Companies Act Versus the Memorandum of Incorporation – The Case of Barry V Clearwater Estates

Section 1 of the Companies Act 71 of 2008 ("the Companies Act") differentiates between alterable and unalterable provisions and defines "unalterable provisions" as a provision that "does not expressly contemplate that its effect on any particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by a company's memorandum of incorporation".
_The case of Barry v Clearwater Estates NPC & Others 2017 (3) SA 364 (SCA)_ deals with section 15(2)(a)(iii) of the Companies Act which states that the Memorandum of Incorporation ("MOI") of a company may not contain a provision that negates, restricts, limits, qualifies, extends or otherwise alters the substance and effect of an UNALTERABLE provision of the Companies Act.
In this case, Clearwater Estates convened a special general meeting to adopt various resolutions.
One of the resolutions approved was to increase levy payments by residents. Barry, being a director of Clearwater Estates, challenged the validity of the resolution on account of the fact that shareholder proxies in terms of the MOI, were to be submitted 48 hours before the time designated for holding the meeting. These proxies were instead submitted on the day of the meeting.
In short, it was contended that proxy forms submitted on the day of the meeting were invalid and therefore that the necessary quorum had not been met. The board proposed that in order to now meet the quorum requirements, it would vote on condoning the late filing of the proxies.
Clearwater contended that the articles found in the MOI relating to proxies were in contravention of the Companies Act in that section 58(1) of the Companies Act states that:
_"at any time, a shareholder of a company may appoint any individual, including an individual who is not a shareholder of that company ..."_
In light of the above, it was argued by Clearwater that the articles contained in the MOI were in contravention of the Companies Act, and the requirement in the articles that any proxy be delivered not less than 48 hours before the meeting was therefore null and void.
As section 58 (1) of the Companies Act is an unalterable provision, it may not be altered by the MOI of the Company.
In contrast to Clearwater's argument, Barry drew a distinction between section 58(1) and an alterable provision in the Companies Act being section 58(3)(c) which states that:
"_except to the extent where the MOI of a company provides otherwise, a copy of the instrument appointing a proxy must be delivered to the company, or to any other person on behalf of the company, before the proxy exercises any rights of the shareholder at a shareholders meeting."_
The court found that although section 58(3)(c) is an alterable provision, the plain wording of sections 58(1)(a) and 58(3)(c) read together is that a shareholder may appoint a proxy at any time provided that a proxy delivers a copy of the instrument appointing the proxy before the proxy may exercise any of the rights of the shareholder at the meeting.
Consequently, if the articles in question contravene or are inconsistent with the provisions of s 58(1), they are void in terms of s 15(1) of the Act.
In conclusion the court held that 58 (1) could not be altered and the articles in the MOI were null and void being inconsistent with the Companies Act.
It is important to note from the above case that if a section in the Companies Act is unalterable, it will always prevail over the company's MOI. Companies need to be cognisant of the unalterable provisions of the Companies Act in order to safeguard compliance with it.
SHOULD YOU HAVE ANY FURTHER QUESTIONS ON THIS, PLEASE CONTACT Kayla Shadiack KAYLA@CM-ATTORNEYS.COM


Companies Act Versus the Memorandum of Incorporation – The Case of Barry V Clearwater Estates


Section 1 of the Companies Act 71 of 2008 (“the Companies Act”) differentiates between alterable and unalterable provisions and defines “unalterable provisions” as a provision that “does not expressly contemplate that its effect on any particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by a company’s memorandum of incorporation”.
The case of Barry v Clearwater Estates NPC & Others 2017 (3) SA 364 (SCA) deals with section 15(2)(a)(iii) of the Companies Act which states that the Memorandum of Incorporation (“MOI”) of a company may not contain a provision that negates, restricts, limits, qualifies, extends or otherwise alters the substance and effect of an unalterable provision of the Companies Act.
In this case, Clearwater Estates convened a special general meeting to adopt various resolutions.
One of the resolutions approved was to increase levy payments by residents. Barry, being a director of Clearwater Estates, challenged the validity of the resolution on account of the fact that shareholder proxies in terms of the MOI, were to be submitted 48 hours before the time designated for holding the meeting. These proxies were instead submitted on the day of the meeting.
In short, it was contended that proxy forms submitted on the day of the meeting were invalid and therefore that the necessary quorum had not been met. The board proposed that in order to now meet the quorum requirements, it would vote on condoning the late filing of the proxies.
Clearwater contended that the articles found in the MOI relating to proxies were in contravention of the Companies Act in that section 58(1) of the Companies Act states that:
"at any time, a shareholder of a company may appoint any individual, including an individual who is not a shareholder of that company ..."
In light of the above, it was argued by Clearwater that the articles contained in the MOI were in contravention of the Companies Act, and the requirement in the articles that any proxy be delivered not less than 48 hours before the meeting was therefore null and void.
As section 58 (1) of the Companies Act is an unalterable provision, it may not be altered by the MOI of the Company.
In contrast to Clearwater's argument, Barry drew a distinction between section 58(1) and an alterable provision in the Companies Act being section 58(3)(c) which states that:
"except to the extent where the MOI of a company provides otherwise, a copy of the instrument appointing a proxy must be delivered to the company, or to any other person on behalf of the company, before the proxy exercises any rights of the shareholder at a shareholders meeting."
The court found that although section 58(3)(c) is an alterable provision, the plain wording of sections 58(1)(a) and 58(3)(c) read together is that a shareholder may appoint a proxy at any time provided that a proxy delivers a copy of the instrument appointing the proxy before the proxy may exercise any of the rights of the shareholder at the meeting.
Consequently, if the articles in question contravene or are inconsistent with the provisions of s 58(1), they are void in terms of s 15(1) of the Act.
In conclusion the court held that 58 (1) could not be altered and the articles in the MOI were null and void being inconsistent with the Companies Act.
It is important to note from the above case that if a section in the Companies Act is unalterable, it will always prevail over the company's MOI. Companies need to be cognisant of the unalterable provisions of the Companies Act in order to safeguard compliance with it.

Should you have any further questions on this, please contact Kayla Shadiack kayla@cm-attorneys.com


Shareholders the Backbone of a Company: What it means to pass a Special Resolution.

Introduction

The Companies Act No. 71 of 2008 (hereinafter referred to as the “Companies Act”) regulates the governance of companies in South Africa.
There are two internal administrative bodies within a company, the board of directors, and the shareholders constituted in a shareholders’ meeting Substantive management decisions which need to be taken by companies are reserved for the board of directors and shareholder bodies respectively.
Greer LJ classically described the relationship between these bodies in John Shaw and Sons (Salford) Ltd v Shaw [1935] 2 KB 113 (CA) by stating that “[a] company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles [equivalent to our Memorandum of Incorporation], be exercised by directors, certain other powers may be reserved for the shareholders in general meeting.”
Our Companies Act contains the procedural rules relating to shareholder meetings, and the passing of resolutions and voting. These formal rules need to be followed so that decisions taken at shareholder meetings are not invalid for non-compliance or procedural irregularities.

The Procedural Rules

Any company's corporate and commercial affairs are managed and controlled by its board of directors, unless its Memorandum of Incorporation (“MOI”) provides otherwise. However, in certain instances and in respect of certain actions and major decisions, a company's shareholders are required to authorise such actions and decisions.
Every decision by a shareholder (resolution) can be passed either by way of an ordinary resolution or a special resolution.
An ordinary resolution must be voted on by more than 50% of the voting rights exercised on that resolution, while a special resolution must be supported by at least 75% of the voting rights exercised on that resolution. These thresholds may, however, be altered by a company's MOl subject to there being at least a 10% gap between the ordinary and special resolution (s65 (7) of the Companies Act No. 71 of 2008.
Resolutions may either be passed at a shareholders meeting (s61 of the Companies Act), or by written consent without a shareholders meeting (s60 of the Companies Act).

Particulars Required

A proposed resolution must be expressed with sufficient clarity and specificity, and must be accompanied by adequate information or explanatory material to enable a shareholder who is entitled to vote on the resolution, to decide whether to participate in the meeting and seek to influence the outcome of the vote on the resolution.
There are also instances where a minority shareholder may prevent a company from taking an essential action due to a special resolution being required. In a recent Business Standard article (www.business-standard.com/article/companies/l-t-becomes-single-largest-shareholder-in-mindtree-acquires-26-stake-119051601374_1.html) an engineering firm, Larsen & Toubro (L&T), acquired a 26%  shareholding in Mindtree, giving L&T the power to make decisions and halt actions requiring a special resolution, at its discretion.

In What Circumstances Are Special Resolutions Required?

Section 65 (11) of the Companies Act states that the passing of a special resolution will be required when: Amending a company's MOI to the extent required by section 16(1)(c) of the Companies Act; Ratifying a consolidated revision of a company's MOI; Ratifying actions by the company or directors in excess of their authority, as contemplated in section 20(2) of the Companies Act; Approving an issue of shares or granting of rights in the circumstances contemplated in section 41(1) of the Companies Act, such as rights issued to a director, prescribed officer, future director, or future prescribed officer of the company; rights issued to a person related or inter-related to the company, or to a director or prescribed officer of the company, or rights issued to a nominee of a person mentioned herein; Approving an issue of shares or securities as contemplated in section 41(3) of the Companies Act which states that a special resolution will  be required for an  issue of  shares, securities convertible into shares, or rights exercisable for shares in a transaction or series of integrated transactions, if the voting power of the class of shares that are issued or issuable as a result of the transaction or series of transactions, will be equal to or exceed 30% of the voting power of all the shares of that class held by the shareholders immediately before the transaction or series of transactions; Authorising the board to grant financial assistance in terms of s44 of the Companies Act by way of a loan, guarantee, the provision of security or otherwise to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or inter-related company, or for the purchase of any securities of the company or a related or inter-related company; Approving a decision of the board for re-acquisition of shares in the circumstances contemplated in s48(8) of the Companies Act; Authorising the basis for compensation to directors for their services in terms of s66(9) of the Companies Act; Approving the voluntary winding up of a solvent company in terms of s80(1) of the Companies Act whereby a solvent company may only be wound up voluntarily if the company has adopted a special resolution to do so, which may provide for the winding up by the company or by its creditors; Approving an application to transfer the registration of the company to a foreign jurisdiction; Approving any proposed fundamental transaction to the extent required by Part A of Chapter 5 of the Companies Act; Revoking a special resolution which triggers appraisal rights under s164 of the Companies Act; and In terms of s36(2)(a) of the Companies Act, the authorisation and classification of shares, the number of authorised shares of each class, and the preferences, rights, limitations and other terms associated with each class of shares as set out in the company's MOI, may be changed only by an amendment of the MOI by special resolution of the shareholders, or the board in certain circumstances provided for in the Companies Act. Additionally, a company's MOI may be tailored to require a special resolution to approve any other matter which is not codified in the Companies Act.

Should you have any further questions on this, please contact us
Kayla Shadiack kayla@cm-attorneys.com


SONA February 2019

Highlights from the SONA Budget Speech:

- No changes to personal Tax

- Introduction of Gambling Tax

- No Change to the 15% VAT rate