[co-author: Zukile Mlonyeni, Candidate Attorney]
The memorandum of incorporation (MOI) is the main constitutional document governing a company’s affairs and deals with various matters including, amongst others, the company’s powers, internal governance, the regulation of securities and the powers of its board and shareholders. In accordance with its objective to create flexibility in the operation of companies, the Companies Act 71 of 2008 (Act) allows a degree of discretion for shareholders to decide what provisions may be included in their company’s MOI. The Act distinguishes between “unalterable provisions” and “alterable provisions”. Alterable provisions are those in the Act that expressly provide that their effect on a company may be altered in substance or effect by the MOI. In these circumstances, the Act itself allows the flexibility to vary the default position contemplated in the Act through amending the MOI. In contrast, unalterable provisions are those in the Act that do not expressly contemplate that their effect on a company may be altered in substance or effect by a company’s MOI. However, the MOI may impose a higher standard or more onerous requirement than what is laid out in the unalterable provision. In other words, the general position is that the unalterable provisions laid out in the Act are mandatory and must be complied with by every company, unless a higher standard or more onerous requirement is included in the MOI.
The Act, however, is not a rigid document and recognizes that modern businesses require flexibility in the operation of companies. Against this background, section 6(2) of the Act creates a process for a person to apply to the Companies Tribunal (Tribunal) for an administrative order exempting “an agreement, transaction, arrangement, resolution or provision of a company’s MOI or rules from any prohibition or requirement established by or in terms of an unalterable provision of this Act”. This provision confers wide discretionary powers on the Tribunal and, except for matters that fall within the jurisdiction of the Takeover Regulation Panel, the Tribunal conceivably has the power to exempt an MOI from any unalterable provision in the Act.
When will the Tribunal grant an exemption?
The Tribunal’s discretion is not unfettered as it must act within the confines of the Act. Section 6(3) sets out the circumstances when the Tribunal may grant an exemption. It provides that the Tribunal must be satisfied that:
The inquiry under section 6(2) boils down to two stages. The first stage is concerned purely with the purpose of the provision of the MOI in question and whether it serves a reasonable purpose. If the purpose is not reasonable, the inquiry ends there and provision of the MOI will not be granted an exemption. However, if the purpose is reasonable then the second stage is concerned with balancing the purpose of the provision of the MOI against the purpose of the unalterable provision in question in order to determine whether it will be reasonable and justifiable to grant the exemption.
What is a reasonable purpose?
The first stage of the inquiry requires the Tribunal to be satisfied that the provision of the MOI serves a reasonable purpose. This means that not every purpose will be recognised. At the bare minimum, an unlawful or illegal purpose will not be reasonable. So, if the provision of the MOI is aimed at (for example) avoiding a criminal sanction, this would not be legitimate.
Even in situations where the purpose is lawful, it may nevertheless not be reasonable. For example, in La Lucia Sands Share Block Limited v. Flexi Holiday Club and Others (CT001APR2014)  COMPTRI 2, the Tribunal found that a resolution aimed at protecting the shareholders against hostile takeovers (by requiring that the contents of the share register be kept confidential) was not reasonable because hostile takeovers “have always been part of our statutory landscape” and there is no reason why a takeover should be something that the Tribunal should assist in preventing.
In determining whether a deviation from the MOI is reasonable, the Tribunal did not find it necessary to consider the socioeconomic aspects of the takeover. It was only concerned with the legal position of whether takeovers are permissible in law. The Tribunal also took into account the fact that, if the manner in which the takeover is effected does not comply with the law, the affected parties do have another remedy to approach the court for appropriate relief in future in terms of the laws governing fundamental transactions. Accordingly, the existence of another remedy in future was a relevant factor in mitigating the reasonableness of the provision of the MOI since the other remedy protected the shareholders.
The following factors from the La Lucia case are relevant in determining if there is a reasonable purpose:
the provision does not necessarily have to be unlawful;
whether the provisions prevent an activity which has “always been part of the statutory landscape of company law”;
the courts may not necessarily look at the socioeconomic impact of the circumstances in question;
whether the applicant has an alternative remedy for appropriate relief which renders the need for granting an exemption allowing the provision in the MOI unnecessary.
If the provision of the MOI does not serve a reasonable purpose, then the inquiry should end there. However, if it serves a reasonable purpose, the Tribunal will turn to the second stage of the inquiry, in which it must consider whether it will be reasonable and justifiable to grant the exemption to the provision of the MOI.
When is it reasonable and justifiable to grant an exemption?
This stage of the inquiry requires the Tribunal to balance policy considerations for and against granting the exemption for the provision of the MOI. It is at this stage that the content of the unalterable provision is first considered including the purpose and policy that it serves. Once the purpose and policy of the statutory provision is identified, then the balancing exercise begins where one compares it against the provision of the MOI in question. The aim is to determine the extent to which the provision in the MOI infringes or would infringe the unalterable provision. This balancing exercise is important because it requires the Tribunal to consider the circumstances of the actual case before making a determination on whether or not the exemption is granted. Where there is only a minor infringement of the unalterable provision, this should be more readily acceptable than one that goes to the heart of the unalterable provision. For example, in the La Lucia case the Tribunal noted that the unalterable provision (regarding the non-confidentiality of information in a share register) served to encourage transparency and a high standard of corporate governance. The resolution to keep the share register confidential was aimed at defeating this purpose and therefore would not have been reasonable and justifiable.
In accordance with the purposes of the Act to promote flexibility, it is welcome that a company may apply to the Tribunal to exempt a provision of its MOI from an unalterable provision in the Act. However, the Tribunal would probably only grant the exemption on rare occasions as the company is required to overcome high thresholds of establishing that the provision of the MOI serves a reasonable purpose and is not merely intended to break the law by doing something unlawful, illegal or aimed at circumventing acceptable company law practices. We anticipate that the Tribunal will be more open to granting an exemption where its infringement on an unalterable provision is minor or incidental.