What is the difference between a Memorandum of Incorporation and a Shareholders Agreement?

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What is a Memorandum of Incorporation (MOI)?

Under the Companies Act 71 of 2008, (“the Act”), every company registered in South Africa is required to have a Memorandum of Incorporation (“MOI”). The MOI sets out the rights, duties and responsibilities of shareholders, directors and other persons involved in its operation.

This document is accessible to the general public on the Companies and Intellectual Property Commission (“CIPC”) website. While a company may still be privately owned, this document is still considered a public document.

What purpose does it serve?

The provisions in the MOI are important as they govern the relationships between these persons and the company.

When you register and incorporate your company with the CIPC, the CIPC will, by default, assign your company a generic MOI. Even though the generic MOI is compliant with the Act, it may not be completely suitable for your company. Every company is unique, and there may be some factors that differ from the generic MOI, such as plans for future growth and expansion. Therefore, it is advisable to develop and draft a customised MOI with a lawyer so that the MOI better suits your company’s needs, goals and aspirations.

While the content of an MOI is largely capable of customisation, the Act does place limitations on certain provisions. Certain provisions, which the Act refers to as ‘unalterable provisions’, cannot be altered within an MOI. An example is the provisions in section 71 (1) of the Act, which provides that a company director may be removed from their position by an ordinary resolution adopted at a meeting of the company’s shareholders. These provisions take precedence over any contrary provisions within an MOI, as will other unalterable provisions in the Act.

Strict compliance with these and all other requirements found in the Act is important for your MOI to function effectively.

Usually, the customised MOI is lodged with the CIPC when the company is registered. If the customised MOI is not lodged at the same time as the company’s registration, then the customised MOI will be submitted to the CIPC as an amendment to the current/default MOI. If any of the provisions within the customised MOI are found to be inconsistent with the Act, the Act will always take precedence.

What is a Shareholders Agreement, and how does it differ from an MOI?

As stated above, the MOI governs the relationships between key stakeholders and a company. However, a Shareholders Agreement takes it a step further and specifically regulates the relationships between the shareholders and between the shareholders and the company. It sets out the rights, obligations and responsibilities of each shareholder, and sets the terms for voting, decision-making and dispute resolution.

In practical terms, a Shareholders Agreement is a legally binding contract between the shareholders and the company. The parties to the Agreement can amend or revise it at any time as the needs of the company change.

A Quick Comparison

There are some similarities between an MOI and a Shareholders Agreement, however, they serve different purposes and have distinct features.

Both the MOI and Shareholders’ Agreement must always comply with the provisions of the Act. The main difference here is that the Shareholders’ Agreement must comply with the MOI. Where provisions within a Shareholders Agreement conflict with those found in the company’s MOI, the MOI will always take precedence. Because of this hierarchy, the MOI must always be considered when drafting a Shareholder Agreement to avoid conflicting and potentially invalid terms from slipping into the Agreement.

Unlike an MOI, a company does not have to file a Shareholder Agreement with the CIPC or make it accessible to the general public. It is instead a private document, often containing confidential information relating to company and shareholder affairs. A Shareholders Agreement is easily amended between the parties to the Agreement. However, any amendments to the MOI must be lodged with the CIPC.

See how Legalese can help your company grow legally and safely.

– Written by Scott Warwick

Professional LLM (Commercial Law) Student at the University of Cape Town

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