This issue results from the common practice of MOIs repeating sections of the Companies Act in an effort to be a comprehensive and one-stop rule book for the company and reduce the need to trawl through the Companies Act to, for instance, determine notice periods, requirements for certain corporate actions, and the like. While the approach of repeating (or at least summarising) the Companies Act sections is a laudable one, it does unavoidably result in the MOI becoming outdated when these repeated sections are amended. In this article we discuss the nuances in navigating the issue of an MOI and the Companies Act going head-to-head, as not all rounds between the two will have the same winner, or even a clear winner, and the key lies in analysing the particular section of the Companies Act and the particular MOI.

When would inconsistencies arise and what are the consequences?

A few observations on MOI drafting styles or approaches are warranted. If, for example, the MOI only references a section of the Companies Act (e.g. “the provision of financial assistance by the company must comply with sections 44 and 45 of the Companies Act”) then the MOI is at a lower risk of experiencing inconsistency issues, depending on the interpretation clause of the MOI that deals with how references to legislation are to be interpreted. The MOI essentially then just assimilates into the new position in law, and nothing more is required. The bigger issue occurs where the MOI does not merely reference a section of the Companies Act, but repeats the section word for word.

The subsequent amendment of the Companies Act and, accordingly, the repeated section, leads to one of three possibilities:

• If the MOI changes an alterable provision of the Companies Act, the MOI will prevail over the Companies Act. This will only apply where the Companies Act permits such a change.
• If the MOI contradicts an unalterable provision of the Companies Act or tries to impose a lesser standard on the company than required by the Companies Act, the Companies Act will prevail over the MOI. For example, if a public company’s MOI provides that the board must appoint the social and ethics committee (as was the case prior to 27 December), such provision will simply be overridden by the new, and more onerous, legal position that requires the shareholders to elect the members of the social and ethics committee.
• If the MOI changes an unalterable provision of the Companies Act by imposing a stricter requirement than the Companies Act, then the MOI will prevail over the Companies Act – with potentially unintended results, given that the provision originally merely sought to capture the default legal position at the time but has now inadvertently turned into a clause that enacts a stricter-than-unalterable regime. For example, if the MOI repeats the previous position that a repurchase by the company of more than 5% of the issued shares must comply with sections 114 and 115 of the Companies Act (as was the case prior to the Companies Act amendments), then, notwithstanding the fact that the Companies Act no longer requires compliance with sections 114 and 115, the debate arises whether the (more stringent) MOI will still apply and the repurchase must comply with those sections.

The first go-to in the latter scenario is often the contact law principle of “tacit terms” i.e. one would presumably argue for a tacit term to be read into the MOI that if the law changes, so does the clause – but many do not appreciate that the threshold for reading in a tacit term is very high and that a court will only do so in a case where the tacit term is obvious to all parties and would have been agreed upon by all of them without hesitation. In a public company where thousands of shareholders are parties to the MOI, how exactly do you read in a tacit term?

The other area of debate is, to what extent can parties to a contract apply a law inter partes when that law is, objectively, not applicable? This ground has been traversed to some extent in a couple of credit law cases dealing with parties mistakenly “contracting into” the National Credit Act 34 of 2005, but a consistent view does not emerge from those cases, and it seems it will turn largely on the intention of the parties and the nature of the statutory provisions sought to be incorporated. Ultimately, the best way to fix the issue is to amend the MOI to bring it in line with the new law.

Practical implications

Clearly, each inconsistency must be treated carefully by considering whether the relevant section of the Companies Act is alterable or unalterable and whether the inconsistency requires following the Companies Act or the MOI. In order to avoid non-compliance with the Companies Act and/or the MOI, or debates around the intention of the parties, the recommendation is that companies must update and amend their MOIs to ensure alignment with these latest amendments to the Companies Act. Maintaining an up-to-date MOI is also important for good corporate governance. While a matchup between the MOI and Companies Act can result in adrenaline filled moments, some fights are best left for TV.