How To Create Founding Documents

How To Create Founding Documents

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If you don't put the right structures in place early on, you just might find that everything comes tumbling down...
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Launching your own start-up is no easy feat, and, is likely to be one of the most daunting steps that you — and those on the roller-coaster with you — will ever take.

The value of tapping into the advice and experience of professionals with expertise in your area of need cannot be underestimated.

First off, it’s important to realise that there are huge benefits to having a firm grasp of the basics of the legal questions surrounding your venture, because these obligations apply — whether you know they do or not. Once you’ve registered a company, the first thing you ought to do is to procure customised founding documents.

Related: Start A Business They Said… It’ll Be Easy, They Said…

The founding documents of your company are just that — the foundation of your company.

A customised Memorandum of Incorporation (usually referred to as an MOI) seeks to govern several relationships, including: 

  • Those between the individual shareholders of the company;
  • Those between the shareholders as a group and their obligations to the company; and
  • Those between the company and the outside world.

Your MOI is a public document which is lodged with the Companies and Intellectual Property Commission (the CIPC). The CIPC also provides a standardised MOI which operates unless your company adopts a new, custom MOI.

In most cases, the adoption of a custom MOI will suffice, but, in limited circumstances, your company may warrant a custom shareholders’ agreement. In this event, your legal expert will ensure that the agreement is consistent with both the company’s MOI and the Companies Act 71 of 2008. A shareholders’ agreement is, in essence, a private contract between the parties to the agreement.

Specifically, the Companies Act provides that if a shareholders’ agreement is not consistent with the company’s MOI or the Companies Act, the shareholders’ agreement is void to the extent of its inconsistency. What follows, serves as a starting point when constructing the brief to be presented to your legal professional.

1

Directors

A company’s board of directors governs the day-to-day operations of the company and the title carries significant responsibilities, both in terms of legislation and the common law.

Their management of your company regulates, among others, the agreements it enters into, its ability to loan money and the ability to encumber the assets of the business.

Further, it’s important to clearly delineate the voting powers of the board and, as a shareholder, you may wish to limit the powers of the board in certain circumstances — such as entering into an agreement for the disposal of a majority of the assets of the company or, at least, require special authorisation prior to taking actions with such significant impact on the business.

2

Shareholders Meetings

Although the distinction is sometimes ambiguous, especially where shareholders and directors are the same people, your founding documents need to define the roles of shareholders — both as between their fellow shareholders and as between the shareholders and the company.

Your agreement ought to regulate when, how and where shareholders meetings occur and how many shareholders are required in order for the meeting to be considered a valid meeting between shareholders of the company.

This is an area where a minority shareholder may be left out in the cold, unless particular safeguards are carved out for the shareholder.

Voting at a shareholder level also needs to be regulated, and requirements for ordinary resolutions (usually 50% plus one) and special resolutions (usually 75%) need to be provided for. Where the agreement between shareholders is not achieved, mechanisms need to be inserted to cater for such deadlock — whether by arbitration, mediation or otherwise.

Related: The Basics Of Registering A New Company

3

Dividends and Repayments to Shareholders

boardroom-meeting

This is one of the primary drivers behind getting involved in a business, so, where the payment of dividends to shareholders is concerned, special attention needs to be paid to ensure that everyone understands where they stand — before the chips are down, so to speak.

You need to carefully consider the circumstances under which a company will repay loans advanced to it by shareholder’s needs. This will also operate as a way to manage perceptions and ensure expectations are kept in check.

4

Share Capital

This fundamental provision caters for the maximum number of shares a company can issue to its shareholders and provides clarity to all shareholders about the extent of their ownership of the company. It ought to cater for the distinctions between any different classes of shares, where relevant.

5

Restricting the Transfer of Shares

Pre-emptive rights, or rights of first refusal, are characteristic of private companies and one of the obligations owed to your co-shareholders. In essence, once you form an intention to sell your shares, you are required to first offer them to your co-shareholders.

Where an offer is received from a third party, that shareholder is required to first offer the shares to the other shareholders on the same terms. In other words, he/she may not sell his shares to an outside third party on terms that are more favourable to the outsider.

6

Deemed Offer

A deemed offer — which arises in limited, pre-agreed circumstances — forces a shareholder to offer up his shares for purchase by the other shareholders, upon the occurence of a trigger event.

It’s important to ensure that you agree on the manner in which the purchase price of the shares in such a situation will be determined. A legal expert is able to cater for these circumstances within the specific framework of your business needs.

Related: Tax Basics For Business Owners

7

Come-Along & Tag-Along Provisions

Tag-along provisions cater for the event of a majority shareholder selling their shares to a third party and, rather than leave a dissatisfied minority shareholder behind, the sale of the majority shareholding is subject to the offer being extended to the minority shareholder on the same terms.

Closely related to these provisions are come-along provisions, which prevent a minority shareholder from blocking a sale of the majority shareholder’s interest in the company.

In essence, where one or more majority shareholders wish to sell their shares to a third party, the majority shareholders can force the minority shareholders to sell their shares on the same terms.

The above can, at best, only be regarded as a guideline, and if anything, serves to illustrate how template founding documents cannot be relied upon as a one-size-fits-all approach to fitting the unique needs of a company and its shareholders. Specifically, the contents of this article ought not to be relied upon as legal advice.

Mar 15, 2016
Andrew Taylor is the co-founder of LexNove, a company that aims to revolutionise the legal industry through an online platform that allows legal professionals to bid on legal work through a fixed-price proposal system.