The Blind Side of Shelf Companies
Many business people purchase a shelf company as a cheap and quick method of obtaining a registered company. Often this is done without realising the consequences of the new landscape brought about by the Companies Act, 71 of 2008 (“the new Act”) with regards to the different types of companies and the powers of its functionaries in terms of the new prescribed “standard” memoranda of incorporation (“MOI’s”).
Under the old Companies Act, 61 of 1973 (“the old Act”), there was a single standard company constitution prescribed for private and public companies respectively. This made it easy to use a shelf company since the choice was only between these two alternatives. In terms of the new Act there are five prescribed “standard form” MOI’s designed for different types of companies. There is, in addition, an option to draft a unique MOI based on the specific requirements of a company.
The most basic prescribed MOI under the new Act is the “short form” MOI for private companies. This MOI is suitable for small owner managed companies. It contains only four articles (which are further subdivided) and allows for minimum flexibility with regards to the governance of a company. Experience shows that this is the standard MOI most commonly used for shelf companies.
One of the key features of the “short form” MOI is that it empowers the directors of a company to exercise most of the powers ordinarily reserved for shareholders. This makes sense in owner-managed companies because the shareholders and directors are the same people. The Board may, for instance, increase or decrease the number of authorised shares of any class, determine the preferences, rights, limitations or other terms associated with each class of shares, and it can issue shares up to a maximum of 30% of the voting power of all shares of that class. The voting rights in the company are pre-determined and so are meeting quorums. The authority of the Board to issue secured or unsecured debt instruments is unlimited and the provisions relating to appointment and removal of directors may not suit every company.
In terms of the new Act a private company is no longer obliged to appoint an auditor or to audit its annual financial statements. However, if the company meets certain prescribed minimum conditions it may be obliged to conduct an audit, or it may even voluntarily elect to do so in its MOI. Many other consequences of the short form MOI could be discussed. A private company using the short form MOI automatically elects not to be audited. Should the company one day fall within the prescribed audit parameters it would immediately become non-compliant with the new Act.
When purchasing a shelf company the difference between ownership and control of the company ought to be kept in mind. If the company will not be owner managed consideration has to be given to the extent of the powers of control of the Board and whether it is desirable to revoke or reduce some of these powers. The governance and oversight procedures must also be considered. The short form MOI can be amended or an entirely new MOI can be adopted immediately after the shelf company is purchased in order to achieve the truly desired outcome. It may be necessary to consult with an experienced professional in order to ensure that the company does not blindly follow the herd to the detriment of stakeholders.