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Tourism, Cars, Traffic

Tuesday, 02 February 2010 12:36

The new Companies Act. Memos, Rules, Agreements

{pp}The Companies Act 71 of 2008, ready to be proclaimed, is expected to come into effect on July 1. Under the old Act, 61 of 1973, Articles of Association were contractual in nature. Shareholders’ Agreements co-existed with the Articles and influenced the way they operated.

This system had several benefits, including confidentiality and the ability to amend the Articles without needing a Special Resolution. The new Act brings a company’s constitution into a single document, the Memorandum of Incorporation (“the Memo”), and declares that to the extent that a Shareholders’ Agreement is inconsistent with the Memo, the Agreement is void.

In some respects the implications are straightforward. For instance, the Memo has leeway to allow directors to be appointed by means other than a shareholders’ vote, where a Shareholders’ Agreement seeking its own way of appointing directors is probably void [Sections 66(4), 68 and 70(3), read together]. But may a Shareholders’ Agreement constrain the transferability of shares? This is trickier. Section 15(7) stipulates that shareholder’s rights granted by Agreements may not be restricted beyond the provisions of the Memo, but where, then, is freedom of contract? Surely parties to a contract may agree how they will dispose of their assets, and place restrictions upon themselves.

Indeed, a strict application of 15(7) could even be read to exclude rights of pre-emption, which cannot have been the intention of the legislature. I vote with the interpretation that agreements restricting transferability are valid, provide that the restrictions are additional, and in no way lessen the restrictions imposed by the Memo. In some respects the Act strengthens the hand of the board of directors, emphasising that the “business or affairs of the company” is the province of the board, not of the shareholders, and empowering the board to make Rules on internal management. Again, however, a Rule that is inconsistent with the Memo is void. Note the use of inconsistency.

It seems the word conflict was purposefully avoided so as to broaden the dominance of the Memo, with which a Rule or Agreement may be inconsistent without being in conflict: A Shareholders’ Agreement will not be void for conflicting with the Rules, nor will it supersede the Rules. unless the Rules are going to be seen as contractual in nature. A shareholder who is also a director will be contractually bound to the Agreement while statutorily bound to the Rules. If such a situation comes before court, the decision will surely be that the Rules take precedence.

One way to avoid the uncertainty and litigation lurking in this terrain is for the board to make the company a party to the contract, but this is shaky ground. Another option is for shareholders to ensure that the Rules reflect the terms they would otherwise have included in their Agreements. But simplest and quickest would be to incorporate pre-existing Agreements into the Rules or the Memo. New companies may consider including a provision to do that in the objects clause of the Memo. Clauses in a Shareholders’ Agreement that have no effect on management – examples would be shareholders’ voting rights and rights of pre-emption attaching to shares – will probably not be affected. Whether a Shareholders’ Agreement will still have a place in the workings of the company is uncertain.

The simplifying of the Rule-making process removes one of the reasons that the Agreements exist, but other factors, like confidentiality, might still play a part. The new Act contains numerous Alterable Provisions, some of them new to South African law, that present manoeuvring space but require decisions to be taken as to how to draw full advantage. Before the Act comes into operation, shareholders and directors would be wise to check that their documentation is compatible with it.

Contact Information:
Walkers Attorneys
Telephone: +27 21 464 1400
Fax: +27 21 462 2256

Published in Tourism, Cars, Traffic

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