Could shareholders inadvertently cancel their Shareholders Agreement?

Could shareholders inadvertently cancel their Shareholders Agreement?
02 Aug 2019

Following the judgment in De Freitas v Chamdor Meat Packers [2015] JOL 33940 (GJ), when a company proposes to its shareholders the adoption of a new Memorandum of Incorporation, the shareholders should carefully consider the provisions of the new Memorandum of Incorporation in conjunction with any current shareholders’ agreement they have in place. Should there be any contradiction between the two documents, the shareholders should seek to align the provisions thereof before the adoption of the new Memorandum of Incorporation, as such adoption may result in the inadvertent termination of the pre existing shareholders’ agreement (or at least, the cancellation of the conflicting provisions contained in the shareholders’ agreement).

In 2015, five shareholders of a company approached the South Gauteng High Court for an order declaring that a shareholders’ agreement dated February 2002 (“Shareholders Agreement”) is of full force and effect, and that the Shareholders Agreement, and not the company’s Memorandum of Incorporation adopted in April 2012 (“MOI”), governs and takes precedent in respect of the relationship between the shareholders, inter se, and the company.

The fundamental issue to be decided by the Court was whether the adoption of the new MOI consequently amended, or set aside, the terms of a pre existing shareholders agreement that are contrary to those contained in the MOI.

It was resolved by the company’s shareholders at a meeting where a quorum of shareholders were present (albeit not by all the shareholders of the company and therefore not all the parties to the Shareholders Agreement) that the MOI be adopted, and the Shareholders Agreement therefore be cancelled.

In terms of section 15(7) of the Companies Act 71 of 2008 (“Companies Act”), the shareholders of a company are entitled to enter into an agreement concerning any matter, provided that it is consistent with the Companies Act and the company’s Memorandum of Incorporation, and any provision of such an agreement that is inconsistent with the Companies Act or the company’s Memorandum of Incorporation is void to the extent of the inconsistency.

Consequently, where a company adopts a new Memorandum of Incorporation by means of a special resolution, it will effectively amend any shareholders agreement concluded between the shareholders of such company (to the extent that it is inconsistent with the Companies Act and/or the company’s Memorandum of Incorporation) or may even cancel a pre existing shareholders’ agreement. In this case, the MOI specifically provided for the cancellation of the Shareholders Agreement.

The Court found that the existence of a non variation clause in an agreement between shareholders would not render an otherwise lawfully adopted Memorandum of Incorporation invalid. The Court additionally held that even if the Shareholders Agreement was not terminated in its entirety, it would in any event no longer have governed the relationship between the parties as material portions thereof were either void or of no force and effect (as they conflicted with the provisions of the Companies Act and the MOI). On this basis, the application was dismissed with costs.

The above judgment provides an indication of, and indeed confirms, the far reaching consequences for a company by adopting a new Memorandum of Incorporation, in that any pre existing shareholders agreement may be found invalid and not binding on the parties thereto with retrospective effect from the date of adoption of the new Memorandum of Incorporation. It is therefore prudent for a company and its shareholders, who are considering the adoption of a new Memorandum of Incorporation, to determine whether: (i) the current pre existing shareholders’ agreement conflicts, in any manner, with the new Memorandum of Incorporation; or (ii) the new Memorandum of Incorporation cancels, whether expressly or implicitly, the shareholders’ agreement, and in either event the company and the shareholders should procure that any new or pre existing shareholders’ agreement is drafted and/or amended to align the provisions thereof with the new Memorandum of Incorporation.

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.)
Michael Peters
Michael Peters

Michael is an associate in the commercial team at Evershed-Sutherland's Johannesburg office. He specialises in commercial and corporate law, private equity, mergers and acquisitions and media, telecommunications and IT.

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