The debate for many companies is whether a tailored Memorandum of Incorporation is necessary and at what point it becomes essential. Certainly, for owner-operated businesses and small businesses it won’t be appropriate and either a short-form or long-form standard MOI will suffice. As soon as there is a shareholders agreement or any other form of agreement in place that determines specific provisions for the management of the company’s shares, ring-fencing, structure of and appointments to the Board and other considerations that would need amendment to the alterable provisions of the Act, then a customised MOI is required. Professional advice should always be sought to ensure that there are no conflicts with the Act and that all aspects of the MOI are compliant and accurately take into account the relevant agreements.

The following article by Adv. Leigh Hefer, first published in 2012, provides a comprehensive overview of the elements to be taken into consideration when customising an MOI.

What is the Memorandum of Incorporation?

The MOI is defined as a document that sets out the rights and responsibilities of shareholders, directors and other within a company, and by which a company is incorporated in the Act, or by which a pre-existing company was structured and governed. All companies are required to have a MOI.

The Memorandum of Incorporation (MOI) replaces the previous Articles and Memorandum of Association.

Why is the MOI so important?

The MOI is the document that sets out specified matters by which the company was incorporated under the new Act, or by which a pre-existing company was structured and governed before the commencement of the new Act (1 May 2011), or if later, the date that a close corporation was converted under the new Act. The specified matters dealt with include the rights, duties and responsibilities of shareholders, directors and others within and in relation to a company, and other matters contemplated in Section 15 of the Act, such as company rules. The MOI therefore has priority over the Companies Act as long as it does not conflict with the Act.

Under the Companies Act 61 of 1973 (the old Act), the Memorandum of Association is the founding document of the company. The Articles of Association deal with the internal arrangements relating to control and administration and may also deal with other matters of considerable substance.

The Companies Act 71 2008 has replaced the Articles of Association and the Memorandum of Association called for by the Companies Act 63 of 1973 with a single MOI.
An important change relates to the legal force of the MOI. While under the previous act, the memorandum and articles were binding between the company and its members, and between and amongst the members, the new Act further binds prescribed officers and members of the audit committee.

The Act states that the primary purpose of the MOI is to protect the interests of shareholders in the company. It provides a set of rules that companies may accept, change or supplement to suit the particular needs of the company, with a proviso that all provisions of the MOI must be consistent with the provisions of the Act.

On the incorporation of a new company, the MOI must be completed and filed by way of a notice of incorporation, whereas for pre-existing companies that have not adopted a new MOI, the current Memorandum and Articles of Association become the new MOI.

All transactions, agreements, Shareholders’ Agreements or resolutions which are in operation, but conflict with the Act (even though they comply with the company’s MOI) become null and void. The onus is therefore on the company, its directors, shareholders and other parties to review their MOIs, binding provisions, standing agreements including Shareholders’ Agreements and resolutions to ensure that its provisions and contents do not conflict with the Act. Any conflicts must be amended to bring them in harmony with the Act and to avoid the negative consequences of non-compliance.

So what’s wrong with the standard MOI?

The DTI through the Companies and Intellectual Property Commission (CIPC) has made available the following standard MOIs:

• Form CoR 15.1A Short Standard MOI form for Private Companies
• Form CoR 15.1B Long Standard MOI form for Private Companies
• Form CoR 15.1C Short Standard MOI form for Non-Profit Companies without members
• Form CoR 15.1D Long Standard MOI form for Non-Profit Companies without members
• Form CoR 15.1E Long Standard MOI form for Non-Profit Companies with members

In terms of the Act there are several alterable and unalterable provisions to be adopted in the Memorandum of Incorporation. Should a company adopt a new Memorandum of Incorporation, they can amend such alterable provisions as deemed fit for purposes of the company. It is thus important to carefully consider the alterable provisions to be included in the Memorandum of Incorporation.

An alterable provision is a provision in the Act that expressly contemplates that its effect on a particular company can be negated, restricted, limited, qualified, extended, or otherwise altered in substance or effect by the company’s MOI.

Here are some of the clauses not included in the standard short and long form MOI:

• which provisions are ring-fenced (RF)
• transparency, accountability and integrity of companies
• finances and distributions
• enhanced accountability and transparency for companies requiring an audit
• fundamental transactions, takeovers and offers
• business rescue
• clarification of unauthorised shares
• Issuing of securities
• power of the board to make rules
• corporate governance
• percentage for resolutions
• director right to unilaterally issue debt instruments
• for a private company, the standard form does not restrict the transferability of shares power of directors to unilaterally increase the authorised share capital for the company.