New Companies Act imposes philosophy change
Many companies will have to align the documents under which they were constituted with the latest laws
IF BY the time you read this article you have not set about replacing the memorandum of incorporation and shareholders agreement of your company that pre-existed May 2011 it is probably too late to do so by the deadline of May 1 2013.
The Companies Act 2008 changes the philosophy regarding the constitution of a company. We have moved from the English approach where the company regulates its own affairs closer to the US approach where the allocation of power within the company is to a large extent dealt with in the legislation.
If you have been comforted by the fact that your directors’ remuneration is dealt with in the company’s constitution or shareholders agreement, you had better look again at those provisions in the light of the Companies Act. You are going to need a special resolution meeting certain requirements if you want to get your directors’ fees.
There are also some unalterable provisions in the new law, and some of them are significant. The Companies Act places the management and control of the company squarely in the hands of the board of directors. Provisions in a shareholder’s agreement giving shareholders control over aspects of the business may no longer be enforceable and companies can no longer be controlled remotely. If you think your shareholders agreement gives you absolute rights to dividends in certain circumstances, you may find that the payment of dividends is limited by the preconditions now applicable to a board proposing to declare dividends.
It is an unfortunate consequence of the modernising of the Companies Act that the shareholders of tens of thousands of companies will have the wrong idea or no idea exactly what their rights and obligations are. The issues are complex and you will probably need advice from someone who understands the complexities. If you are relying on some special right under your shareholders agreement you had better find out whether that right remains intact.
On the other hand a welcome feature is the ability to include in the memorandum of incorporation any provision dealing with a matter on which the Companies Act is silent. That means that you may not need a shareholders agreement as well as a memorandum of incorporation, and that you can incorporate the shareholder requirements in the constitutional documents. Bear in mind that the memorandum, registered in the companies office is a public document and you will lose confidentiality.
Once you align your constitutional documents with the law you will find that the new philosophy in the Companies Act will give greater flexibility in many respects if you follow the rules. But make sure you find out what the rules are.
Patrick Bracher is a director at Norton Rose SA.