Shareholders agreement v MOI

SHAREHOLDERS AGREEMENT v MOI

  1. Introduction
    • The Companies Act, 71 of 2008 (“the New Act”) commenced on 1 May 2011. Prior to the New Act, the Companies Act, 61 of 1973 (“the Old Act”) applied.
    • Prior to 1 May 2011 Position:
      • A shareholders agreement was entered into between the company and the shareholders, and between the shareholders inter se. The purpose of the shareholders agreement was to regulate the rights and obligations of the parties, as between the shareholders to each other, and as between the shareholders and the company;
      • Subject to compliance with the Companies Act, 1973, the shareholders agreement could contain provisions which were in conflict with the then Articles of Association (“Articles”). In this regard, it was common to place a term in the shareholders agreement, which provided that, in the event of conflict between the shareholders agreement and the Articles, the shareholders agreement would prevail.
    • After 1 May 2011 Position:
      • The New Act brought about a dramatic reduction in the potential scope and application of a shareholders agreement. For example, the New Act, now includes alterable and unalterable provisions, which in effect seek to protect minority shareholders. For example, in order to liquidate a company, a special resolution must be passed.
      • By reason of section 15(7) of the Companies Act, an agreement between the shareholders of a company must be consistent with the New Act and the company’s Memorandum of Incorporation (“MOI”) and “any provision of such an agreement that is inconsistent with the Act or the company’s MOI is void to the extent of the inconsistency”. With this change, all companies were required to change over from the then Memorandum of Association and Articles to the MOI and to incorporate the new provisions of the New Act.
      • During the period 1 May 2011 to 30 April 2013, the provisions of a pre-existing shareholders agreement prevailed over any contrary provisions of the New Act, except to the extent that the shareholders agreement itself, or the MOI, provided otherwise. However this period of grace has now expired and section 15(7) applies without qualification.
  1. The New Act & the MOI Are Binding
    • The Memorandum and the Articles of the Old Act have been replaced with a MOI. To the extent, unalterable provisions apply, neither the MOI, nor the shareholders agreement can be amended. In terms of section 15(6) of the New Act the MOI and any rules made by the board are binding:
  • between the company and each shareholder;
  • between or among the shareholders of the company; and
  • between the company and:
  • each director or prescribed officer of the company; or
  • any other person serving the company as a member of a committee of the board.
    • Therefore the MOI is in itself a shareholders agreement. The effect of the New Act, is that clauses which were previously included in a shareholders agreement can now be included in the MOI. Note however, that the MOI, IS A PUBLIC DOCUMENT. Shareholders should therefore consider which terms they seek to keep confidential, for example funding of the company, tag along/come along clauses and dispute resolutions.
  1. Alterable & Unalterable provisions
    • The Companies Act contains unalterable and alterable provisions. The alterable provisions may be varied by the MOI. This provisions may not be varied by any other agreement. Included amongst the variable provisions of the New Act are provisions governing shareholders meetings, meetings of the directors, the appointment of directors. Section 66(4) of the Companies Act, which provides for the election and appointment of directors, clearly contemplates that the provisions for the election and appointment of directors must be in the MOI.
    • Commonly occurring terms which can be included either in a shareholders agreement or in a MOI include:
  • an obligation on the part of shareholders to make loans to the company;
  • forced sales provisions, in terms of which shareholders are automatically deemed to offer their shares for sale to the remaining shareholders in certain circumstances, for example on the termination of the employment of a shareholder who is an employee of the company or a related company;
  • a come-along clause, that is a clause which entitles the majority shareholders to oblige minority shareholders to join with them in selling all of the shares of the company to a third party;
  • a tag-along clause, that is a clause which entitles minority shareholders to prevent the majority shareholders from selling their shares to a third party unless the third party offers to buy the shares of minority shareholders on the same terms as those applicable to the majority shareholders;
  • a put and call option which entitles a shareholder under agreed circumstances to require the other shareholders to buy his or her shares and which accords an equal and opposite option to the other shareholders to require the shareholder to sell his or her shares, in each case at a valuation or at a predetermined price;
  • terms governing the breaking of any deadlock that may occur between the shareholders.

 

Written By:

Cherine Hoffman

LLB (Cum Laude) | LLM (Tax) | Certificate in Mining Law

Director/Attorney

CH Legal Consulting (Pty) Ltd

www.chlegalconsulting/com

Email: cherine@chlegalconsulting.com

Tel: +27 72 479 3863

 

 

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