|Shareholder agreements, as the backbone of shareholder relationships, form a vital part of any company’s potential for stability, success and profitability. But what happens if your shareholder agreement conflicts with your company’s MOI (Memorandum of Incorporation)? Worse still, what if either of them are at variance with the Company’s Act? Which of the three takes precedence?
We discuss how our law addresses those questions, with reference to a case in which shareholders fell out over whether the appointment of directors, and shareholder relationships generally, should be governed by their shareholder’s agreement or by the (subsequently adopted) MOI.
Shareholder agreements usually form the backbone of shareholder relationships as they govern, for example, how shareholders sell their shares, how shareholder disputes are settled and the type of authority required for certain transactions.
The Companies Act makes it clear that:
- If there is any conflict between the MOI (Memorandum of Incorporation – the statutory document which per the Companies Act “sets out the rights, duties and responsibilities of shareholders, directors and others within and in relation to a company”) and the shareholders’ agreement, the MOI will prevail.
- Similarly, if there are any differences between the Companies Act and the shareholders’ agreement, then the Companies Act will take precedence.
The case that tested a shareholder agreement v the MOI
A company issued a new MOI in 2012. This MOI conflicted with the shareholders’ agreement and some shareholders approached the Court to have an order granted that the shareholders’ agreement governs the relationship amongst shareholders and thus supersedes the MOI. The shareholders’ agreement contained a non-variation clause which stated that no changes to the agreement could be made unless all shareholders agreed in writing.
The Court refused to grant the order and said that the issuing of the new MOI was done lawfully and in line with the requirements of the Companies Act. The shareholders’ agreement so materially conflicted with the MOI that it was now effectively null and void.
As a shareholders’ agreement is fundamental to the workings of shareholders, it is important to carefully consider how the MOI will relate to the shareholders’ agreement. Thus, any potential conflicts should be ironed out when drafting either a new MOI and/or a shareholders’ agreement.
Take your accountant’s advice when doing this to avoid extra cost, aggravation and time taken to resolve any differences which may surface when you need to enforce your shareholders’ agreement.