Attorney Tracy Hockly of Dommisse Attorneys elaborates: "While companies who aren't yet fully compliant probably have no need to panic, they should use the opportunity to review their founding documents.
"For many companies this is one of those important-but-not-urgent things that can too easily fall off busy people's agendas," says Hockly. "But it's wise to make some time to deal with it."
Hockly explains that the new Act "contains some provisions that conflict with what companies may have specified in their old founding documents, such as shareholders' agreements and the Memorandum of Incorporation (MOI) (previously known as the articles and memorandum of association). The Act provided for a two-year grace period to give companies time to amend all their documents and harmonise these with the Act, which has now expired."
What this means, she adds, "is that since the deadline passed, anything in your founding documents that conflicts with the unalterable provisions in the new Act is now null and void (unless your MOI imposes a higher standard, greater restriction, longer period of time or any similarly more onerous requirement). Also, perhaps most importantly, anything in your shareholders agreement that is inconsistent with the Act or the MOI is null and void."
For many companies the end of the transition period is not too much cause for concern, says Hockly, especially private companies that are owner-managed. It will ultimately be more important to ensure that the unalterable provisions in the Act are being complied with by your directors. Nevertheless, she says, "it's still a good idea to get your housekeeping in order. The end of the grace period doesn't mean you can no longer amend your MOI, or that you'll be charged any penalty for failing to do so (aside from a nominal fee for the amendment, payable to the CIPC). But you do need to know that the assumptions you're operating under are correct."
The situation is more urgent for those who have two or more shareholders, especially if there is a difficult relationship between shareholders. If you are not completely confident that your rights under old founding documents are adequately protected under the new Act, it is wise to check with an attorney how best to deal with this as soon as possible. Hockly adds that "we really don't recommend using a standard-form MOI. They tend to be very sparse and don't encourage engagement with the issues. Your MOI should be the expression of an agreement all the shareholders have come to after really thinking through the options. The Act lays down the minimum requirements, but you are quite entitled to have more demanding founding documents in place to manage your relationships and avoid future conflict."
If a company does decide to approach an attorney to review its founding documents, concludes Hockly, "you can shorten the process and manage your costs by preparing a good brief. As well as your existing documents, be sure to include exact details of all your current shareholders and directors, how directors are appointed, how decisions should be made, and any agreements you currently have in place around transfers of shares, loan accounts and so on. If you're thinking of bringing in an outside investor or selling shares, mention it; and also point out any red flags or areas of actual or potential conflict. Write down all the questions you have before any meeting, and don't be afraid to ask what might seem like stupid questions. The new Act is in many ways intended to be less onerous and better for business than the old version, so it's to your benefit to develop a good grasp of the basics."
For more information, go to www.dommisseattorneys.co.za.
