COMMERCIAL LAW: Companies Act: The relationship between the Act, your Memorandum of Incorporation an

In assisting clients with their company documents it has become apparent to us that many people are not aware of the fundamental shift in the treatment of Shareholders Agreements under the 2008 Companies Act compared to that under the previous Act. Where it was previously common for Shareholders Agreements to contain a clause stating that, in the case of conflicting provisions between the agreement and the company’s founding documents, the provisions of the agreement would prevail, under the new regime shareholders insert such a clause at their peril.

Under the new dispensation, the Act takes precedence. Its provisions can be broadly categorised into so-called “alterable” and “unalterable” provisions. As the name suggests, the former may be altered in the company’s founding document (now a single document called a “Memorandum of Incorporation”), whereas the latter may not be altered, although more onerous provisions may be stipulated in some cases. The Shareholders Agreement ranks last and may not conflict with the Memorandum of Incorporation or the Act (if it does, its provisions will be overridden by those of the Memorandum or the Act, as the case may be).

The new hierarchy has led to queries by many businesses as to whether there is still a role for the Shareholders Agreement. The answer is a resounding “yes”. One should bear in mind that the Act and the Memorandum only deal with a limited range of issues, which mostly relate to the legal status and governance of the company. Many aspects are only dealt with in the broadest strokes or are ignored entirely. This is where the Shareholders Agreement still has a role to play. Detailed provisions relating to financing, dividend policies, compliance-related issues (such as B-BBEE status, the company’s approach to tenders, tie-in periods, come-along provisions to name a few) may (and should) still be dealt with in a Shareholders Agreement. This agreement deals more with the “nuts and bolts” of the relationship between the shareholders, whereas the Memorandum and Act deal with governance and compliance. The Shareholders Agreement may also be kept confidential, whereas the Memorandum is a public document.

Companies would be well advised to consult a professional to assist them in structuring their company documents correctly and to maintain the intricate balance between the Act, the Memorandum and the Shareholders Agreement.