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.
All current Articles and Memorandum of Associations will have to convert to the MOI within two years of the new Act being implemented which was on 1 May 2011. Therefore all companies will need to amend and lodge their MOIs before 30 April 2013.
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 the current Memorandum and Articles of Association become the new MOI.
For existing companies the main issue of concern is whether to amend their Articles and Memorandum of Association which are deemed to be the MOI. The Act provides a transition period of two years. During this period existing companies may, without making any changes, use their MOI even if it is in conflict with the Act as the MOI will have higher priority than the Act. All transactions, agreements, Shareholders’ Agreements or resolutions which are in operation during the transitional period are valid to the extent that they do not conflict with their MOI, notwithstanding any conflicts with the Act.
The main problem arises once the transitional period expires. At this point the MOI loses its priority over the Act and hence all its provisions and contents will be subject to the Act. After expiration a company’s MOI must not conflict with the Act in any manner. 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 during the transitional period 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
ONLINEMOI identifies all the relevant sections of the Act and regulations that impacts on the MOI, giving one the facility to customise and tailor-make your MOI by selecting the articles and clauses to meet the needs and preferences of your company, its shareholders, directors and stakeholders.
ONLINEMOI will decrease the commercial and legal risk of directors.