Mr S Makhubu

BER220

Study unit 2 MOI

 BER 220

Study unit 2 Memorandum of

Incorporation
Study Unit 2 Memorandum of Incorporation
PRESCRIBED READING – Chapter 25
Business law Nagel et al p 361 – 366
Study Objectives
After studying this section you should be able to:
1. Briefly discuss the functions of the Memorandum of Incorporation (‘MOI’) and
the rules;
2. Explain constructive notice, and discuss whether it applies under the Companies
Act of 2008;
3. Define and discuss the legal status of the MOI, shareholders’ agreements and
rules;
4. Discuss Alterable and Unalterable provisions of the Companies Act 71 of 2008
5. Briefly discuss the contents of the MOI and the amendment thereof;
6. Explain what is meant by the “company’s capacity” and how capacity may be
limited;
7. Discuss representation and authority;
8. Explain the Turquand rule.
9. Apply the theory to a set of facts to solve unfamiliar but relevant problems.
Explanatory notes
Introduction of the functions of the
Memorandum of Incorporation (‘MOI’) and
the rules
• The current Companies Act 71 of 2008 (‘the
Act’) which regulates companies in South
Africa, requires one document as the
constitutive document of the company.
• This document is known as the Memorandum
of Incorporation (‘MOI’)
• It is used as the incorporation (establishing)
document of the company.
Introduction of the functions of the
Memorandum of Incorporation (‘MOI’) and the
rules Continues

• This is the governing document in the

company and it regulates relations
within a specific company and with
third parties.
• However, the MOI must be consistent
with the Act.
• If not, then it is void to the extent of
inconsistency.
Rules of the board and Shareholders’
agreements.

• Directors may create rules and

• Shareholders may create
shareholders’ agreements.
• And they should also be consistent
with the Act.
Doctrine of constructive notice and whether
it applies under the Companies Act 71 of
2008
• In the past, third parties concluding
contracts with the company, were
required to know the contents of the
constitutive documents due to the filing
and provision of access at the office of
the company.
• It has been partly abolished in the
current Act.
Constructive notice continues:
• Some companies MOI’s contain special
restrictive conditions on the capacity of
the company and authority of those who
are representing companies and
requirements of amendment and prohibition
of the amendment of such conditions in the
MOI.
• NOI and NOA should inform third parties
about such provisions. Draw their attention.
• Company name must end with RF’.
• Compliance with the provision is
required when concluding contracts.
Construction notice in personal liability

• In personal liability companies, third parties

are also deemed to know that current and
past directors are jointly and severally
liable together with the company for debts
that were contracted during their terms of
office.
• This is how the doctrine of constructive
notice is partially applicable.
• If you wish you can read s19(5), 15(2) b and
c and 19(3) of the Act.
Legal status of the MOI and rules,
The MOI and the rules of the board are
binding:
• Between the company and each shareholder.
• Between shareholders themselves
• Between the company and each directors
• Between the company and prescribed officers
• Between the company and any member of the
board committee or an audit committee.
• MOI and rules should be consistent with the Act
otherwise they are void to the extent of their
inconsistency.
Shareholders’ agreements

• Shareholders may also agree on

certain matters and such agreements
will regulate relations between them
in the company.
• Should be consistent with MOI and
the Act.
Alterable (can be changed in the MOI)

• E.g. Section 44(2) of the Act

provides the board with authority to
authorise financial assistance for
the purchase of company’s shares.

• Such provisions include words such

as these. Except to the extent that
the MOI provides otherwise…
Unalterable (cannot be changed in the
MOI)
• e.g. Section 76(3)(a) and (c) of the Act
provides that directors of the company
when representing the company must
exercise their powers and perform their
functions
• in good faith and for proper purpose
• in the best interests of the company
• with the degree of care, skill and diligence…
• N:B Unalterable provisions can only be
changed in the MOI if the change
provides a more rigorous or stricter
provision.
Memorandum of Incorporation and
the amendment thereof:

• The MOI is the constitutive document of

the company and it is required when
registering a company.
• It regulates the rights, duties and
responsibilities of shareholders,
directors and other persons in the
company.
Amendment of the MOI
• Since the MOI is an important governing document
in the company, it requires a rigorous process to
amendment.
• The board or
• Shareholders holding an aggregate of 10% or
more of the shares/voting rights in the company
can propose an amendment.
• Court order – no special resolution required.
• The amendment will require a special resolution
(75% or more of voting rights)
• The NOA must be filed at the CIPC and fee paid.
• The date amendment will be the later date
between the acceptance of filing of
amendment by the CIPC or date specified in
the Notice of Amendment.
Company’s capacity
What a company is able to do in the sphere of
business. E.g concluding transactions.
Ultra vires doctrine:
• In the past companies had the capacity to
conclude contracts that were provided for in their
objects clause.
• E.g If a company was in the catering business,
the object clause in its governing documents
would provide that it could only conclude contracts
that were in line with catering. This meant that
such a company could not purchase an expensive
luxury sports car or horse.
• This was known as the doctrine of ultra vires .
• Transactions that were outside the scope of the
company were void.
Capacity continues: Section 19

• This was unfair to third parties who contracted

with the company.
• Section 19 and 20 of the Current Act remedied
the injustice presented by the ultra vires
doctrine.
• Section 19(1)(b) provides that a company has
all the legal powers and capacity of a natural
person except to the extent that the company
cannot exercise such powers or cannot have
such capacity or the MOI provides otherwise.
E.g. Companies cannot get married.
Capacity continues Section 20:
• However, section 20(1) provides an
imperative provision by providing that in
instances where the MOI of the company
prohibits, limits or restricts any actions
by the company or directors do not have
the capacity to represent the company
because of the prohibitions, limits or
restrictions in the MOI, those actions are
nonetheless valid between the company
and third parties.
Section 20 Continues
• In other words, section 20(1) provides that
the contract is not invalid because the MOI
prohibits a transaction or director lacks
authority because the MOI prohibits a
transaction.
• The transaction is valid between the
company and the third party as long as it is
not against the Act.
• Section 20(1) provides that such contracts
are only invalid between company and
shareholders, prescribed officers and director
or between shareholders, directors and
prescribed officers.
Section 20 continues:

• This means that the company can use

the fact that the contract is prohibited
in the MOI to hold a director who acted
contrary to the MOI personally liable
for damages.
• In such circumstances directors will be
in breach of their fiduciary duty.
• In other words, they would have acted
dishonestly by not abiding to the MOI.
Section 20 Continues

Ratification
• Section 20(2) allows the general meeting to
ratify or accept the contract that is contrary
to the MOI with a special resolution.
Restraint - interdict
• Section 20(4) allows organs and other
stakeholders such as unions representing
employees to apply to court to restrain a
transaction that is contrary to the Act.
Interdict (Prohibition from concluding
any provision that contravenes the MOI.)

• Section 20(5) provide that organs

(shareholders, directors) may apply to the
High court to restrain the company or
directors from concluding any transaction
that contravenes the MOI. This does not
affect the damages of the third party,
provided the third party acted in good faith
and had no knowledge that the MOI restricts
the transaction.
Section 20(6) Claim for damages by
each shareholder:

• Section 20(6) provides that each

shareholder has a claim against any
person who intentionally, fraudulently or
with gross negligence causes the company to
contravene the Act and MOI unless the
transaction is ratified in terms of subsection
(2).
Company representation
• In terms of section 66 of the Act, the board
of the company has the power to control
and bind the company.
• Companies can also be bound by agents of
the company who are granted actual
authority which is express authority or
implied.
• Agents can also bind companies based on
ostensible authority where the company
created an impression that the agent has
authority whereas this is not the case.
Company representation continues:

• Express authority is granted to an agent in

the MOI or by a board resolution.
• Agents must accept delegation of powers.
• Implied authority is when an officer in the
company performs the functions of the
office.
• The board may appoint one director to
represent the board in concluding contracts
or appoint another officer.
Instances of ostensible authority
E.g. The MOI of the company provides that Sam is the
only director who has the authority to conclude
contracts on behalf of the company. For the past 5
years the company has allowed Ronnie another
director to conclude contracts and the board of the
company has honoured those contracts despite the fact
that Ronnie lacked authority. In the year 2023, the
board refuses to pay one of the contracts concluded by
Ronnie with the third party and argues that Ronnie
lacks authority to conclude contracts . Is there a
recourse for the third party?
Yes, the company has granted Ronnie an ostensible
authority, thus estoppel is applicable to prevent the
company from relying on the truth because it created
the impression that Ronnie has authority.
Ostensible authority continues 4 requirements
• The company must have intentionally or negligently
misrepresented to the third party.
• The misrepresentation must be serious enough to
reasonably mislead the third party.
• The third party must have been lead to act because
of the misrepresentation.
• The third party must have suffered damages due to
acting based on misrepresentation.
Ratification (see the discussion on the
discussion of company’s capacity)
Section 20(2) provides that shareholders may with a
special resolution ratify (accept) a contract that is
concluded by a director who lacks authority due to
MOI.
Turquand rule in terms of Common law and
Statutory Turquand rule
Common law
• In some companies, authority to bind companies is
dependent on internal management
requirements or indoor management
requirements.
• This places a burden on the shoulders of the third
parties who want to contract with the company to
inquire as to whether the internal requirement was
complied with.
• This is unfair to third parties concluding contracts
with companies as they have to spend money to
find out whether internal requirements have been
complied with.
Let’s use an example to explain:
The board of directors of Yim Furnitures (Pty) Ltd has
authorised Tim the managing director to conclude
contracts on behalf of the company. However, where the
contract exceeds R 100 000, the board must hold a
meeting and grant authority to Tim. Tim concludes a
contract that exceeds R100 000 on behalf of the
company with Zweli logistics CC for Zweli logistics to
deliver the company’s furniture in Durban. Zweli logistics
delivers on its undertaking and claims the money for the
service rendered to the company. The board claims that
Tim does not have the authority because the meeting of
the board did not grant him authority as the contract
exceeds R100 000. The board refuses to pay Zweli’s
logistics CC. Is this fair to Zweli logistics?
• Turquand rule in terms of common cont:

• Obviously not as it is difficult for Zweli

logistics to know whether or not the internal
requirement was complied with.
• Turquand rule comes into the picture to ensure that
there is fairness to Zweli logistics.
• Common law Turquand provides that:
• A third party (Zweli logistics CC) when acting in
good faith when concluding a contract with the
company (Yim furnitures),
• Can assume that the internal requirement has
been complied with in the company (the meeting of
the board was held and authority was granted to
Tim to conclude a contract that exceeds R 100 000)
Common law Turquand rule continues:
• In terms of Turquand rule, Yim Furnitures will
be bound even though Tim did not have
authority.
• Zweli logistics should not make further inquiries.
• Good faith means that Zweli logistics should not
have been aware that the meeting did not take
place and Tim did not have authority or could not be
deemed to have known.
• And Turquand rule is available only when the third
party contracted with the person who actually has
general authority to bind the company. E.g The
board, Managing director with authority or officer of
the company but there was an internal requirement.
• Turquand rule will not be available when people
pretend to be members of the board.
Statutory Turquand rule (please refer to the same
example above)
Section 20(7) of the Act provides:
• That Zweli logistics CC when acting in good faith when
contracting with the Yim Furnitures,
• Is entitled to presume that all internal requirements in
terms of the Act, MOI or rules of the company (Yim
furnitures) have been complied with. (The meeting took
place and Tim was granted authority to conclude a
contract that exceeds R 100 000)
• Zweli logistics cannot presume if they knew or ought to
have reasonably known that the meeting did not take
place and Tim did not have authority.
• The common law and statutory Turquand rule are
applicable side by side. The plaintiff can choose either
one.
Self-assessment question
Jamie and Zac two of the five shareholders of
the company want to propose a resolution to
amend a certain provision of the MOI of the
company because it is unfair to them as
shareholders. Jamie holds 5% of voting rights
and Zac holds 6% of voting rights.
Advise Zac and Jamie whether they can
propose the amendment of the MOI? (5)