In terms of the new Companies Act (No. 71, 2008), all companies are required to replace their current Memorandum and Articles of Association (initial founding documents) with a single document, the Memorandum of Incorporation or MOI. This MOI has to be registered with the Companies and Intellectual Properties Commission (CIPC) by no later than 30 April 2013.
Some weeks ago Aucamp Scholtz Lubbe launched its own MOI-process in order to assist clients with the drafting and registration of these MOIs to ensure compliance with the requirements of the Act. At that time we were receiving the same questions from several clients with regard to the drafting and registration of the MOIs. We therefore deemed it necessary to provide you with the researched answers to these frequently asked questions (FAQs). Whether you have already started compiling your MOI or are struggling with some uncertainties or questions in this regard, we trust that this document will be both valuable and insightful.
FAQ 1: Do I really need a MOI or can I still use my initial founding documents (Memorandum and Articles of Association)?
Yes, you are allowed to use your initial founding documents as your MOI but there are significant implications that need to be taken into consideration.
Should a company decide not to have an MOI registered with the CIPC it is allowed to use its Memorandum and Articles of Association. The existing Memorandum and Articles of Association will, until such time as it is converted to an MOI, be deemed to be the MOI required in terms of the 2008 Act, even after the transition period which ends on 30 April 2013. The company will then continue to be governed in terms of the provisions of its Memorandum and Articles of Association, but only to the extent that those provisions are consistent with the 2008 Companies Act.
In terms of section 15(1) of the 2008 Act, any provision in the Memorandum and Articles of Association which is inconsistent with the 2008 Act, will be deemed void and the provisions of the 2008 Act will prevail. The company could therefore find itself in a situation where it is governed partially by the provisions of its deemed MOI and partially by the provisions of the 2008 Act in so far as the MOI provisions are deemed to be void.
Furthermore, it is important to note that all MOIs completed before the end of the transition period (30 April 2013) can be lodged with the CIPC at a reduced rate whereas, if the MOI is submitted after the expiration of the transition period, the standard fee for registering an MOI will be required.
FAQ 2: What are the implications for the audit requirements of my company, of not having an MOI?
In terms of the provisions of the 2008 Act, with certain exceptions companies might, based on their Public Interest Score, qualify for alternatives to a statutory audit, i.e. either an independent review or, in very limited circumstances, a compilation. However, as long as a company’s articles of association specify that an auditor shall be appointed, that company shall appoint an auditor and an audit shall be performed for the company in terms of the requirements of Chapter 3 of the 2008 Act. In essence this is a statutory audit with much more stringent requirements.
The most significant of these requirements is Section 90(2)(b)(iv) of the Act which stipulates that, in the case of a statutory audit, no accounting or secretarial services shall be performed by the appointed auditor.
Accordingly, in order to prevent the application of certain requirements in Chapter 3, either of the following has to be done:
(1) Register the new MOI in terms of the 2008 Act with the CIPC
This will ensure that the company is allowed to use alternatives other than only an audit (based on their Public Interest Score).
Furthermore, should the company elect to have an audit performed even if it is not required in terms of the Act, based on the Public Interest Score provisions such audit will be deemed a voluntary audit. In the case of a voluntary audit the requirements in terms of the 2008 Act are far less onerous and the most significant provisions of chapter 3 will not be applicable.
(2) Amend the Articles of Association (the deemed MOI) by means of a special resolution registered with the CIPC
It is advisable that in both the following instances a special resolution is passed by the shareholders in order to remove the requirement regarding the appointment of an auditor from the company’s Articles of Association:
i. All companies which are still in the process of formalising their MOI before the expiration of the transition period; and
ii. Companies where the old Memorandum and Articles of Association will be deemed the MOI after the transition period.
It is important to note that in both instances (i) and (ii) above the required resolution needs to be taken before the company can exercise any of the following options:
i. Voluntary audit (i.e. not statutory in terms of Chapter 3 of the Act);
ii. Independent review; or
iii. Compilation (in the case of owner-managed businesses)
FAQ 3: What are the risk(s) for me as a director for not putting in place an MOI?
As mentioned in FAQ 1, your company is allowed to use its old Memorandum and Articles of Association, so there are no implicit risks for you as a director of the company. Note, however, that in this case the company will be using an MOI (in terms of the old Act) and that you will not be certain which provisions apply and which are deemed void.
Theoretically there is also no risk for third party claims against a company for not having an MOI. However, because the directors might not always be sure what their responsibilities are in view of the fact that certain provisions are contained in the Act and not in the MOI (old Memorandum and Articles), they might incur liability in instances of non-compliance.
Considering what has been explained above we urge our clients not to use their existing Memorandum and Articles of Association but rather to get their MOI in place as required by the 2008 Act, as soon as possible. Ultimately the costs saved by not doing so are just not worth the risk for both you and your company.
Because we have cooperation agreements with leading law firms we are well-positioned to assist you with the drafting of you company’s new Memorandum of Incorporation (MOI). We offer this service in the knowledge that the product that we will be providing to your company will meet the highest standards of comprehensiveness, accuracy and applicability. These are, after all, the distinctive service qualities that we are committed to.
Please do not hesitate to contact any of our directors should you require a quotation for our assistance in the process of converting to an MOI.