There is no doubt that the Companies Act (71 of 2008) (“Act”) has modernised corporate law in South Africa, by amongst other things, creating flexibility and simplicity in the formation and maintenance of companies whilst promoting a balance between the rights and obligations of shareholders and directors. This includes the concept of alterable and unalterable provisions. The Act is a significant improvement to the corporate law regime which existed under the 1973 Companies Act. Also see comments from CIPC and Mondaq here.
In promoting flexibility, the Act makes provision, on the one hand, for default rules that apply to all companies unless varied or altered in the company’s memorandum of incorporation (“MOI”). These rules are called “alterable provisions”.
An alterable provision is defined in section 1 of the Act as a provision which expressly contemplates that “its effect on a particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by that company’s MOI”. Alterable provisions can often be identified by phrases such as “except to the extent that the company’s MOI provides otherwise” and other similar phrases.
On the other hand, the Act makes provision for core mandatory company law rules which cannot be varied or altered in a company’s MOI. These are called “unalterable provisions”.
An unalterable provision is defined as a provision “that does not expressly contemplate that its effect on any particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by that company’s MOI or rules”.
However, section 46 (and the other unalterable provisions) must be read in light of section 15 of the Act. Section 15 seeks to expand companies’ ability to regulate their own affairs by allowing the alteration of otherwise unalterable provisions in certain limited circumstances.
Unalterable provisions are, in fact, alterable but only to the extent and only under the circumstances contemplated in sections 15(2)(a)(iii) and (d):
“A memorandum of incorporation of any company may –
(a) include any provision –
(iii) imposing on the company a higher standard, greater restriction, longer period of time or any similarly more onerous requirement, than would otherwise apply to the company in terms of an unalterable provision of this Act;
(d) not include any provision that negates, restricts, limits, qualifies, extends or otherwise alters the substance or effect of an unalterable provision of this Act, except to the extent contemplated in paragraph (a)(iii).”
Based on the provisions of section 15, it is clear that unalterable provisions may be altered. Such alteration, however, must comply with sections 15(2)(iii) and (d). However, from a practical perspective, companies may have difficulty determining whether or not the extended requirement is in compliance with section 15(2)(d) and falls within the scope of the caveat in section 15(2)(a)(iii). In the context of distributions, what is clear is that a company may regulate its distributions in terms of the MOI by requiring, for example, shareholder approval in addition to the requirements of the Act and the board would have to carry out distributions in accordance with the MOI.
Read the full article here.