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Significant Legal Changes Affecting Your Business

The effects of the Memorandum of Association (MOI) on third parties.

Nicolene Schoeman-Louw

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South African Business Law

Do you manage a business? If so, it’s important that you understand the very significant changes triggered by the Companies Act 71 of 2008.

Under the Companies Act 61 of 1973 (the ‘Old Act’), every company had to register its Memorandum of Association and its Articles of Association. While the previous Act imposed various requirements on the form and content of the memorandum, it did not govern the content of the articles.

In terms of the 1973 Act, it was legal to alter the memorandum and articles independently of one another through a shareholders’ special resolution. Additionally, the memorandum and articles were binding between the members (shareholders) of the company and the company itself.

Now, however, the rules have changed quite drastically. Under the Companies Act 71 of 2008 (the “new Act”), the MOI is a legally binding document between shareholders themselves, between the company and shareholders, and between the company and third parties.

Now, existing companies that registered under the old Act must align their existing articles and memorandi with the provisions of the new Act. Furthermore, the new Act has set a window period within which this is to be done. The window period closes at the end of April 2013.

This means it’s important for companies to consult their attorneys sooner rather than later to assess the impact these changes may have on their financial year-end and to reconsider their strategies.

The legal nature of the Memorandum of Incorporation

A Memorandum of Incorporation (MOI) is defined in the new Act as an instrument: ‘that sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to the company, and other matters as contemplated in section 15; and by which:

  1. The company was incorporated in terms of this Act, as contemplated in section 13; or
  2. A pre-existing company was structured and governed before the later of:

aa) the effective date; or

bb) the date it was converted to a company in terms of schedule 2’.

Accordingly, the MOI now combines the Articles of Association and Memorandum of Association in one legal document and broadens its purpose. Currently, the articles and memorandum of companies registered before the new Act was introduced will automatically form its MOI. However, these companies should ensure that their existing articles and memorandum conform to the provisions of the new Act.

Your company MOI and third parties

Under the old Act

A fundamental principle of the common law has always been that a company representative (or agent) must have the necessary authority to bind the company to a contract as the principal. This was enshrined in common law and the principles relating to the law of agency, which specifically evolved in the company law context.

Broadly speaking, a number of well-known company law doctrines or common law principles, such as the doctrine of disclosure, meant that prescribed information was continuously made public to inform interested parties about the true state of affairs within a company.

Because this information was made public, the doctrine of constructive notice assumed that everyone dealing with a company had knowledge of who had authority to bind the company. There was an assumption that anyone dealing with the company had read these documents.

Further, any acts outside the scope of the company’s business (known as ultra vires acts) were not permitted in terms of the common law either. The company’s business − or rather, the scope of its business − was defined in the company’s memorandum (sections 33 and 34 of the old Act).

This meant that third parties dealing with the company could be denied contractual rights because the contract was null and void from the start. In other words: it never came into existence.

The practical realities of conducting business meant that agents with invalid authority often entered into contracts on behalf of their company without the company itself necessarily objecting. The law was consequently adapted to match this reality.

Section 36 of the old Act altered the common law position by validating a company’s actions even if they were outside the company’s scope or entered into by directors acting without proper authority.

No dependence on this lack of capacity on behalf of the company or lack of authority on behalf of the director may have been relied on in any legal proceedings. The company rules were applicable only between the members/company and its directors.

Third parties could not rely on them. This represented a significant departure from the common law position.

Finally, the Turquand rule was imported into our law from England. This rule stated that a third party could presume that all internal company formalities specific to that company were complied with when granting an agent the necessary authority.

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Under the new Act

The common law will continue to apply − provided it does not conflict with the new Act. Disclosure is now regulated in terms of section 75 of the new Act (conflicts of interest). In addition, companies are obliged to disclose special or more restrictive provisions contained in their MOI by affixing the suffix ‘RF’ to the company name under section 19 of the new Act.

Furthermore, according to Section 19 of the new Act, a company now has ‘all of the legal powers and capacity of an individual, except to the extent that (i) a juristic person is incapable of exercising any such power, or having any such capacity; or (ii) the company’s Memorandum of Incorporation provides otherwise’.

In addition, Section 20 of the new Act has extended the rights of third parties against both the company and those purporting to represent the company because a contract cannot be declared void by the company under the common law. Accordingly, the doctrine of ultra vires seems totally redundant both in common law and as enshrined in Section 36 of the old Act.

On the other hand, the Turquand rule has not been totally removed from our law. Section 20(7) now states that a third party dealing with a company may still presume that all the internal formalities have been complied with − provided it was not within that person’s reasonable knowledge that this was not the case.

Conclusion

Because companies now have wider powers and greater capacity to act than before, it is of the paramount importance that third parties observe the contents of the company’s MOI and related documents, and seek advice about possible consequences when authority does not exist. In addition, third parties should also conduct a due diligence investigation.

Nicolene Schoeman – Louw is an admitted attorney of the High Court of South Africa, as well as being a Conveyancer, Notary Public and Mediator. She is the Managing Director of Schoemanlaw Inc Attorneys, Conveyancers and Notaries Public (Schoemanlaw Inc Attorneys) in Cape Town. Visit www.schoemanlaw.co.za for more information or email enquiries@schoemanlaw.co.za

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Business Landscape

Medium-Sized Businesses Reap Greater Rewards In Tough Times

With prominent industry names being added to business rescue reports almost every week, risking it all in times such as these may sound ludicrous.

Kristly McCarthy

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medium sized business tough times

We’ve said it before: Diversifying, streamlining and investing in new ventures during the tough times is vital to a company’s survival.

Running a successful and diverse business requires resources, passion and an unwavering vision. Poised for continuous growth, a company looks to its team of forward-thinking, calculated risk takers to help prepare and invest for the future, now.

Investing in the future and creating wealth means doing things right – right now. With headlines such as ‘real estate investments in SA increase by R28 billion’ and ‘the industrial sector is the top performer in the SA property market’, it makes sense to put your money where your mouth is in 2018.

Bartlett Construction is one such company. Wayne Bartlett, Contract’s Director for Bartlett Construction says that the company opened its property division several years ago in a quest to gain more market share and use its expertise to cultivate a robust property portfolio.

“Accelerating our economy through investment is key. While there are still high hopes for SA in 2018, applying a long-term strategy to property investment allows you to reap the real rewards in future,” says Wayne.

Related: The Ultimate 101 List Of Business Ideas To Start Your Own Business In South Africa

Acquiring, building and renovating factories and industrial spaces has been a focus for the company over the past few years. “We have all seen the headlines about the industrial sector performing well in terms of property and this is true. It’s truly sad to see some of the big names (in all industries) undergoing business rescue but ultimately, waiting for times to change and focusing on one strategy is never advisable – especially not in a market such as this one” he continues.

Creating a scalable business in times such as these is key. Wayne notes that medium-sized companies have remained notably robust by ensuring just the right amount of resources to remain lean, yet effective.

“The economic downturn has had significant impact on both big and small companies. Companies with high overheads, many employees and massive contracts on the line have been most affected. Small companies, on the other hand, with very little business and resources who rely on business from big and medium businesses have also taken a knock.”

Established more than half a century ago and with Wayne having 30-plus years of experience in the industry, it’s fair to say that he has seen it all. “What’s helped our company through the years is remaining scalable and finding balance. Times are tough, and everyone is feeling the pinch – success is dependent on how the industry performs but we try our best to never over invest or under invest; we diversify whilst maintaining high-levels of competency in our current projects, we are fair and reward long-standing, loyal employees who give us that competitive edge and we adapt according to industry and client needs.” Wayne concludes.

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Business Landscape

How To Leverage Partnerships, Industry Associations & Endorsements

Nobody can succeed in business entirely on their own without personal as well as professional support. ‘Signing up’ can be a deciding factor in the growth of a company, says the Proudly SA CEO.

Eustace Mashimbye

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Leverage by association can be a great business tool. Hitching your wagon to an industry associated body, joining a local chamber of commerce, or seeking a respected contemporary’s endorsement can change your brand recognition struggle to an opportunity. Becoming part of a whole new entity can be one of the best decisions you will ever make.

How to choose your partner or affiliation?

You know the expression ‘Two heads are better than one’ so you should choose a partner or affiliation that exposes you to twice as big an audience as you can reach alone, preferably with a different customer base. Find an association that fits with your own business ethos and has the same goals as you, otherwise you will find you are working against each other rather than complementing each other.

What do you stand to gain?

By association you will appear in listings, on websites, you will be invited to related events where you can network your socks off, and in some cases, doors will automatically be opened for you. Visibly aligning yourself with an organisation that can propel your brand and/or product into the market place should be grabbed with both hands.

What does the partner stand to gain?

Your relationship with a partner should be symbiotic, benefitting from each other’s contacts as well as a platform for sharing ideas.

Related: How Do I Register A Partnership And What Documents Are Involved?

What are my responsibilities towards the other party in the relationship?

Perhaps you will have to add a logo to your marketing collateral or packaging, perhaps you will have to comply to standards even higher than those you set for yourself. Perhaps you will have to pay subs or a small joining fee, or even a large joining fee, so you need to decide what you can afford and when.

But you must view the relationship in a positive light even if it involves redesigning artwork or re jigging your material. There is no point in ‘signing up’ if you’re not prepared to share your brand affiliation with your customers and suppliers. It’s like getting married and refusing to wear a ring.

How long should I sign up for?

You really should take a long-term view of any marketing relationship. Your hook up may take time to filter down into the market place, you may have a lot of pre- relationship stock that doesn’t have the logo of your new partner on it, so you will need to give a fair chance to the whole exercise.

What happens if one party brings the other company into disrepute by association?

No one wants to be brought down if someone or something with which you are closely associated is found not to be quite as ethical or honest as you. Don’t forget this isn’t a JV, it’s a brand partnership, and so as long as you are operating separately, you will always be able to distance yourself from any scandal should the need arise. (But hopefully you chose your brand affiliation well!) , but by and large, being the single part of a whole can only be beneficial when you’re starting to build your brand.

How does using the Proudly South African ‘tick’ logo fit in?

The Proudly SA logo is the mark of an authentically locally grown, manufactured or produced item or service that is of proven high quality. It can be leveraged in the same way as any other brand affiliation and can assist in providing access to market and building trust with your buyers and suppliers.

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Business Landscape

The Differences Between A Supplier Relationship, Agency And Distributor

To a large extent I suppose it depends on industry, the vision of the business and how quickly you wish to scale.

Nicolene Schoeman-Louw

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legal-agreements

Many businesses reach the point where they have to consider in which way to best expand its market share and reach. In many industries, a customer and supplier arrangement are sufficient, but in others different arrangements such as agency or distribution are preferred.

So, the question is – what is best and when?

Well, to a large extent I suppose it depends on industry, the vision of the business and how quickly you wish to scale.

1. Supplier / Customer

This is a typical arrangement of a willing buyer willing seller. In most instances this is the typical way in which business is run or at the very least to a large degree this is the starting point. Clients or customers are typically engaged by agreement usually a form of terms and conditions or perhaps even an agreement detailing credit.

Related: Supplier Agreements – Do I Need A Written Agreement?

2. Agency

An agency agreement could either relate to an individual or an organisation. This means an individual or a business could represent the supplier of the goods or services and earn a commission or remuneration for their efforts to sell the goods or services.

In this context an individual is often referred to as a “rep”, which is a typical arrangement for wholesalers marketing products to retailers.  In many instances these agreements do not constitute employment contracts and further, the agent does not buy and on-sell the products.

The agent usually refers orders to the supplier and therefore is cost effective for both parties and further limits risk. This also means that the supplier benefits from a relatively low input cost and commitment but increased sale. An important portion of an agreement such as this is that the agent has certain powers in representing the supplier.  It is therefore of crucial importance that the agent’s powers are constructed in such a way as to serve the needs and best interests of both parties.

3. Distribution

A crucial difference between agency agreements and distribution is twofold – one: that the distributor does not have any power of representation as an agent would typically have. Secondly, that the distributor usually purchases the goods / products from the supplier and then stores, transports and sells, as the case may be. In most cases these agreements are confined to goods.

It is therefore important for the business to assess what would sell the most products or services in the shortest space of time. Then to seek professional advice to construct the most suitable agreement.

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