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The details of the articles applicable to a pharmaceutical company.

In order for companies to ensure compliance with all relevant provisions of the Companies Act (the Act), it is important that the company be classified correctly. The classification may affect provisions related to, among others, governance, the audit requirement, independent review, the audit committee, financial reporting standards and fundamental transactions.

During the transitional period (1 May 2011 to 30 April 2013) the Act provided that in the event of a conflict between a company’s Memorandum of Incorporation (MOI) and the Act, the provisions of the MOI prevailed. This also applied to a conflict pertaining to the company’s classification.

As a result of the Act, it often happened that a company may be identified as a private company by its MOI, but was classified as a public company in terms of the Act. During the transition period such companies were able to rely on the classification as per the MOI, and continued to operate as private companies.

However, since the end of the transition period (namely 1 May 2013), the provisions of the Act override those of the MOI. This means that companies that regard themselves as private companies may in fact be either public companies or state owned companies.

It is important to note that in certain instances the classification will be done by default, that is, where a “private company” does not meet the requirements of the Act, it will automatically be classified as a public company. Similarly, the classification will be automatic where a company meets the requirements for classification as a state owned company.

The Importance of the MOI

The Memorandum of Incorporation was introduced in 2008 and has replaced previous legislation that was under the Companies Act, No 61 of 1973 (‘the old Act’). Under this old Act there were two documents known as the M&A:

1. The Memorandum of Association which was the founding document of a company;

2. The Articles of Association which dealt with the internal arrangements relating to control, administration and any other matters of considerable substance.

The Companies Act, No 71 of 2008, as amended, has since replaced the Memorandum and Articles of Association (‘M&A’) with a single Memorandum of Incorporation (MOI).
The most important document governing a company is the Memorandum of Incorporation (MOI). The MOI sets out the rules governing the conduct of the company, as specified by its owners.

The Companies Act imposes certain specific requirements on the content of a Memorandum of Incorporation, as necessary to protect the interests of shareholders in the company, and provides for a number of default company rules / alterable provisions, which companies may accept or alter as they wish as long as it is in line with the Companies Act.

Alterable provisions within the Companies Act, 2008:

• A company has all the legal powers and capacity of an individual, except to the extent that

o a juristic person is incapable of exercising any such powers, or having any such capacity; or

o the company’s MOI provides otherwise (for example, the MOI may state that no director may contract on behalf of the company in his/her own capacity).

• Private, non-profit and incorporated companies may elect to comply with the extended accountability requirements of Chapter 3 of the Act (Sect 34(2));

• Shares within the same class has the same rights, limitations and terms, unless the MOI provides otherwise (Sect 37(1));

• MOI may exclude the right of first refusal of current shareholders of a private company in respect of shares issued by the company (Sect 39(3);

• MOI may forbid the board to render financial assistance to parties wanting to acquire shares in the company (Sect 45(2);

• MOI may provide for longer minimum notice periods for meetings;

• Electronic notice and electronic participation in meetings are allowed unless MOI prohibits it (Sect 63(2);

• Companies may determine a higher number of minimum directors than what the Act prescribes (Sect 66(2).

Unalterable provisions are provisions of the Act which the company may not change, such as directors’ duties and responsibilities and enhanced accountability requirements for public and state owned companies. In instances where the MOI is in conflict with the Act, the Companies Act will prevail.

In addition, the Act allows for companies to add provisions to address matters applicable to that company, not addressed in the Act itself, but all provisions of the MOI must be consistent with the Act. The Memorandum of Incorporation contains the following information:

• Detail of Incorporators;
• Number of directors and alternate directors;
• Share capital (maximum issued);
• Content of the MOI.

Memorandum and articles of association vs. Memorandum of Incorporation

It is important to note that for pre-existing companies which have not yet replaced their M&A with a compliant Memorandum of Incorporation (MOI), the M&A no longer has any priority over the Act and hence all the provisions and contents of the M&A will be subject to the Act. Any Shareholders Agreements, transactions, agreements or resolutions which are in operation but conflict with the Act become null and void.

Par Value Shares, Capital Accounts and Share Certificates (Schedule 5, Item 6 and Item 2(4) of the Amendment Act)

Section 35(2): specifies that no shares shall have a nominal or par value, except for banks, as defined in the Banks Act, which entails that a pre- existing company needs to convert its existing par value shares to shares with no par value within the two year grace period;

Schedule 5, Item 6(2): Despite Section 35(2) any shares of a pre- existing company that have been issued with a nominal or par value, and are held by a shareholder immediately before the effective date, continue to have the nominal or par value assigned to them when issued, subject to the regulations made in terms of sub-item (3);

Item 6(3) as amended by the Amendment Act: The Minister, in consultation with the member of Cabinet responsible for national financial matters, must make regulations to take effect as of the general effective date, providing for the optional conversion and transitional status of any nominal or par value shares, and capital accounts of a pre- existing company. But any such regulations must preserve the rights of shareholders associated with such shares, as at the effective date, to the extent doing so is compatible with the purposes of this item;
Regulation 31: Conversion of nominal or par value shares, and related Matters. Regulation 31 does not apply to a bank, as defined in the Banks Act, 1993;

Regulation 31(2): A pre-existing company may not authorise any par value shares or shares having a nominal value on or after the effective date;

a) Prepare it annual financial statements, convene an annual general meeting, provide to its shareholders copies of its annual financial statements, any notice or any other document, or
Regulation 31(3): Form CoR 31 (Notice of Board Resolution to Convert Par Value Shares) may be filed with the Commission at any time but only in respect of classes of authorised shares from which shares have not been issued or if issued are no longer outstanding. There is no fee for filing the form if it is filed within two years after the effective date of the Act.

The Board of the company is required to pass a resolution to convert the class or classes of authorised shares to shares having no nominal or par value, and filing the Form CoR 31 with the Commission at any time after the effective date.

It is important to note that the rights attached to any par value shares, held by a shareholder are not affected by the conversion, to the extent that it is compatible with the purposes of Item 6.

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