Drafting an MOI: A guide to the provisions relating to directors (Part 1)

24 Nov 2023

As Derick approaches the final phase of drafting the new MOI for Vector AI, he must focus on the provisions relating to the board of directors.

These provisions are crucial for defining the governance structure and operational efficiency of the Company. First, he needs to look at the provisions in the MOI dealing with the board’s composition.

The minimum and maximum number of directors

The MOI needs to set the lower and upper limits for the number of directors who will serve on the board of the Company.

A larger board might offer diverse perspectives, but it can also lead to inefficiencies and difficulties in reaching consensus. Derick needs to strike a balance to ensure the board is large enough for diverse input yet small enough for effective decision-making and interaction.

Ex officio directors

Next, Derick needs to deal with ex-officio directors.

After doing the research, Derick establishes the following –

• If the Company is going to have ex-officio directors, then the MOI needs to provide for this.
• These directors hold a seat on the board by virtue of an office or position they hold. For example, in some companies, the CEO automatically becomes a board member.
• Ex officio directors usually have the same rights and duties as other board members, but the Company’s MOI can vary this.

Ultimately, Derick realises that including ex officio directors can ensure continuity and an intimate connection between the company’s management and its board. However, balancing these roles is important to maintain a clear distinction between governance and management functions.

Appointed directors

The concept of ex officio directors got Derick thinking about whether all directors must be elected to the board. Why can’t a shareholder merely appoint a director they want to serve on the board?

Derick phones up Kevin, his father’s best buddy, who he knows sits on various boards. Kevin explains that the MOI can be drafted in such a way that a person can appoint a director to the board, as opposed to having directors elected by shareholders.

Kevin, however, says there is a caveat.

Kevin explains the provisions allowing a person to be appointed provide significant flexibility in board composition. However, the Companies Act balances this flexibility by mandating that the shareholders elect at least 50% of the directors.

So, for example, let’s consider a scenario involving Vector AI. If there are only four seats on the board, then only two can be filled by appointment.

Elected directors

Next, Kevin dives into the importance of elected directors and the process that must be followed.

Kevin explains that the default position for the election of directors under the Companies Act provides a structured and democratic process for filling board vacancies, but it’s important to note that a Company’s MOI can modify these default provisions to suit specific needs. Kevin then proceeds to summarise the default position under the Companies Act as follows:

• Series of votes for each vacancy: The election process is conducted as a series of votes. Each vote focuses on the candidacy of a single individual to fill one vacancy on the board. This series of votes continues until all vacancies on the board at that time are filled. This method ensures that each candidate is considered separately, allowing shareholders to evaluate each one on their individual merits.
• One vote per voting right: In each vote to fill a vacancy, each voting right entitled to be exercised can be used once. This provision upholds the principle of ‘one share, one vote’, ensuring that each shareholder’s voice is proportionate to their stake in the company.
• Majority support for election: A candidate is elected to fill a vacancy only if they receive the support of a majority of the voting rights exercised. This means that more than half of the votes cast must favour the candidate for them to be successfully elected.

The MOI can provide a different method of electing directors. This flexibility allows companies to tailor the election process to better suit their specific governance structures, shareholder dynamics, or industry practices. For instance, the MOI could stipulate a different voting mechanism, such as cumulative voting, which can be particularly beneficial in ensuring minority shareholder representation. Alternatively, it might set different election thresholds or allow block voting to streamline larger companies’ processes.

Ineligibility and disqualification of directors

With the circus going on at OpenAI and the firing of Sam Altman still fresh in Kevin’s mind, he adds that the MOI can provide a set of additional criteria that could render an individual ineligible or disqualified to serve as a director.

These criteria can be tailored to the specific context or needs of the Company. For example, a company might require that directors do not have a conflict of interest with any other business in the same industry, or they might set stricter financial probity standards.

The aim is to ensure that the directors’ profile aligns with the company’s values, operational needs, and strategic objectives, thereby upholding a high standard of governance and integrity.

The MOI can also specify minimum qualifications that individuals must possess to be eligible to serve as directors. These qualifications can include education, experience, expertise, or other relevant criteria. For instance, a technology company might require a certain number of its directors to have an IT or digital innovation background.

Temporary vacancies and alternate directors

Lastly, Kevin explains two important considerations when drafting an MOI: temporary vacancies and alternate directors.

Under the default provisions in terms of the Companies Act, the board of directors of a profit company has the authority to fill temporary vacancies by appointing new directors.

This capability is critical for maintaining the board’s functionality, particularly when unexpected vacancies arise. However, it’s important to note that the MOI can alter or restrict the board’s authority to appoint directors if there is a temporary vacancy on the board.

With regards to alternate directors, Kevin explains that the Companies Act provides a mechanism for ensuring continuity and representation on a Company’s board of directors by providing that the MOI can make provisions for alternate directors (an alternate director means a person elected or appointed to serve, as the occasion requires, as a member of the board of a company in substitution for a particular elected or appointed director of that Company).

Conclusion

Kevin certainly has a lot to ponder. In drafting the new MOI for Vector AI, Derick must consider whether the default provided under the Companies Act best fits the Company or if a modified approach would better serve Vector AI’s needs and objectives. This decision will play a crucial role in shaping the governance and future direction of the company.

See also:

• A guide to drafting different share structures in an MOI
• A guide to drafting provisions relating to shareholders in your MOI
• Removal of a director by shareholders of a company: reasons not necessarily to be provided
• The legal status of companies and the validity of company actions
• Am I a shareholder? How do I know?

(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.)