In the previous Companies Act, a company regulated its relationships within the company with two kinds of documents. The first was the company’s constitution as represented in its Memorandum and Articles of Association. The second document is its shareholders agreement. The constitution is a contract between the company and its shareholders, whilst the shareholder’s agreement outlines the relationship between the company shareholders. The shareholder’s agreement is a vital document to the company as it should contain provisions that overrule the company’s constitution as well as regulating the relationship between the shareholders of the company.
In the new Companies Act the Memorandum of Incorporation (MOI) is a company’s most important founding document and requires that any shareholders agreement be in aligned with the company’s MOI and the Act, essentially inverting the position as it was under the previous act.
How does this affect existing shareholders agreements?
The Act determines that if a company had a shareholder’s agreement in place on or before 1 May 2011, that agreement will continue to apply for two years from 1 May 2011 or until amended by the shareholders who are parties to such an agreement, even if it is not in line with the company’s MOI.
Shareholders thus have an opportunity during this 2-year period to amend their shareholders agreement and align it with the MOI. If the shareholders fail to amend the agreement in this period, those parts of the shareholders agreement that are in line with the MOI and the new Companies Act, will continue to apply. Conflicting provisions may however be invalid if they are non-compliant with the Act.
If the shareholders of the company amend an existing shareholder’s agreement subsequent to 1 May 2011 but before the 2- year grace period has expired, the two year grace period expires immediately and the shareholders agreement has to immediately be brought aligned with the Act. In such circumstances it is advisable that all the company’s documentation be brought aligned with the Act simultaneously.
The Act provides for ‘alterable provisions’ which will automatically apply to a company unless they are amended in the company’s MOI. A number of these alterable provisions relate to matters that would generally have been regulated in the shareholders agreement of a company under the old dispensation. The new Act would have these items regulated in the MOI.
What does this mean in practice?
To comply with the Act, a company has to compare each of the provisions of its shareholders agreement with the alterable provisions of the Act to determine overlaps.
Overlapping provisions from its shareholders agreement must then be moved to the company’s MOI, as the Act requires that these provisions and changes must be contained in the MOI for them to be effective.
Does this render the Shareholders Agreement invalid or obsolete?
To answer this question, you must look at the nature of the MOI versus a shareholders agreement.
The MOI is a registered public document. The shareholders agreement is a private document between the shareholders of the company and generally not publicly available.
A shareholder’s agreement is still highly relevant where shareholders wish to regulate certain matters of the company on a private basis. Such matters may include for arrangements regarding the buying and selling of shares, valuation of share price etc, on condition that the shareholders agreement is not contrary to the provisions of the new Companies Act or MOI.
Assisting you to get your shareholders agreement aligned with the company’s MOI and the Companies Act.
Companies Act Compliance