Review of Memorandum of Incorporation and Shareholders Agreements

A company’s memorandum and articles of association have been replaced with a single document known as the ‘memorandum of incorporation’

The two year transitional period granted under the new Companies Act, 2008 (“The Act”) expires at the end of April 2013. Companies that existed prior to 1 May 2011 (the “effective date”), and which have not yet undertaken a review of their constitutional documents and shareholders agreements to ascertain the impact of the Act, should do so without delay.
Memorandum of Incorporation
Under the Act, the memorandum and articles of association are replaced with a single document known as the ‘memorandum of incorporation’ (“MOI”). Each provision of a company’s MOI must be consistent with the Act and, subject to certain exceptions, is void to the extent that it contravenes or is inconsistent with the Act.
The Act however provides a two year transitional period for a pre-
existing company to file, without charge, a notice of amendment to its constitutional documents to bring them in line with the provisions of the Act. During that two year period, if there is any conflict between the Act and a pre-existing company’s constitutional documents, the latter will prevail, except in regard to the following matters which took effect on the effective date:
  • the duties, conduct and liability of directors;
  • the rights of shareholders to receive any notice or have access to any information;
  • meetings of shareholders and directors, and adoption of resolutions;
  • fundamental transactions, takeovers and offers; and
  • the approvals required for any distribution, financial assistance, insider share issues or options.
Shareholders Agreements
The Act specifically recognises shareholders agreements. In terms of section 15(7) of the Act, shareholders of a company may enter into any agreement with one another concerning any matter relating to the company, but such agreement must be consistent with the Act and the company’s MOI. Any provision which is inconsistent with the Act or the company’s MOI will be void to the extent of the inconsistency.
In terms of the transitional arrangements, however, a shareholders agreement adopted by shareholders of a pre-existing company before the effective date will continue to have the same force and effect despite section 15(7) –
  • for a period of two years after the effective date or until changed by the shareholders who are parties to the agreement; and
  • after the two year period, only to the extent that it is consistent with the Act and the company’s MOI.
Accordingly, during the transitional two year period, if there is any conflict between the
provisions of an existing shareholders agreement and the provisions of the Act or the company’s MOI, the shareholders agreement will prevail. After the expiry of that period, or if any amendment is made to a pre-existing shareholders agreement prior to the expiry of that period, then with effect from the date the amendment took effect, any provision in a shareholders agreement that is inconsistent with the Act or the MOI will be void. This could have negative consequences for shareholders who may have carefully negotiated certain protections in a shareholders agreement which may now become void.
Practical Implications
A review of a pre-existing company’s constitutional documents and shareholders agreements should be undertaken to determine the extent to which they are inconsistent with the Act and the amendments that may be required in order to bring those documents and agreements in line with the Act and the parties’ negotiated contractual arrangements.

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