Shareholder Relationships: Shareholder agreements, Memorandum of Incorporation and Memorandum of Understanding explained.

Shareholder Relationships: Shareholder agreements, Memorandum of Incorporation and Memorandum of Understanding explained.

When starting a business, certain essential documents set the foundation and boundaries on how the internal relationship will be managed and the Company’s powers.

One of these documents is a Memorandum of Incorporation (“MOI”), which, is the essence of each Company. It is the only document that governs the Company and sets out the directors and shareholders’ rights, responsibilities and duties. The MOI deals with the powers of the Board of directors and the amendment of the MOI. It sets the rules applicable to the Company, which contain alterable and unalterable provisions. The Directors of the Company have the option to stipulate restrictions that are more stringent than the Companies Act (“the Act”), but they cannot be less restrictive than the provisions of the Act. Any clause contained in an MOI that is contrary to the Act shall be void. However, the void clause will not have the effect of nullifying the MOI in its entirety.

In addition to the MOI, which is crucial to structure a Company, the Shareholders Agreement is another important document, regulating the relationship between the Company and its Shareholders. It is necessary that a good understanding exists between the Company and its Shareholders, especially concerning the rights of Shareholders. It is insufficient to merely have clauses that cover when shares in the Company are sold (i.e. the “Come Along” and “Tag Along” clauses). It is necessary to have clear regulations which will anticipate any dispute that may potentially arise. A Shareholders Agreement is, therefore, an advisable agreement for any Shareholder to enter into. However, any terms in the Shareholders Agreement which are inconsistent with the MOI will not be valid. Such terms will be dealt with in terms of the MOI.

A situation can, however, arise when specific terms have not yet been decided upon in either of the abovementioned agreements. In this scenario, the Shareholders or the directors of the Company have the option to enter into a Memorandum of Understanding (“MOU”).  The MOU sets out only the intention and willingness of the parties as a starting point for negotiations, as well as potential timelines. Depending on how the MOU is drafted, it may be binding on the parties to the agreement.  Therefor a MOU can have legal consequences that you were unaware of, due to binding clauses in the MOU.  Intrinsically a MOU is not binding, however it should still be entered with caution.

Do not get caught in a clause, let the ASL Business Advisory team help you navigate your shareholder relationships.