The Great Mock MOI Swindle

The Great Mock MOI Swindle

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Most people are by now aware that every Pty needs to have a new MOI (Memorandum of Incorporation) by the end of April. What most people do not know is that most people who have so far filed a MOI have done so incorrectly.

The problems arises from the fact that under the previous Companies Act Memorandum and Articles were a very standard affair with most not being looked at from one decade to the next and with most of the substance being in the shareholders agreement.  This emphatically does not apply to the new MOIs.

Making mistakes

Creating a MOI involves making fifty decisions that affect how your company operates at the most fundamental level. It determines that power of shareholders vs directors; who can issue shares, how debt is managed, how directors vote and how the rules can be changed.

The mistake many companies have made is to use a standard form MOI as it is. The standard form is not supposed to be used as is. It’s supposed to be changed to reflect the nature of your company and how you want it to operate in the future.

In using the standard form as is, companies have changed the nature of their company in up to fifty random ways without thinking through any of these changes. It is quite amazing how many reasonably large companies have done this.

For example, unless otherwise varied in the MOI, AGMs can be held anywhere in the world. So why not have them in Mongolia, pay for the directors to go and the pesky shareholders won’t be able to afford to come to the meeting and vote?

 

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And did you know that in the standard MOI, the board can issue shares without asking the shareholders thus diluting the shareholding of existing shareholders. These are just two of fifty possible consequences of filing a standard MOI without properly thinking through every option.  What have you already changed in your company without meaning to?

Opportunities missed

But companies are not only taking big risks by randomising their company affairs with a standard MOI, they are also missing a huge opportunity. It is a much unappreciated benefit of the Companies Act that options that were illegal before, like insuring directors against being liable for the Company’s debt, are now at the Company’s discretion.

The new MOI structure allows you to choose for yourself how your company should be, and you should carefully make these choices and express exactly how your company will be.

For example, you can choose whether you allow proxies or not. Can a proxy appoint another proxy? Can you use electronic means like Skype to conduct a board or shareholders meeting? If so, there is less need for proxies. How to you feel about face to face meetings?

Should all meetings be that way or is that not necessary? Or should some issues be done face to face and for others an email decision suffices?  Do you want to make these decisions consciously, or would you prefer to take whatever option the standard MOI happens to say?

Getting it right

The default in the standard MOI is that if meetings are postponed then they are postponed for a week. Is that really the best option for you? People coming from out of town are rarely able to wait a week, and they wouldn’t normally have other business in town that would justify returning a week later (they may have in a month).

Making this period one day or one month really makes much more sense than a week. Yet thousands of companies have chosen this option mindlessly, by mindlessly making their MOI, rather than managing their MOI masterfully.

MOIs can be changed at any time, and the process of doing a MOI properly can cost not much more than it cost to get your standard one. Everyone needs a proper MOI eventually. So if you have not done your MOI yet (you still have six weeks), it might be a good idea to do it properly the first time!

Douglas Shaw
Douglas Shaw is a legal expert and one of the leading drafters of MOIs in South Africa today. He is also a former chairman of Mensa Johannesburg and the author of 19 books. He can be contacted at advocate@douglasjshaw.co.za.