MOI vs Shareholders Agreements

What’s the Difference?

A Memorandum of Incorporation, or MOI, is a cornerstone document for any company, laying out the rights, responsibilities and duties of shareholders and directors. It is obligatory that every company has an MOI filed with the Companies and Intellectual Property Commission (“CIPC”), and the MOI is available for public viewing at a small fee.

It is not obligatory for a company to have a Shareholders Agreement.  However, because it is a private document and not filed at CIPC, it is useful to conclude if there are truly confidential matters that the shareholders and the company want to agree on. In our experience there are rarely terms that are truly private or confidential, and as such there is little need to also have a Shareholders Agreement on top of the obligatory MOI.

Since the Companies Act of 2008 came into effect in 2011, MOIs should contain much more detail than their predecessor (memorandums and articles of association). This has lead to the decrease of content in Shareholders   Agreements. The MOI stands as the most important document of the two, and trumps the Shareholders Agreement if the two conflict. As such, the Shareholders Agreements need to align to the information contained in the MOI. Any inconsistencies in the Shareholders Agreement could lead to that conflicting clause not being implemented.

There are also differences in how the documents bind new shareholders. The MOI automatically binds new shareholders without their explicit agreement, while a Shareholders Agreement needs to be agreed to before being binding.

Lastly, the MOI requires at least a shareholders special resolution in order to be amended, while the Shareholders Agreement requires unanimous agreement and approval in writing (all shareholders and the Company) before amendment. This however may mean that a minority shareholder who cannot block a special resolution being passed may prefer more detail to be included in the Shareholders Agreement so that those terms cannot be amended without its consent.

CIPC Templates

CIPC does offer free MOI templates, but they are very basic and we would not recommend that they are used. They leave out many important clauses that we can draft into a bespoke MOI to protect minority or majority shareholders, or even just one particular shareholder. The default Companies Act provisions in the template MOIs can also be amended to suit one or some of the shareholders, and so at the very least the template MOI should be carefully amended by an attorney to suit the client, and not just adopted as is.  It is advised that an attorney is consulted in drawing up a tailored MOI to include protection of the shareholder that such attorney represents.

Additional Clauses to Consider Adding: The following clauses are not provided for in the CIPC templates, nor in the Companies Act, but may be important to include in an MOI:

1. a pre-emptive right in favour of the remaining shareholders if one shareholder decides to sell its shares;
2. a drag along right in favour of the majority shareholders- so if they find a buyer for 100% of the shares in the company, they can force the minority shareholders to sell their shares to that buyer;
3. a come along right in favour of the minority shareholders – which says if the majority shareholders sell their shares, the minority shareholders can demand that their shares are also sold to that buyer, so they aren’t left as minority shareholders in a company with an unknown majority shareholder;
4. restraint of trade and non-compete clauses that apply to all shareholders, or only some, as relevant;
5. a deemed offer of shares clause- which forces a shareholder to offer their shares for sale to the other shareholders if certain trigger events occur- such as a shareholder’s death or incapacity, a shareholder materially breaching the MOI, or a shareholder’s employment by the company ending;
6. a funding clause recording where funding will be sought if the company needs it, and whether shareholders are obliged to advance funds to the company, and if they do not, if their shareholding can be diluted in favour of the shareholders that do advance funding. And if shareholders advance funds to the company, what interest will they accrue and when will they be repaid;
7. a no encumbrance clause- prohibiting shareholders from encumbering their shares or loan accounts against the company in favour of any 3rd party (for example, they will be prohibited from ceding and pledging their shares to a bank as security for their repayment of a personal bank loan);
8. a dispute resolution clause which obliges shareholders or the company that are arguing about the MOI to try and settle it through mediation, failing which by arbitration.

Default Companies Act Provisions to Consider Amending: Other provisions in the Companies Act that can be amended in the MOI to suit the relevant shareholder include:

1. Percentages required to pass shareholders’ ordinary or special resolutions – the percentages prescribed by the Companies Act can be amended, and it can even be recorded that a specific shareholder must have voted in favour of the resolution for it to pass;
2. Who must be present to form a quorum for a shareholders’ or directors’ meeting.

–  The default position in the Companies Act for when a shareholders’ meeting can begin is if shareholders holding only 25% of the votes are present. This is usually far too low to protect most of the shareholders who would not want a meeting to begin unless they or at least the majority of shareholders are present.  We can increase this percentage, and we can again add that a specific shareholder must be present for the quorum to be constituted.

-The default position for when a directors’ meeting can begin is that a majority of directors must be present. This may be acceptable to the shareholders, but we can raise that threshold or add that a specific director must be present if required;

3. The list of matters that require approval by shareholders’ special resolution (in effect taking away the power from the board to make those decisions). For example: decisions relating to when dividends are declared and paid; deciding on senior managements’ salaries and bonuses; deciding when senior management are hired or fired; deciding when new auditors or accountants are appointed; deciding when expenditure outside of the annual budget is planned, etc;
4. How directors are elected or appointed: this is incredibly flexible and we can even give minority shareholders, if they can convince the other shareholders to accept this, a guaranteed seat on the board. In fact we draft the entire MOI once we understand which shareholders ‘control’ the votes on the board – which leads us to draft the majority of the decisions either in the board’s hands or in shareholders’ hands. Because if a shareholder doesn’t control the votes at the board- it may be able to at least block a shareholders resolution on the matter being passed;
5. We elaborate on the procedure to be followed if the pre-emptive right that is granted under the Companies Act to shareholders when new shares are about to be issued, because the Companies Act sections on this are undetailed. Or we can record that shareholders do not have this right at all.

Buy & Sell Agreements and Conflicts with the MOI

Buy & Sell Agreements are concluded when shareholders take out an insurance policy on the life or disability of another shareholder, so that on the other shareholder’s death or disability the first shareholder is paid out the funds by the policy to be able to afford to buy that other shareholder’s shares. However, when insurance companies draft these agreements, they often lack the coherence and detail of an attorney-drafted legal document. And more importantly, the insurance companies do not check whether the Buy & Sell Agreement conflicts with what is already recorded in the MOI regarding death or disability of a shareholder.

The MOI trumps all other agreements between shareholders, so if it conflicts with the Buy & Sell Agreement, the provisions of the MOI will prevail. As such, if a Buy & Sell Agreement is concluded, the MOI may need to be amended so there is no conflict between the two.