STANDARDISED SHAREHOLDER AGREEMENTS AND A COMPLETE DISREGARD OF THE MOI
There are entities out there that are peddling either “standard” private company shareholders’ agreements, or automatically generated private company shareholders’ agreements that are seemingly tailored to, inter alia, cater for shareholders’ rights, with a COMPLETE disregard as to a company’s memorandum of incorporation (“MOI“) and what is contained therein, especially if such is a short standard form of CIPC MOI.
Purchasing a “standard” shareholders’ agreement or buying a seemingly bespoke one that is generated online is problematic if the MOI is left out of the equation; this can be a huge problem for companies- especially for SMMEs- as their businesses expand, and more directors are brought on board.
Shareholders may find themselves deprived of certain rights due to alterable provisions in the MOI not having been dealt with. As stated, this is particularly exacerbated where such companies have made use of the short standard form of MOI provided by CIPC. The short standard form of MOI applies the alterable provisions as they are; it allows for no variation. Accordingly, if you have a shareholders’ agreement that is in conflict with the MOI, for example concerning directors being permitted to make rules to which the company must adhere to, it is the MOI that prevails! This is a significant departure from the previous Company’s Act, where the shareholders’ agreement was king.
Under the previous Companies Act, a shareholders’ agreement took precedence over a company’s memorandum and articles of association. This is no longer the case. The MOI is now KING! A company’s shareholders who ignore the latter, do so at their own peril.
If a company has used a short standard form of CIPC MOI, or if a company still labours under the articles and memorandum drafted under the previous Companies Act, shareholders may be at risk where they have left the management of the company in the hands of directors, as the alterable provisions of the new Companies Act would not have been amended.
Varying a clause of the MOI in the shareholders’ agreement simply does not work. There are about 52 default provisions in the new Companies Act that can be amended. However, ONLY the MOI can modify the alterable provisions of the new Companies Act.
Admittedly, the long standard form of CIPC MOI is better, but it does not address specific issues.
More on the above later (A longer article on this is in the process of being written), suffice to stress for now that SMMEs (or even larger private companies) should be circumspect about purchasing the “standard” or “seemingly bespoke” shareholders’ agreement with a complete (or scant) disregard for the MOI.
Please note that I am not disputing that there are other agreements that can be standardised to a large extent and tweaked by even non-legal practitioners. I am loathe however to place the shareholders’ agreement and the MOI into the category of “standard”; legal agreements/documents; to reiterate beware also of the seemingly bespoke, automatically generated shareholders’ agreements that do not cater for what is contained in the MOI and that do not advise on what needs to happen with the MOI so that companies are not caught with “their (corporate) pants down”.
When it comes to the MOI and the shareholders’ agreement, it is simply best to err on the side of extreme caution and to make use of a skilled legal practitioner to draft bespoke documents.
We have a private company shareholders’ agreement for sale on this website. Please read more here.
Several MOIs are in the process of being drafted and shall be made available shortly with detailed explanatory notes.
HOWEVER, as we firmly believe that the MOI is such a critically necessary and important document, we feel that it is best to have such drafted by a legal practitioner. Unless you are very comfortable using the ones we will be placing on this site with explanatory notes and drafting notes therein, please go ahead. Otherwise, we encourage you to please visit our VIRTUAL LEGAL CONSULTING page for further information with regard to the drafting of a unique MOI by a legal practitioner.