Shareholder’s Agreement vs MOI: Understanding the Difference

A Shareholders’ Agreement and the Company’s MOI (Memorandum of Incorporation) go together like the proverbial horse-and-carriage. Before the new Companies Act, a private company’s Shareholder’s Agreement was king of this carriage, overriding any conflicting provision in the articles of association. But not anymore. In terms of the South African Companies Act, the terms of the company’s Memorandum of Incorporation override any conflicting provisions in the Shareholders’ Agreement. Does this mean that a Shareholder’s Agreement is no longer relevant? Not at all. A Shareholders’ Agreement neither replaces nor alters the MOI. A company’s Shareholders’ Agreement should complement its MOI. What this does mean, however, is that shareholders should pay careful attention to the MOI under which it is incorporated.

There are two versions of the MOI. The short version MOI is a standard, unalterable MOI. This version is applied either by design, where the shareholders contemplate their options and intentionally elect to use the short version of the MOI. Or, more commonly, by default, as the short-version MOI is applied as the default MOI. The short version MOI is generally adequate for most small to medium-sized companies, where the shareholders and directors are invariably the same people. As the company grows and appoints new directors, however, the company may want to consider reviewing its MOI (and related Shareholders Agreement) to confirm whether the terms and provisions are still applicable.

The second version of the MOI is the long version MOI, which allows for several components to be altered. The long MOI is typically used by larger companies. Generally, the companies that elect to use this version are ones where the Board comprises directors who are not necessarily shareholders. Applying an altered, long version of the MOI can give shareholders more rights and protection than they would have under the short version. However, altering and adjusting this MOI, tailoring it to the Company’s requirements, can be an involved and lengthy process. It is not for the faint-hearted, and a detailed knowledge of the Companies Act is essential.

Be aware that if you don’t like a provision in your Company’s MOI you cannot simply change the clause in your Shareholders’ Agreement. The MOI takes precedence over conflicting provisions in the Shareholders’ Agreement. You can, however, change the provision in your MOI. But only if you get sufficient support from your company, if the long version MOI is applicable (the short form MOI cannot be altered), and if the provision is an alterable provision, ie. if the Companies Act permits you to alter the provision in the MOI.

It is important to understand that the Shareholders’ Agreement needs to be drafted with the chosen MOI in mind – so exercise caution if you’re using a “standard” Shareholder’s Agreement that can supposedly be used with either version of MOI. If your company is incorporated with the short standard form MOI then your Shareholders’ Agreement needs to acknowledge this MOI, and importantly, must not include any terms or clauses that conflict with the MOI. Likewise, if your company has chosen to use the long, alterable version of the MOI, your Shareholders Agreement needs to be drafted in line with your MOI.

A Shareholders Agreement can serve to clarify and enhance matters that are included in the MOI, and can also add to the shareholders’ rights and responsibilities. Shareholders are advised to read the Memorandum of Incorporation applicable to their company, sign a Shareholder’s Agreement that aligns with the company’s MOI, and above all, understand their rights and obligations as a shareholder in terms of these documents.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.