New Com­pa­nies Act im­poses phi­los­o­phy change

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Pa­trick Bracher

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.

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