Drafting an MOI: A guide to the provisions relating to directors (Part 2)

10 Jan 2024

With part 1, Derick explored various provisions forming part of the MOI relating to the composition of the board of directors of a company.

Next, Derick needs to consider important MOI provisions related to directors’ meetings and how these meetings will work.

Derick decides to rope in Kevin again, knowing his involvement in more than a few ‘rodeos’ when it comes to board meetings.

Calling board meetings

Kevin starts off by explaining the vital aspect of calling board meetings.

Kevin reminds Derick of the default position as stipulated in Section 73 of the Companies Act, 2008, which outlines who may call a board meeting.

According to this section, a director authorised by the board can call a meeting anytime, and this director must call a meeting if requested by a certain percentage or number of directors:

• For boards with at least 12 members, at least 25% of the directors must request the meeting.
• For smaller boards, at least two directors are needed to make such a request.

Additionally, Kevin emphasises that the Act allows for flexibility: a company’s Memorandum of Incorporation can modify these thresholds, either increasing or decreasing the required percentage or number of directors needed to call a meeting.

Kevin then addresses why a company might consider altering this default position. He suggests that:

In smaller companies or startups, where board dynamics are more fluid, a lower threshold might be beneficial to foster more frequent and nimble decision-making.

Conversely, a higher threshold could prevent frequent, potentially unnecessary meetings in larger, more established corporations, ensuring that meetings are called for substantive, well-justified reasons.

This flexibility in the MOI can be tailored to align with the company’s size, operational style, and strategic needs, allowing for governance practices that best support the organisation’s unique context.

Notice of board meetings

Next, Kevin notes the importance of giving notice of board meetings.

Kevin starts by outlining the standard requirements for notice of board meetings under the Companies Act.

The default position under the Companies Act provides the board of a company has the discretion to determine the form and timing of the notice for its meetings, subject to the MOI and the rules of the Company.

Kevin then proceeds to explain that in certain circumstances, it is important for the MOI to lay down the law when comes to the form and timing of notice for board meetings.

For example, in fast-paced environments where decisions must be made rapidly, you don’t want over-burdensome requirements regarding the content of the notices and overly long notice periods.

On the flip side, there are situations where the board of the Company needs to be highly coordinated. This is generally required when board members are not in constant communication with one another or are geographically dispersed, and longer notice periods might be essential to ensure everyone can attend, either in person or virtually.

A critical rule is that no board meeting can be convened without notifying all directors, ensuring transparency and equal opportunity for participation.

There are, however, exceptions.

A meeting can proceed without the standard notice if all directors acknowledge receipt of the notice, are present at the meeting, or waive the notice requirement.

The exceptions allow for flexibility in cases where all directors are already informed or agree to proceed.

In conclusion, Kevin emphasises that while the default position under the Companies Act, 2008, provides a solid foundation, each company’s unique circumstances might necessitate a tailored approach in their MOI for giving notice of board meetings, striking a balance between legal compliance and operational flexibility.

Voting

Kevin’s next focus relates to crafting effective MOI provisions on the voting process during board meetings.

Kevin begins by outlining the default voting procedures as set by section 73 (5) (b) – (e) of the Companies Act, 2008:

• A majority of directors must be present to call a vote
• Each director is entitled to one vote
• Resolutions pass with a majority of the votes cast

The chairperson may cast a deciding vote if they haven’t voted initially. If the chair has already voted or has no chair, the tied vote means the resolution fails. Kevin then proceeds to discuss the circumstances under which a company might consider altering these default voting rules in their MOI.

A higher quorum might be set for the number of directors to be present before a vote can be called in situations where the Company has a large board. This will be to ensure more comprehensive representation in decision-making.

Companies may allocate different voting weights to certain directors, particularly in cases where stakeholder representation is crucial.

It is also common for “owner-managed” companies to tie the number of votes on director level to the percentage of shareholding in the company. For example, if the director is a shareholder holding 30% of the issued shares, then that director will be able to exercise 30% of the voting rights on board level.

A higher threshold than a simple majority might also be warranted for significant strategic decisions to ensure broader consensus. For example, approving the next year’s budget may require at least 65% of the voting rights.

Powers of the board

As a parting thought, Kevin stresses the importance of Section 66 (1) of the Companies Act, 2008.

Section 66 (1) provides that the business and affairs of a company are primarily managed by or under the direction of its board. This provision empowers the board with broad authority to exercise the company’s powers and perform its functions.

The section further provides that the board’s powers are subject to limitations set forth in the Act itself or the company’s Memorandum of Incorporation.

Kevin goes on to explain the strategic significance of the MOI in potentially limiting the board’s powers. He explains the MOI can be crafted to delineate specific powers of the board that require shareholder approval, going beyond the standard ordinary and special resolutions mandated by the Act.

Situations where companies might opt for this additional shareholder control are often referred to as “reserved matters”. These matters can be anything from hiring and firing certain employees to deviating from an agreed budget for the financial year.

Conclusion

The MOI plays a pivotal role in defining the nuances of board meetings, the intricacies of voting procedures, and the extent of the board’s powers.

As Kevin’s insights illuminate, while the board is central to company decision-making, the MOI provides an invaluable opportunity to tailor these dynamics to the company’s unique needs.

Ultimately, it’s about striking a delicate balance – ensuring that the board operates with sufficient autonomy for efficient management and decision-making while embedding checks and balances through shareholder involvement in crucial matters.

See also:

• Drafting an MOI: A guide to the provisions relating to directors (Part 1)
• What is a contract playbook and why do you need one?
• The legal status of companies and the validity of company actions
• Drafting Memorandum of Incorporation (MOI) share structures – Important considerations

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)