Under the previous Companies Act, a company generally regulated its relationships within the company with two kinds of documents. The first was the company’s constitution (its Memorandum and Articles of Association) and the second, its shareholders agreement. The constitution was essentially a contract between the company and its shareholders, whilst the shareholder’s agreement regulated the relationship between the different shareholders. The shareholder’s agreement was a vital document to the company as it could contain provisions that overruled the company’s constitution as well as regulating the internal relationship between the shareholders of the company.
The new Companies Act (“the Act”) has changed this position. The new Act establishes the Memorandum of Incorporation (MOI) as a company’s most important founding document and requires that any shareholders agreement be in line with the company’s MOI and the Act, essentially inverting the position as it was under the previous act.
But what about existing shareholders agreements?
The Act determines that where a company had a shareholder’s agreement in place on or before 1 May 2011, that agreement will continue to apply for two years from 1 May 2011 or until amended by the shareholders who are parties to such an agreement, even if it is not in line with the company’s MOI. Shareholders thus have an opportunity during this two year period to amend their shareholders agreement and bring it in line with the MOI. Also, if the shareholders fail to amend the agreement in this period, all is not lost, as those parts of the shareholders agreement that are in line with the MOI and the new Companies Act, will continue to apply. Conflicting provisions may however be invalid due to their non-compliance with the Act.
It is however important to note that, should the shareholders of the company amend an existing shareholder’s agreement subsequent to 1 May 2011 but before the two year grace period has expired, the two year grace period expires immediately and the shareholders agreement has to immediately be brought into line with the Act. In such circumstances it is advisable that all the company’s documentation be brought into line with the Act simultaneously.
The Act further provides for so-called ‘alterable provisions’ which will automatically apply to a company unless they are amended in the company’s MOI. Interestingly, a number of these alterable provisions relate to matters that would generally have been regulated in the shareholders agreement of a company under the old dispensation. It now appears that the new Act would have these items regulated in the MOI.
So what does this mean in practice?
To comply with the Act, a company would have to compare each of the provisions of its shareholders agreement with the alterable provisions of the Act to determine overlaps.
Overlapping provisions from its shareholders agreement must then be moved to the company’s MOI, as the Act requires that these provisions and changes thereto must be contained in the MOI for them to be effective.
But as these provisions are stripped out of the shareholders agreement and included in the MOI, one may now ask – has the shareholders agreement been rendered obsolete?
To answer this question, one must look at the nature of the MOI versus a shareholders agreement.
The MOI is a registered public document. On the other hand, a shareholders agreement is a private document between the shareholders of the company and generally not publicly available.
A shareholders agreement may therefore still be highly relevant where shareholders wish to regulate certain matters of the company on a private basis. Such matters may include for example arrangements regarding the buying and selling of shares, valuation of share price etc.
Importantly though, the shareholders agreement may not be contrary to the provisions of the new Companies Act or MOI.
For shareholders to establish whether they still need a shareholders agreement, the following two basic questions may assist:
- Does our shareholders agreement contain alterable provisions which should be regulated by the MOI and which are still relevant to the company?
- Are there provisions that we would prefer to be privately regulated, and are these provisions compliant with the MOI and Act?
Based on the above, it may transpire that a company may migrate many of their existing shareholder provisions to their MOI (in a manner that is compatible with the Act) and then retain a reduced version of their shareholders agreement which primarily deals with the private aspects of the shareholders’ relationship such as their buy and sell arrangements.
Whether a shareholders agreement is still relevant to a company will vary from company to company. The rule of thumb would be that a company should as soon as possible obtain the advice and guidance of a company law specialist to assist in reviewing current shareholding arrangements and ensure alignment between this and the company’s MOI.