Article by listed attorney: NICOLENE SCHOEMAN
Introduction
Do you manage a business? If so, it is important that you understand the very significant changes triggered by the Companies Act 71 of 2008.
Under the Companies Act 61 of 1973 (the “Old Act”), every company had to register its Memorandum of Association and its Articles of Association. While the previous Act imposed various requirements on the form and content of the memorandum, it did not govern the content of the articles.
In terms of the 1973 Act, it was legal to alter the memorandum and articles independently of one another through a shareholders’ special resolution. Additionally, the memorandum and articles were binding between the members (shareholders) of the company and the company itself.
Now, however, the rules have changed quite drastically. Under the Companies Act 71 of 2008 (the “new Act”), the MOI is a legally binding document between shareholders themselves, between the company and shareholders, and between the company and third parties.
Now, existing companies that registered under the old Act must align their existing articles and memorandi with the provisions of the new Act. Furthermore, the new Act has set a window period within which this is to be done. The window period closes at the end of April 2013. This means it is important for companies to consult their attorneys sooner rather than later to assess the impact these changes may have on their financial year-end and to reconsider their strategies.
The legal nature of the Memorandum of Incorporation
A Memorandum of Incorporation (MOI) is defined in the new Act as an instrument:
‘that sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to the company, and other matters as contemplated in section 15; and by which:
1. The company was incorporated in terms of this Act, as contemplated in section 13; or
2. A pre-existing company was structured and governed before the later of:
aa) the effective date; or
bb) the date it was converted to a company in terms of schedule 2’.
Accordingly, the MOI now combines the Articles of Association and Memorandum of Association in one legal document and broadens its purpose. Currently, the articles and memorandum of companies registered before the new Act was introduced will automatically form its MOI. However, these companies should ensure that their existing articles and memorandum conform to the provisions of the new Act.
Your company MOI and third parties
Under the old Act
A fundamental principle of the common law has always been that a company representative (or agent) must have the necessary authority to bind the company to a contract as the principal. This was enshrined in common law and the principles relating to the law of agency, which specifically evolved in the company law context.
Broadly speaking, a number of well-known company law doctrines or common law principles, such as the doctrine of disclosure, meant that prescribed information was continuously made public to inform interested parties about the true state of affairs within a company. Because this information was made public, the doctrine of constructive notice assumed that everyone dealing with a company had knowledge of who had authority to bind the company. There was an assumption that anyone dealing with the company had read these documents. [1]
Further, any acts outside the scope of the company’s business (known as ultra vires acts) were not permitted in terms of the common law either. The company’s business − or rather, the scope of its business − was defined in the company’s memorandum (sections 33 and 34 of the old Act). This meant that third parties dealing with the company could be denied contractual rights because the contract was null and void from the start. In other words: it never came into existence.
The practical realities of conducting business meant that agents with invalid authority often entered into contracts on behalf of their company without the company itself necessarily objecting. The law was consequently adapted to match this reality. Section 36 of the old Act altered the common law position by validating a company’s actions even if they were outside the company’s scope or entered into by directors acting without proper authority.
No dependence on this lack of capacity on behalf of the company or lack of authority on behalf of the director may have been relied on in any legal proceedings. The company rules were applicable only between the members/company and its directors. Third parties could not rely on them. This represented a significant departure from the common law position.
Finally, the Turquand rule was imported into our law from England. This rule stated that a third party could presume that all internal company formalities specific to that company were complied with when granting an agent the necessary authority.[2]
Under the new Act
The common law will continue to apply − provided it does not conflict with the new Act. Disclosure is now regulated in terms of section 75 of the new Act (conflicts of interest). In addition, companies are obliged to disclose special or more restrictive provisions contained in their MOI by affixing the suffix ‘RF’ to the company name under section 19 of the new Act.
Furthermore, according to Section 19 of the new Act, a company now has ‘all of the legal powers and capacity of an individual, except to the extent that (i) a juristic person is incapable of exercising any such power, or having any such capacity; or (ii) the company’s Memorandum of Incorporation provides otherwise’.
In addition, Section 20 of the new Act has extended the rights of third parties against both the company and those purporting to represent the company because a contract cannot be declared void by the company under the common law.
Accordingly, the doctrine of ultra vires seems totally redundant both in common law and as enshrined in Section 36 of the old Act.
On the other hand, the Turquand rule has not been totally removed from our law. Section 20(7) now states that a third party dealing with a company may still presume that all the internal formalities have been complied with − provided it was not within that person’s reasonable knowledge that this was not the case.
Conclusion
Because companies now have wider powers and greater capacity to act than before, it is of the paramount importance that third parties observe the contents of the company’s MOI and related documents, and seek advice about possible consequences when authority does not exist. In addition, third parties should also conduct a due diligence investigation.
