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Understanding Shareholder Agreements

The future of shareholders agreements under the New Companies Act.

Nicolene Schoeman-Louw

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Under the previous Companies Act of 1973, shareholders agreements (and share sale agreements) played a very important role and proved to be a powerful business tool in negotiations between shareholders and with investors.

They were also vital for the general growth and management of a company. In many instances, these agreements determined important issues such as the powers of the directors and management as well as governance issues.

One of the reasons why these agreements are so powerful is because they are private documents and therefore, relatively speedy to execute as opposed to the legalities involved in amending the articles and memorandum of a company (constitution).

The amendments

policy-ammendments

Previously, shareholders agreements could, in most instances, supersede (if so contracted) the articles and memorandum of a company. In other words, a private document would prevail over a public document if so stipulated. This contract phrase prevented legal uncertainty to some extent. Although this has been a very practical commercial business tool, it has certainly been abused.

As a result, the legislator has addressed this concern within the framework of the Companies Act 71 of 2008 (henceforth called the “Act” or the “new Act”). This is further reinforced by the memorandum and objects of the Act, which state that the purpose of the amendments is to ensure amongst other things:

  • The simplification and easy maintenance of corporate systems
  • Corporate flexibility, efficiency and transparency.

Transitional provisions

In terms of the transitional provisions of the new Companies Act existing shareholders agreements, like existing articles and memoranda will need to be replaced by a memorandum of incorporation (MOI). This will need to be done within two years of the new Act’s commencement, i.e. by 2013.

Wondering what the Companies Act means for you? Find out here

Shareholders agreements, the MOI and governance rules

In terms of section 15(7) of the Act, shareholders may still enter into any agreement with one another provided that it is consistent with the provisions of the Act and the MOI. The MOI is defined as a document that:

“Sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to a 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:
    1. the effective date; or
    2. the date it was converted to a company in terms of Schedule 2;”

Thus, in the case of a conflict between the agreement and the MOI, the MOI will now prevail. If a clause in the agreement is in conflict with the stipulations of the MOI, then only that clause will be voidable and can only be voided by a court application.

This was done to create transparency by preventing companies from including additional stipulations in the agreement, which previously was not in the public domain and thus could have a negative impact on anyone who, for example, was considering buying shares in the company. Due to the challenges in respect of legal costs and the fact that litigation is so time-consuming, this provision could be abused.

Related: How to Maximise Returns for Your Shareholders

Moreover, if the MOI makes provision for it, the board can make rules about the governance of a company on matters that are not addressed in the Act or the MOI.

These rules provide a greater degree of flexibility for companies as it may be easier to create or amend a rule than to amend the MOI (an amendment to the MOI usually requires a special resolution to be passed – by the shareholders of the company.

Each document introduced by the new Act therefore, has its own specific purpose that must be recognised and applied in the best interests of the company.

We therefore recommend that existing shareholders agreements be revised by an attorney so that they conform to the provisions of the new Act and that shareholders agreements entered after the Act has commenced, only contain private/confidential information and not be in conflict with the MOI or governance rules.

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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Compliance

Can Your Words Be Used Against You?

Yes, they most certainly can. Here’s what the RICA Act has to say about recordings.

Andrew Taylor

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“This call may be recorded for quality control and records purposes…” Anyone who has been on hold with insurance companies would be familiar with these words — but what are the implications of a recorded conversation and when is it legal?

In essence, the Regulation of Interception of Communications and Provision of Communication-Related Information Act of 2002 (mercifully shortened to ‘RICA’) permits any person, who is a party to a conversation to record that conversation, provided that it is direct communication — which is defined as oral communication between two or more persons that occurs in the immediate presence of those persons.

Section 4 of the RICA Act governs this aspect of our monitoring law. What is unclear, however, is the degree to which this extends to legal persons, such as a company that monitors a call centre agent’s performance, for example.

Related: Understanding Shareholder Agreements

Evidence in legal cases

While limited to direct communications and not covered by third party interception, such as an eavesdropper, the lesson here remains pretty stark — you could legally be recorded during any conversation you have.

The implications of this are significant — just ask former Springbok player Luke Watson, who had a conversation recorded during a function in 2008 that was subsequently leaked to the media.

Furthermore, with the widespread use of smartphones, together with applications freely available on the relevant app stores, designed to record cellphone calls, the likelihood of you being recorded — whether you know it or not, is ever increasing.

Beyond the moral or ethical ambiguity of this, the legal ramifications of what is recorded are more certain — the recording may be used against you as evidence in any criminal proceedings, or equally as possible, in civil proceedings where, for example, agreement to a contract or term thereof is in question, or in the insurance company’s case, whether or not to repudiate a claim based on the information you provide to them.

Related: Protect Your SME From PoPI

Know the business exception

Section 6 of the RICA Act contains a course of business exception that allows the interception of indirect communication:

  1. a) By means of which a transaction is entered into in the ordinary course of business
  2. b) Which relates to that business
  3. c) Which otherwise takes place in the course of that business.

While there has not, to my knowledge, been a reported case that deals with this aspect of the RICA Act, the implications regarding the use of this information to evidence the valid conclusion of a contract or as to the intentions of the parties to a contract are significant, particularly given that the scope is relatively broad, although limited.

The matter has, however, come before the Constitutional Court in the 1999 criminal case of S v Kidson, where the court held, per Justice Cameron, that unless a “reasonable expectation of privacy exists” it would be difficult to prevent the recording or interception falling within the ambit of the RICA Act.

Where to from here?

From both a commercial and criminal perspective, this should serve to remind us all of our wise grandmother’s words — if you have nothing nice to say, rather say nothing at all (especially because you never know whether you are being recorded).

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Compliance

Why You Shouldn’t Be Sweating The Fine Print

Signing a contract is a big deal, and you never want to sign anything you don’t fully understand.

Andrew Taylor

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While it is almost always a grudge purchase, ensuring that you have had a legal eye cast over a contract you intend to conclude means that you are protected, that you understand the nature of the obligations you are taking on and perhaps, an even better deal for you.

Given that legal agreements are an important aspect of commerce, we have distilled key points for you to consider, before engaging with external counsel. This will make the process more efficient and, hopefully, less expensive.

Reviewing a contract is a tricky business, not entirely different from asking a builder to finish building a half built house. However, there are some useful techniques to ensure you get the most out of the exchange with your lawyer.

Related: Why Your Business Needs Employment Contracts

Always create a timeline

You have lived and breathed your business and this transaction, while your attorney is possibly hearing about the matter for the first time.

Setting the scene correctly puts your attorney in the picture and explains what you want out of the exchange. Print this out for your attorney.

It will help an attorney identify key areas of risk which you might not have anticipated. Be sure to also tell your external counsel how quickly you need the review to be done. Setting expectations means there is less chance of disappointment later.

Provide supporting documents

It wastes your time and money when your attorney has to come back to ask you for supporting documentation.

Try to anticipate which documents will be relevant to your transaction and bring copies of them to the meeting for your attorney to consider. If you have previous versions of the agreement, for example, bring those too.

Remember, the more background work you do, the simpler and more efficient the process will be.

Understand your needs

Are you looking for a high level overview of your document to highlight some key contractual risks or are you looking for a thoroughly sanitised document reviewed from every possible angle?

I recently had to look over Jim’s Sale of Business Agreement for the potential acquisition of his Technology Company. He came to me with limited areas of risk which he had identified and wanted me to look at these clauses.

I was able to advise him to push back on certain clauses he had already negotiated and the resulting document placed him in a stronger legal and financial position. It was easy to justify the costs associated with the review.

This is not always necessary though — where there is limited legal exposure, or you have no bargaining power, the role of the attorney can be restricted, but still worth the investment since you have assurance that your legal exposure is as restricted as possible.

Be guided by the relative value of the document and the ensuing legal responsibilities — is this a standard supply agreement with a strange payment clause or a multi-national acquisition of intellectual property? The type of expert you engage with will vary, as will the cost of the review.

Related: Protect Yourself: How to Structure Your Consulting Contracts

Areas of concern

Directly related to knowing your business and understanding your needs, is your responsibility to communicate specific areas of concern to your attorney.

A recent client’s business processed a lot of personal information, in accordance with the Protection of Personal Information Act, but, the contractor they were about to sign a service supply agreement sought to have access to some of this personal information.

Had the client signed this agreement without a review of the potential legal consequences, it would have resulted in a clear breach of an essential provision of his own terms of use.

Seen alone, there was little risk, but within the context of this business, we were able to avoid this. A trusted and qualified expert will help you navigate the complex commercial world.

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Compliance

Are You Protecting Your Customer’s Data?

A company’s privacy policy dictates what personal information is processed, and the manner in which such information is collected, stored, and shared.

Kyle Torrington

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The collection, usage and sharing of personal information is regulated primarily by the Protection of Personal Information Act 4 of 2013. The Act was recently promulgated and is yet to be implemented. The Act seeks to give expression to the right to privacy provided for in the Constitution.

At the time of writing, the primary enforcement arm contemplated by the Act, the Information Regulator, has yet to be appointed. Once appointed, all businesses will be required to register with the Information Regulator to make public what personal information is being collected, and what it is being used for.

The Information Regulator will be empowered to enforce compliance with the Act, and able to investigate whether an entity is lawfully processing the public’s personal information. 

Related: Protect Your SME From PoPI

How are privacy policies affected?

The Act defines the term ‘processing’ broadly, and includes “the collection, receipt, recording, organisation, collation, storage, updating or modification, retrieval, alteration, consultation or use of a person’s personal information”. To process a person’s personal information, the prior consent of the person (data subject) is needed.

Personal information includes email addresses, names, identity numbers, phone numbers, the race, gender, religion, marital status of a person, and if applicable, an entity such as a company, to name but a few. One of the purposes of a business’ privacy policy is to obtain such consent, by an indication that the privacy policy has been read and agreed to.

The primary purpose of a privacy policy is to set out in clear and concise terms what personal information is collected by the company, and exactly what the company will and will not do with that information. It should also set out whether personal information will be shared, and with whom.

The Act restricts a company’s ability to store personal information outside of the country by requiring that it be transferred only to countries in which comparable security laws and data protection measures exist.

A situation such as this arises more easily than expected. Consider the example of the humble contact form: Your website, with its local server situated in Midrand, utilises a plugin to create custom contact forms.

Although your server may be in Midrand, every person who completes the contact form on your website has their personal information transferred and stored on servers in the home jurisdiction of your plugin creator, which may be in the US. But the plugin creator may also make use of third-party service providers based in Vietnam. An in-depth investigation of all third-party plugins and processes of a website is therefore required to ensure that you comply with the Act.

Access by a data subject to personal information

A data subject is entitled to request a full disclosure of any personal information held by the company.

As the procedures governing access to personal information overlap, companies should also ensure compliance with the processes outlined by the Promotion of Access to Information Act 2 of 2000 (‘PAIA’).

Related: Five Tips for Effective Marketing that Complies with the POPI Act

In terms of PAIA, all companies are required to compile a manual that needs to be registered with the South African Human Rights Commission. This manual sets out the company’s contact information, what records are available for inspection, the identity of the leadership of the company, as well as the manner in which a person may request access to information held by the company.

However, the Minister of Justice and Correctional Services has exempted private bodies from complying with this requirement for a period of five years, starting from
1 January 2016.

To ensure compliance with all data protection, privacy, and access to information laws, a privacy policy and a PAIA manual will be required by every business.

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