Legal compliance is not negotiable. Yolelwa Sikunyana the founder
and Director of Sikunyana Incorporated Attorneys answers some of the questions and concerns entrepreneurs have on this matter.
The common mistake most entrepreneurs make is thinking that legal compliance is an option. This is probably because it is perceived as expensive or just too complex to achieve. However, doing this can be detrimental for entrepreneurs as non-compliance can sometimes lead to fines, criminal prosecution or even closure of the business.
Compliance extends to contracts as well, as these create legal obligations. It is therefore important for entrepreneurs to understand contracts and their implications. Entrepreneurs tend to think that because they know each other and have a good business concept, they do not have to define their relationship and obligations in writing. Although verbal contracts are valid, it is prudent to record the terms of a contract in writing for proof and certainty.
What is the difference between shareholders and directors?
Shareholders own a company through owning its shares and directors manage it. Unless the MOI (Memorandum of Incorporation) provides otherwise, a director does not need to be a shareholder.
What is a Shareholders Agreement?
A Shareholders Agreement is used to govern the relationship between the various parties in their capacity as shareholders and often also in their positions as directors of a company.
Why is a Shareholders Agreement important?
As soon as two or more people decide to be involved in business together, the Shareholders Agreement should be the first document that should be prepared and signed. This document ensures that the running of the company and the responsibilities of the shareholders are properly regulated. Accordingly, it will reduce the potential for conflict between shareholders and help the company to be run efficiently. Most importantly it is a private document.
What to include in a Shareholders Agreement?
The list is not exhaustive, but these are some of the things that can be included:
- The procedures applicable to directors and shareholders’ meetings
- Provisions dealing with the sale of shares
- Implications in case of death/retirement of a shareholder
- Share valuation methodology & Loan accounts
- Options to minorities when majority of shareholders sell their shares
- BEE Requirements and implications if they cease to be met
- Dividend policy
- Working capital requirements
What is a Memorandum of Incorporation?
The MOI is a document that sets out the rights and responsibilities of directors, shareholders and others within a company. This is however a public document, so some items that the shareholders want to govern more confidentially may be done in the shareholders agreement. In instances where there is a conflict between the Shareholders Agreement and the MOI, the MOI will prevail [It is therefore important that the two documents be prepared simultaneously]. Similarly, where the MOI is in conflict with the Companies Act, the Act will prevail.
What is the importance of contracts in a business?
In any business, the key way to safeguard resources and investment is by embracing contracts. Contracts detail legal obligations and expectations of both parties and also provide a process on how negative situations will be resolved. These contracts aim to ensure that the parties to them understand the details of the commercial arrangements they are making. It is therefore important for entrepreneurs to understand contracts as non-compliance may lead to legal action.
What are some of the types of contracts in existence?
- Employment contract: sets out the terms and conditions of the relationship between an employer and an employee
- Joint venture agreement: is a strategic cooperation where two or more people and/or companies agree to contribute goods, services and/ or capital to a common commercial enterprise for the purpose of a specific tender or request for proposal.
- Sub-contractor agreement: an agreement between a general contractor and a subcontractor; it describes the services and materials provided by the subcontractor, price of the work, and warranties of the parties.
- Non-disclosure agreement (NDA): a contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish to restrict access to or by third parties.
- Funding agreement: is a legal document that outlines the terms, conditions and obligations of funding, service delivery, accountability for both the funder and the business funded.
- Memorandum of Understanding (MOU): an agreement between two or more parties outlining the terms and details of an understanding, including each parties’ requirements and responsibilities. An MOU is often the first stage in the formation of a further contract to be concluded in the future.
What are some of the compulsory laws (as amended) that the business needs to comply with?
- Basic Conditions of Employment Act of 1997
- Labour Relations Act of 1995
- Occupational Health and Safety Act of 1993
- Companies Act of 2008
- Black Economic Empowerment Act of 2003
- Compensation for Occupational Injuries and Diseases , Amendment of 1997
- Protection of Personal Information (POPI) Act of 2013
- Consumer Protection Act of 2005
- Various Tax Laws
What are some of the requirements for a compliant business?
- Company Registration
- VAT registration
- BEE certificate or Affidavit
- Letter of Good Standing
- Bargaining Council registration
- PAYE, UIF – registrations
- Tax clearance certificate
Some of the useful links for compliance are: