Lawyers go as far as saying that it can, if adopted as it stands, lead to serious problems for a company. 

Here Trudie Broekmann of Gunstons Attorneys explains why each company must now have its own MOI and not rely on the standard form.

Broekman says that one of the major misconceptions currently prevalent in SA business circles is that drawing up a new Memorandum of Incorporation for a company – as required by the Companies Act – is a simple matter of using the standard form.

She has produced a statement giving ten reasons why every company should have its own “customised” MOI, preferably compiled in conjunction with an attorney.  Pitfalls, she says, lie in wait for those who “follow the route of least resistance” by adopting the standard government form.

“If your company is a private company and you use a standard short-form MOI,” she said, “the disturbing truth is that the company will immediately lose its status as a private company and become a public company.  This is because the standard form does not restrict the transferability of shares, as is required for private companies in the new Companies Act – so your company will automatically become a public company.  This means that it will have to meet requirements for public companies, for example, undergoing a mandatory annual audit, holding annual general meetings and having at least three directors and an audit committee, none of which are required of private companies.”

A company’s current Articles of Association, said Broekmann, may require it to undergo an annual audit, but this is no longer called for by the new Act.  This audit obligation remains in force until the company has drawn up a new MOI in place of the Articles of Association.

For certain companies, it will be equally important, said Broekmann, (unless a company’s MOI stipulates otherwise) that each director has only one vote at board meetings, even though the shareholding each director represents may differ widely. Unless the MOI provides otherwise, directors’ decisions are made by majority vote.

Furthermore, as the Companies Act now stands, says Broekmann, it is impossible for a company to comply with the requirements for setting a record date and notice periods, because these provisions are drafted in a contradictory way.  This problem, she said, can be corrected by a properly drafted MOI but, again, the standard MOI does not deal with this at all.

The new Companies Act, she adds, also allows directors to make far-reaching rules without the shareholders’ consent. In most cases, the MOI should limit this power to protect shareholders, but the standard MOI does not do so.

Of great concern to shareholders, said Broekmann, should be the fact that the Companies Act gives directors the power unilaterally to increase the issued share capital of the company, so diluting the right of the shareholders to company profits – and allows them to change any of the rights attached to any class of shares.  Again, a customised MOI could and almost certainly should curtail this power – but the standard Memorandum does not. Directors also now have the right to issue debt instruments without the shareholders’ consent, unless a new MOI prohibits this.

Another shortcoming of the current MOI, she says, concerns preference shares:  if a company has these it will be necessary to insert carefully drafted provisions on voting to protect holders of preference shares, since shareholders of other classes of shares will under the new Act have the right to vote on preference shares and the rights attached to those shares as well.

Other shortcomings of the new Act will, says Broekmann, be immediately apparent to any experienced corporate lawyer. 

“A customised MOI can be profitably used by a company to protect stakeholders, to substantially ease the administrative burden of the company secretary and even to decrease directors’ legal risk.  It will give the company the ability, for example, to lower or increase the percentage vote required on special resolutions, to vary the quorum requirement for general meetings, to set terms of office for directors and to decide whether board meetings can be conducted by electronic communication. A custom-made MOI is a long-term investment in simpler corporate governance,” said Broekmann.