5.13 RULES OF THE COMPANY
The Rules of a company is a new concept that comes out of the United States or Canada. Rules are very similar to bi-laws in a City Council. They are an addition to the constitution of the city council and would probably deal more with operational details not contained in the constitution of the city council.
The rules of a company are in fact an extension of the MOI and are designed to govern the internal affairs of the company. The problem with rules are that there are no examples and no definition of what should be included in the rules. The rules may deal with any corporate governance issues not contained in the act or in the MOI. The rules cannot be in conflict with the act or the MOI.
The rules and the MOI are in fact binding on the following in terms of S15(6);
-
between the company and each shareholder
-
between or among the shareholders
-
between the company and each director or prescribed officer of the company in exercise of their functions within the company
-
any other person serving the company as a member of a board committee in exercise of their respective functions of the board within the company.
The last two are new and overrides the long-established principle that the company’s constitution is binding on a company and its shareholders only and only in the capacity of shareholders not directors. Owing to this change each party can enforce the MOI or the rules against one another in any lawful manner, this could be by way of an interdict or a damage claim arising from a breach.
The rules create a contract between the above mentioned parties in the above mentioned capacities. Please note that if the director or shareholder act in another capacity to the company then the rules can’t be applied.
The rules can be changed or created quite easily without changing the MOI. Remember the rules are over and above, or one can say an extension of the MOI. It should be noted that the MOI will always take precedence over the rules. Where there are rules inconsistent with the MOI or the Act, these rules will be void to the extent of the inconsistency. The rules are still subject to anti-voidance sections of the Act. Rules cannot be used to alter the unalterable provisions of the act. One can make unalterable provisions stronger by inserting clauses in the MOI.
The advantage of having rules is that the directors can in fact compile and publish the rules and once the rules have been published, they are binding on the company. Regulation 16(1) provides that any rules of a company must be filed on Form Cor 16.1 within 10 business days after being published by the company.
See s15(4)(b), the board may change or append rules in any manner. It is important to know that the rules must be ratified at the next available shareholders meeting by way of an ordinary resolution. After the rules have been ratified the necessary form has to be filed with the CIPC. Regulation 16.2 is to indicate the rules have been ratified or rejected. It is not necessary to call a shareholders meeting to specifically ratify the rules, the ratification can wait until the next shareholders meeting.
Before the rules have been ratified, they are nevertheless still binding even though they are at an interim stage. What happens when the rules fail to be ratified (I.e. the shareholders vote against the rules or a particular rule) at the next general meeting? The position in this case is that even though they were in an interim stage everyone can rely on them to that point as everyone is bound by them. Once a rule has failed the ratification vote they are therefore no longer binding from that point in time. Once a rule has failed ratification it cannot be reintroduced by the directors for a further 12 months unless approved in advance by an ordinary shareholders resolution.
The advantage of compiling rules is that the directors can do it very easily without going to shareholders and the rules can be binding whilst waiting for ratification. In smaller companies it could be that ratification takes a long time because there are no shareholders meetings to ratify the rules.
Rules would deal with matters of meetings, the maximum number of Directors and potentially anything in relation to the corporate governance not in conflict with the MOI or the Act.
Some examples could be;
· Authority level of chairman of the board and frequency of director’s meetings.
· Financial and marketing strategy
· Succession planning