On 1 May 2013 will your company’s shareholders agreement be with paper that it is written on?

This is an important corporate law consideration which must be addressed by all South African companies and their shareholders which rely on shareholders agreements concluded prior to the commencement of the new Companies Act, No 71 of 2008 (“the new Companies Act”), as after the end of the new Companies Act’s transitional period much of what is contained within the current shareholders agreements could automatically be rendered void.

In terms of the previous Companies Act, No 61 of 1973 (“old Companies Act”) a company’s constitutional documents consisted of its memorandum of association and articles of association. In addition to these statutory documents, shareholders often concluded an additional shareholders agreement to regulate the internal affairs of the company.

A shareholders agreement typically provided that in the event of any conflict between the company’s articles of association and the shareholders agreement, the shareholders agreement would be the document that takes precedence.The shareholders therefore regularly used shareholders agreements to regulate important aspects of the company without the need to amend its articles of association and, by doing so, make the provisions public.

The new Companies Act has, however, dramatically changed the possible scope and effectiveness of not only the new shareholders agreements concluded in terms of the new Companies Act, but also shareholders agreements which were concluded prior to the new Companies Act’s commencement date on 1 May 2011.

In terms of the new Companies Act, all shareholders agreements must be consistent not only with the provisions of the act itself, but also with companies constitutional documents, namely the memorandum of incorporation. Should there be any inconsistency between the shareholders agreement and a provision of the new Companies Act or memorandum of incorporation, the provision contained within the shareholders agreement shall be void.

A provision in a shareholders agreement which provides that the shareholders agreement will take precedence over the act or memorandum of incorporation shall itself be void and shall not provide any assistance to the shareholders.

Companies which were incorporated under the old Companies Act and which had pre-existing shareholders agreements are, however, provided with a two year transitional period which ends of 30 April 2013.

During the transitional period, pre-existing companies may update their constitutional documents to comply with the provisions of the new Companies Act, and during such time should a shareholders agreement conflict with the provisions of the new Companies Act, or the company’s articles of association, the provisions of the shareholders agreement shall take precedence.

On 1 May 2013, any provision in a pre-existing shareholders agreement which directly conflicts with the new Companies Act or the company’s memorandum of incorporation will be void.

A company which takes no steps to align its current articles of association and shareholders agreement with the provision of the new Companies Act may find itself in a situation where most, if not all, provisions contained within the shareholders agreement are void as they conflict with the company’s articles of association which is automatically deemed to be its new memorandum of incorporation for the purposes of the new Companies Act.

Important provisions which are ordinarily contained within the shareholders agreement which may be void include provisions restricting or allowing the alteration or conversion of share capital, provisions regulating company meetings, provisions granting minority shareholders or specified shareholders rights to appoint directors to the company’s board, minority protection provisions includingprovisions which limit the board of directors powers, and provisions regulating borrowing powers and the determination and payment of dividends to shareholders.

What can be done to ensure that important provisions contained within a shareholders’ agreement are not void?

It will be necessary to determine where conflicts currently exist between the new Companies Act, articles of association and shareholders agreement.

Once all conflicts have been identified, it will be necessary to determine which matters are now classified as alterable provisions and which are classified as non-alterable provisions in terms of the Companies Act.

Should any of these matters be classified as alterable or non-alterable provisions within the new Companies Act, it will not be possible for the shareholders to regulate these matters in a shareholders agreement, as non-alterable provisions cannot be altered and alterable provisions can only be altered in the company’s memorandum of incorporation.

Once this analysis has been done it will then be necessary to update the company’s memorandum of incorporation to deal with all alterable provisions in terms of the Companies Act which can only be altered in the memorandum of incorporation, and draft an amended shareholders agreement relating to the remaining company matters.

By Kevin Pietersen – Director, Pietersen Incorporated

Issued by RedStar Communication on behalf of Pietersen Incorporated.

For more information contact:
Edward Mahlasela on 083 427 0834