A guide to drafting different share structures in an MOI

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08 Nov 2023

In the next chapter of Derick’s legal odyssey, the stakes are elevated. Our quick-witted in-house counsel for Vector AI, with his desk now a shrine to legal tomes and tech gadgets, faces a challenge of corporate structure.

After a particularly heady board meeting, the CEO drops the gauntlet: Vector AI’s Memorandum of Incorporation (MOI) needs a revamp. It’s not just any update – the MOI must now reflect the agility of their expanding enterprise with provisions for multiple classes of shares, a move that will chart the company’s strategic future in the vibrant economic landscape of South Africa.

The task is daunting but vital. Derick knows the MOI is the constitutional backbone of the company, detailing the rights, duties, and responsibilities of shareholders, directors, and others within the company’s architecture.

Each clause will need to be a strategic chess move, positioning Vector AI to attract investment, incentivise founders and employees, and maximise governance efficiency – all while adhering to the robust dictates of South African corporate law.

Pouring his favourite brew into his ‘Legal Eagle’ mug, Derick begins his quest for the perfect blend of legal precision and business acumen. The new MOI will not only have to be compliant with the Companies Act but also versatile enough to accommodate the company’s dynamic growth strategies. It’s time for Derick to transform legalese into a launchpad for Vector AI’s ascent in the tech industry.

Authorised shares vs issued shares

As Derick delves into the intricacies of MOIs, he encounters the fundamental concepts of ‘authorised shares’ versus ‘issued shares’ – terms that are as vital to corporate structuring as coffee is to his morning routine.

Authorised shares represent the total stock that Vector AI is legally permitted to issue, as detailed in its MOI. It’s a ceiling rather than a mandate; the company isn’t obligated to issue all these shares at once, or ever, really.

Issued shares, in contrast, are the actual shares that have been issued to the company’s shareholders. They represent ownership currently in play, generating voting power and dividends.

Understanding the distinction is crucial for Derick. It’s about potential versus reality; the authorised shares are a reserve of potential that allows Vector AI flexibility for future growth, funding, and compensation opportunities. The issued shares reflect the company’s current equity structure – the reality of ownership distribution as of now.

With the CEO’s directive clear, Derick’s task is to ensure that the MOI allows for an adequate number of authorised shares to cater to Vector AI’s ambitious growth plans while the issued shares are managed to maintain control, provide shareholder value, and entice future investors. It’s a balancing act that Derick, with his newfound knowledge and his trusty ‘ContractNinja‘ at his side, is ready to tackle.

Different share classes

Derick sits back in his chair. He’s got to tackle the important concept of share classification in the MOI, and this, he realises, is where the bespoke nature of MOIs comes into play.

The South African Companies Act is like an empty chessboard; it doesn’t prescribe the pieces – your pawns, knights, or bishops, like ‘ordinary shares’ or ‘preference shares’. It’s silent on the specifics. That’s the company’s prerogative, outlined in the strategy manual of the MOI.

So, Derick ponders, the MOI is the rulebook that will define Vector AI’s arsenal of shares, labelling each class and detailing their powers, benefits, and limitations.

Derick starts with the Companies Act. He notes the following:

  • Every share issued by a company has associated with it an irrevocable right of the shareholder to vote on any proposal to amend the preferences, rights, limitations and other terms associated with that share;
  • All shares of any particular class authorised by a company must have the same preferences, rights, limitations and other terms associated with the specific class of shares; and
  • If the company has only one class of shares, those shares have a right to be voted on every matter that may be decided by shareholders and the holders of that class of shares are entitled to receive the net assets of the company upon its liquidation.

Derick, still feeling out of his depth, decides to give Jen a call. Jen explains the MOI will generally determine the following:

The voting rights attached to the class of shares

Generally, each share will give a shareholder a single vote. This can be changed, and each share within a specific class can, for example, have five votes per share. Voting rights can also be conditioned or limited, and certain “special voting rights” can be conferred on the shareholders of a certain class of shares.

The payment of dividends

The right to receive dividends is where most of the variability comes in. The shareholders do not have to receive dividends in proportion to their shareholding in the Company. The MOI can, for example, determine that a certain class of shares will receive preferential dividends calculated in a certain way. Dividends can then also be cumulative, non-cumulative or partially cumulative.

Redemption or conversion of shares

Shares can also be redeemable or convertible. If the specific class of shares are either redeemable or convertible, it is important that the MOI provides when the redemption or conversion right can be exercised, by whom the right can be exercised, how will the consideration for the shares be determined, and any others associated with such redemption or conversion right.

Sharing in the company’s residual value upon liquidation

As with dividends, the MOI may determine that a certain class of shareholders will share in the company’s residual value upon liquidation while another class of shareholders will not share in this residual value.

Jen then ends by saying that there is another special class of shares that mustn’t be forgotten –

Shares subject to board determination

Things change, and the funding requirements of a company may also change. It is possible to include a class of shares without specifying the associated preferences, rights, limitations or other terms of that class. The preferences, rights, limitations and other terms associated with this class of shares are determined by the board.

The above approach provides flexibility with regard to the capital structure of the company. There is no need to obtain a special resolution from the shareholders each time the board wants to make available shares with different preferences, rights, limitations and other terms associated with such shares.

Conclusion

In summary, revising a company’s MOI is a critical undertaking that requires meticulous attention to detail. From defining voting rights and payment of dividends to rights on liquidation and the conversion or redemption of shares, each clause must be tailored to uphold the strategic and financial integrity of the company. It’s a complex task requiring legal expertise and strategic foresight.

Fortunately, for those looking to navigate this process, there’s ContractNinja’s MOI document builder. This powerful tool is designed to streamline the creation of a robust and compliant MOI, reflecting the unique needs of your company while adhering to South African law. With its intuitive interface and guided steps, the MOI document builder is the trusted companion for legal professionals aiming to construct a solid legal foundation for their clients.

See also:

(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.)
Martin Kotze

Martin Kotze has been a practising attorney, conveyancer and notary public for more than 10 years. He began his academic pursuit with a degree in business, where he dived deep... Read more about Martin Kotze

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