Memorandum and articles of incorporation explained

Memorandum and articles of incorporation explained

Q.1: What is a memorandum of incorporation?

It is a document which you must file when setting up your company, which is signed by your initial shareholders to confirm that they wish to form a company. Once your company has been set up the memorandum of incorporation has no ongoing relevance for you.

The only possible ongoing relevance of your memorandum of incorporation is if your company was set up (or you applied to set it up) before 1 October 2009In such circumstances, if you have not made any changes to your company’s constitution since October 2009, your memorandum of incorporation might contain restrictions on what your company can or cannot do. Detailed coverage of these type of restrictions is beyond the scope of this service. If you are concerned that your company’s memorandum of incorporation might contain such restrictions, you can access a specialist lawyer to advise or remove the restrictions for you by using our Find a Lawyer service.

Q.2: Does my company need to have a memorandum of incorporation?

Yes, you need a memorandum of incorporation to set up your company. It is referred to in your application and must be in a set form(as to which see Q. 3).

If your company was set up after 1 October 2009, your memorandum will generally have no ongoing relevance for you after your company is set up.

Q.3: Does my company’s memorandum of incorporation have to be in any particular form?

Yes.

The form is prescribed by legislation and when you set up your company each of your subscribers must sign or authenticate it.

You will find a template memorandum of incorporation for editing in the Documents tab. If you apply online to register your business, your memorandum will be generated automatically but this is a generic CIPC MOI so will need amending to align to your business’s needs.

For guidance on applying to set up a company, see Setting up a new company, and for everything you are likely to need for the job, see our Starting a company toolkit.

How to produce a memorandum of incorporation

Q.4: Do I have to write my own memorandum of incorporation when setting up my company?

No, if you are setting up your company online (see Q. 5) or through an agent (see Q. 7).

Yes, if you are setting up your company by post (see Q. 6).

For guidance on applying to set up a company, see Setting up a new company, and for everything you are likely to need for the job, see our Starting a company toolkit.

Q.5: How do I produce a memorandum of incorporation if I set up my company online?

Your memorandum of incorporation will be automatically generated as part of the online process. You do not need to prepare your own separate memorandum of incorporation although we would suggest updating this to align to your company needs.

Your memorandum must be authenticated by each of your subscribers by signature.

For further details of how your memorandum will be generated, how you can review the draft version, and how your subscribers can get authentication codes, see Setting up a new company.

Q.6: How do I produce a memorandum of incorporation if I set up my company using the paper form?

As part of submitting the paper application form, you will need to prepare your own memorandum of incorporation.

This is very straightforward and can be completed through finding it on our solution. The memorandum must be signed by each of your company’s subscribers.

For a template memorandum of incorporation and instructions on how to complete it, see our memorandum of incorporation and begin editing right away.

Q.7: How do I produce a memorandum of incorporation if I set up my company using a company formation agent or solicitor?

If you are using a company formation agent or solicitor to set up your company, they will prepare your memorandum of incorporation for you.

Articles of incorporation

Q.8: What are my company’s articles of incorporation?

A company’s articles of incorporation are often tied up within their Memorandum of Incoporation. They contain important rules as to how to operate your company, including:

  • appointments to your board and powers of your directors;
  • conduct of board meetings;
  • matters requiring shareholders’ approval;
  • conduct of shareholders’ meetings; and
  • usually, share rights.

Your articles of incorporation will be your company’s key constitutional document, together with your shareholders’ agreement if you have one (see Shareholders’ agreement).Your directors are under a legal duty to comply with your company’s articles and will be held accountable to this by your board of directors.

Q.9: Does my company have to have articles of incorporation?

Yes and an up to date copy must be filed at CIPC and be available for public inspection.

Q.10: Do I have to write my own articles of incorporation for my company?

No.

You have three options when choosing your company’s articles:

  • You can adopt what are known as model articles which are a standard set of rules and will apply to your company by default. See Q. 18 for more guidance. If your company is a private company limited by shares, a specific set of model articles will apply to your company.
  • You can use an amended or modified version of the model articles. If you wish to do this, you have to include a copy of the amended articles with your application when you set up your company (see Setting up a new company).You are recommended to get expert legal advice if you choose this option.
  • You can write your own articles from scratch. If you choose this option, you must include a copy of the new articles with your application when you set up your company (see Setting up a new company).You are recommended to get expert legal advice here too.

See Q. 11 as to how to decide which option to choose. If you decide to amend the model articles or write your own articles from scratch, you can use our Find a Lawyer service to access a specialist lawyer in a few simple steps.

Q.11: How do I decide which articles of incorporation to choose when starting my company?

You have three options for articles to choose from when making your application to set up your company:

  • adopt the model articles; or
  • adopt the model articles subject to any changes you wish to make; or
  • use entirely bespoke articles.

See Q. 10 for more detail on your options. For guidance on applying to set up a company, see Setting up a new company, and for everything you are likely to need for the job, see our Starting a company toolkit.

Adopting the model articles of incorporation will be the most straightforward option for your company if it is a private company limited by shares. It is the form adopted by most new SMEs, at least when they are first set up. See Q. 18 and following for what adopting the model articles will mean for your company.

The chief disadvantage of using the model articles in their default form is that they are not tailored to any specific needs your company might have, for example in relation to voting rights or dividends for particular people. For this reason, you might choose one of the other options although you are strongly recommended to get expert legal advice before doing so. For access to a specialist lawyer in a few simple steps, you can use our Find a Lawyer service.

Note that even if you adopt the model articles, you can amend or replace them at any time provided you follow the correct procedure. See Q. 12 and Changing a company’s articles of incorporation for how to do this.

You can complement your articles with a shareholders’ agreement which will be binding on those of your shareholders who sign up to it (see Shareholders’ agreement).

Q.12: Can I amend my company’s articles of incorporation?

Yes, you can amend or even replace your company’s articles at any time by your shareholders passing a special resolution.

You might wish to amend your articles as your business grows and develops, or as part of bringing in third-party investment.

For guidance on changing the articles when bringing in a new share investor, and for template new articles, see Agreeing terms for a new share investment and Articles of incorporation(new share investor).

For guidance generally on how to update your company’s articles of incorporation, see Changing a company’s articles of incorporation.

Q.13: Who can see my company’s articles of incorporation?

Your company’s articles are publicly available on the CIPC public register. They can be found by searching for your company’s name and looking at its filing history. Locating your company’s current articles simply involves scrolling through the reverse chronological filing history to find the most recent filing. 

As articles of incorporation are a public document, you should be careful about including confidential or personal information in them, or provisions that apply personally to individual shareholders. Such provisions might be better contained in a separate shareholders’ agreement, which complements the articles. For guidance on when a shareholders’ agreement might be suitable and how best to enter into one, see Shareholders’ agreement.

Q.14: Is it a problem if my company’s articles of incorporation are breached?

This depends on what has happened, and how it affects the company and its shareholders.

In the case of an uncontroversial technical or accidental breach of the articles, where neither the company or the shareholders are aggrieved, steps can be taken to simply ratify the breach or to ensure the correct process is followed.

For more serious or contentious breaches, your company’s shareholders or the company itself could take legal action to enforce the terms of the articles. See Q. 15 and following.

Other legal actions can result from a breach of the articles. For example, a director who breaches a company’s articles of incorporation may also face claims for breach of duty and for breach of their service agreement or letter of appointment. If such claims are successful, a director could potentially be removed from office and could face personal liability as a result. For further guidance, see Directors’ personal liabilities.

Q.15: Can shareholders sue if my company’s articles of incorporation are breached?

Yes.

The action taken will depend on what provisions of the articles have been breached. Potential legal claims include:

  • a legal claim by a shareholder to declare any decision or action taken in breach of the articles invalid and void;
  • a legal claim by a shareholder to force others to comply with the articles; and/or
  • an application by a shareholder for a court order to stop an ongoing or threatened breach of the articles (an injunction).
  • Bringing, or defending, any of these legal actions is complex and will require specialist legal advice. If you are thinking about it, you can access a specialist lawyer in a few simple steps by using our Find a Lawyer service.

Q.16: Can my company sue if its articles of incorporation are breached?

Yes.

The action taken will depend on what provisions of the articles have been breached. Potential legal claims include:

  • a legal claim by the company to declare any decision or action taken in breach of the articles invalid and void;
  • a legal claim by the company to force others to comply with the articles; and/or
  • an application by the company for a court order to stop an ongoing or threatened breach of the articles (an injunction).
  • Bringing, or defending, any of these legal actions is complex and will require specialist legal advice. If you are thinking about it, you can access a specialist lawyer in a few simple steps by using our Find a Lawyer service.

Q.17: Can my directors take legal action if my company’s articles of incorporation are breached?

No.

A director who is not a shareholder cannot take legal action to deal with a breach of the articles themselves. However, an individual director can attempt to force the company to do something by convening a board meeting and proposing that legal action is taken by the company (see Q. 16).

Choosing the model articles

Q.18: What are the model articles of incorporation?

These are prescribed forms of articles of incorporation for South African companies. They are also referred to as statutory default articles. 

If your company is a private company limited by shares set up in South Africa, the appropriate version of the model articles will apply to you unless you have chosen otherwise when setting up the company.

Note that your articles will be set at the date of incorporation of your company, so if the government later publishes an amended version of the model articles, yours will not be affected unless you amend them yourself.

Q.19: What does it mean for my company if I use the model articles?

It will mean that:

  • your directors will run your company as they think fit unless the shareholders direct them to do or not do something (see Q. 20);
  • directors’ decisions will be made at board meetings or by unanimous written resolution (see Q. 21);
  • new shares can be issued by shareholders passing an ordinary resolution and your directors have the discretion to refuse to allow a share transfer (see Q. 22);
  • your directors can pay out interim dividends but final dividends must be declared by your shareholders (see Q. 23);
  • shareholders’ decisions will be made at general meetings or by written resolution (see Q. 24); and
  • your board can approve an indemnity from your company or the taking out of insurance to protect any director from personal liability (see Q. 25).

Q.20: How should my company be run if I use the model articles?

Under the model articles, your directors are given general authority to run your company on a day-to-day basis. This means that, unless shareholder approval on a matter is legally required or unless your shareholders require the directors to act in a certain way, your company’s directors will be responsible for running your company.

Q.21: How do my company’s directors make decisions if I use the model articles?

Under the model articles:

  • If you have more than one director, decisions are made by majority vote at a board meeting, or unanimously by a written board resolution.
  • A process is set out for board meetings, including quorum, chair, dealing with conflicts of interest and recording any decisions made.
  • A director cannot take part in any decision about a transaction or arrangement with your company if they have an interest in it, unless authorised by your shareholders (see Directors’ conflicts of interest for guidance on this).
  • If there is only one director, they can make decisions at their own discretion.

Q.22: How does my company issue or transfer of shares if I use the model articles?

Under the model articles:

  • New shares can be issued by ordinary resolution of your shareholders. See our other guides for more detailed guidance on how to issue new shares.
  • Directors have a right to refuse to permit the transfer of any shares at their discretion. See Transferring shares for guidance on how to transfer shares.

Q.23: How does my company declare and pay dividends if I use the model articles?

Under the model articles:

  • No dividend can be declared or paid unless recommended by your directors.
  • Your directors can pay interim dividends on their own but need approval from shareholders before they can pay a final dividend.
  • See Dividends and other distributions for more detailed guidance on declaring and paying dividends.

Q.24: How do my shareholders make decisions if I use the model articles?

Under the model articles:

  • Your shareholders can make decisions either by voting at a general meeting or by passing a written resolution.
  • You must comply with specific rules if holding a general meeting, in particular regarding quorum, chair, voting, proxies and resolutions (see Shareholders’ meetings).

See How to make a shareholders’ decision for more detailed guidance on how shareholders should make decisions.

Q.25: Can my company indemnify or insure my directors if I use the model articles?

Yes. The model articles permit your board to compensate or cover any of your directors out of the company’s assets against some liabilities they may have incurred whilst acting as director. The indemnity cannot cover negligence or default or breach of duty or trust against your company.

Your board is also permitted to take out insurance, at the cost of your company, to protect your directors if they get sued as a result of carrying out their duties. Insurance can cover more extensive liabilities than an indemnity from your company.

Relationship between articles and shareholders’ agreement

Q.26: Should I have a shareholders’ agreement as well as articles of incorporation?

Usually yes, if you have more than one shareholder. Remember, these documents perform different functions and although it is not mandatory, it is strongly recommended that you have a shareholders’ agreement, to complement your articles, which sets out the rights and responsibilities of your shareholders as part of your company’s internal management.

Unlike your company’s articles, there is no default form of shareholders’ agreement and you can enter into one at any time. For example, if you did not use a shareholders’ agreement when setting up your company, you may find that new investors require one as a condition of investing.
See Shareholders’ agreement An introduction for more detailed guidance on putting a shareholders’ agreement in place, including a Shareholders’ agreement drafting walk-through.