shareholders’ agreement, but the truth is that both are vital. A company should have an MOI and if necessary, a shareholders agreement, that cater to its specific set-up. These documents form the foundation of the company, and should be modified to suit your Company’s needs.
The MOI of a company is a public document that is registered with CIPC. In the MOI, a company can regulate the directors’ and shareholders’ rights and duties, and alter the alterable provisions of the Companies Act 71 of 2008 (“the Act”). Every company must have an MOI, which MOI must also comply with the Act. A MOI can also set out the relevant provisions of the Act, to ensure that the shareholders and directors can look to one place when compliance issues arise.
The shareholders agreement is a private document, between the company and its shareholders, and the shareholders inter se. In contrast to the MOI, a shareholders agreement is not compulsory. Amongst other things, a shareholders agreement can deal with founding principles, forced sales of shares, restraints of trade, and each shareholder’s specific deliverables.
Below, we will consider which fundamental considerations need to be taken into account when drafting your MOI.
2 MEMORANDUM OF INCORPORATION
The following needs to be considered when drafting the company’s MOI –
2.1 Securities & Holders of Beneficial Interest
The company needs to set out the number of authorised shares and the classes of such shares. Furthermore, the specific rights that attach to each class of shares, including the number of votes that can be exercised per share should be provided for in the MOI.
The powers of the board of directors relating specifically to shares should also be set out therein, especially if any special provisions apply, such as whether the board has the authority to increase or decrease the number of authorised shares. The company can also set out whether its shares may or may not be held or registered in the name of one person for the beneficial interest of another.
2.2 Shareholders’ Meetings and Resolutions
The manner and form of shareholders meetings, any compulsory meetings, and whether an annual general meeting is required, should be contained in the MOI.
The company can also regulate the right of shareholders to demand a meeting and the quorum requirement for such a meeting, in addition to the form, period, and manner in which notice of the meeting must be given. Furthermore, the use of electronic communication for the purposes of conducting a shareholders meeting can be included or excluded.
Finally, the company can regulate the percentage of voting rights required to pass both ordinary and special resolutions, along with which matters are to be treated as special resolutions, generally referred to as specially protected matters. The default position in the Act is that ordinary resolutions require the support of more than 50%, and special resolutions require the support of at least 75% of the voting rights exercised on such resolutions. The MOI can prescribe a higher percentage for the passing of ordinary resolutions, and a lower or higher percentage for the passing of special resolutions, provided that there is always a margin of 10% between the two.
2.3 The Board of Directors
The company should set out a minimum and maximum number of directors, along with any special rights of the shareholders to nominate directors.
For example, the MOI can set out that every shareholder holding more than a certain percentage may nominate and remove a director of their choosing, and further that every shareholder must vote in favour of such nomination or removal.
The use of ex officio and alternate directors may also be regulated, along with additional requirements for directors to serve as such, and the term for which a director may serve. The company may also provide for a chairman to be elected, if they see fit. The conduct of board meetings may be regulated, similarly to shareholders’ meetings i.e. specifying quorum, voting percentages, notice periods and electronic communication.
The authority of the board of directors may be limited in the MOI, for example whether the board of directors can authorise the company to provide financial assistance to related or inter-related parties. The MOI may further provide that directors may or may not receive compensation for their services, or indemnification for any liabilities incurred in the exercise of their duties.
2.4 Officers, Committees and Rules
The MOI may provide for the appointment of certain officers or committees, to which some powers of the board may be delegated or alternatively, that such authorities or the use of committees be restricted instead.
The MOI may further make provision for rules to be implemented for the company and its shareholders, should the need arise.
2.5 Annual Financial Statements
Depending on whether the Act specifically requires it, the company may regulate whether its annual financial statements are to be audited, and the MOI may set the date of the company’s financial year end.
2.6 Resolution of disputes
Starting a company is exciting, and the parties involved are part of a mutual trust relationship. Unfortunately, such relationships often break down, and one must provide for a proper dispute resolution mechanism. Whether this be provision for mediation or arbitration, or merely regulating any litigation and the costs associated therewith, it is vital that a company make provision for a dispute resolution mechanism in its MOI, to both cost-efficiency and expediency.
There are many decisions to be made when starting a company, decisions that should not be left to chance, or the generic provisions contained in the Act. Your company should be set up to cater for the unique characteristics of your business, and your MOI must provide therefor. In similar vein, a shareholders’ agreement is equally important, and both documents should be drafted by an attorney who understands the needs of your company.