Financial Training Company

2007

Corporate and Business Law- F4 (Zimbabwe)

Casebook

Authorized share capital

The critical issue here is that the authorized share capital of the company is already fully issued and therefore no new shares can be issued in the company unless the authorized share capital is increased. Section 87 of the Act allows a company to increase its share capital by special resolution and s.89 requires the company to give notice to the Registrar of any increase in the share capital of the company within one month after the passing of the special resolution.

Section 133 provides that a special resolution requires a majority of not less than 75% of such members entitled to vote as are present in person or by proxy at a general meeting of which not less than 21 days notice has been given, specifying the intention to propose the resolution as a special resolution and at which members holding an aggregate of not less than 25% of the total votes of the company are present in person or by proxy. A shorter notice period is permitted provided that this is agreed by a majority of members entitled to attend and vote at the meeting and holding not less than 95% of the total votes of all the members or by all the members.

Chronologically the steps to be taken are as follows: A general meeting will be convened to pass a special resolution authorizing the increase in the company share capital. At this meeting the members will also pass an ordinary resolution giving the directors their approval to the issue of the new shares. The Secretary will draw up a timetable for the work to be done. A Board meeting will be convened to approve a draft circular to shareholders advising them of the rights offer. A rights issue is an issue of new shares to existing shareholders in proportion to

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the number of shares they already hold. Once the authorized share capital of the company has been increased, existing shareholders will be advised of the proposed rights issue and given a certain period within which to exercise their option to take up new shares. Since Green Valley Enterprises is a public company, the Stock Exchange will have to be notified. The offer documents, comprising letters of allocation and forms of acceptance and renunciation will be sent out. After the offer closes, a board meeting will be called to make a formal allotment of shares. The share certificates will then be prepared and sent to shareholders. A return of allotments in form CR2 will be lodged with the Registrar of Companies within one month by the Boards formal allotment resolution. The register of allotments must be updated in terms of s.71. Finally the nominal value of the share is $800 each but they are being issued to members at $1000 each. In other words, the shares are being issued at a premium and the provisions relating to the share premium account (sec. 74) apply.

Section 74(1) reads as follows:

If a company issues shares at a premium whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account called the share premium account and provisions of this Act relating to the reduction of a companys share capital shall apply except as provided in this section as if the share premium account were part of its paid-up capital.

Types of share capital

Shares are basically divided into four different classes, namely ordinary shares, preference shares, redeemable preference shares and deferred shares. Ordinary shares, as the name implies, constitute the residuary class in which everything is vested after the special rights of other classes, if any, have been satisfied. They confer a right to the equity in the company. As a form of company security, ordinary shares are the riskiest and it is for this reason that they are referred to as equities or risk capital. Ordinary shareholders bear the risk that payment is postponed until a dividend is declared and after the payment of preference shareholders. This remains the same even when

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regarding the repayment of capital.

Ordinary shares are not fixed and where the company is doing well they may be paid the residuary distributable profit, divided proportionally by ordinary shareholders dividend percentage. This is the same with the repayment of capital or where the company is distributing the remaining capital or assets.

However, this is only possible where preference shareholders do not have a right to participate in the surplus assets. Ordinary shareholders normally comprise the bulk of companys shares. In most cases they are the majority and participate in most of the decision making within the company and are better placed in exercising their right to vote. They overally have control over the running of the company.

It is usually spelt out in the Companys Articles of Association that whenever a fresh issue of shares is made, these should be offered to ordinary shareholders, usually at a lower price than outsiders.

Preference Shares: These confer on holders, preference over other classes of shareholders in respect of either dividends, repayment of capital or both. Preference shares include a right to receive dividends of specified, or of a fixed, rate of dividend. An example would be 10% of their nominal value of profits each year before any dividend may be paid out to holders of ordinary shares.

Preference shares are cumulative unless the articles or terms of issue state otherwise. This means that if the company cannot pay a dividend in one year the arrears must be carried forward to future years. If preference shares are non-cumulative and the company cannot pay the dividend, the arrears are not carried forward and so the preference shareholder will not receive a dividend for that year.

Preference shareholders have a right to sue, for payment of dividend from the available profits where the Articles of Association specifically confer this right and thus would be contractually binding. Unless the articles provide to the contrary, preference shares carry the same voting rights as other shares. However, preference shareholders voting rights are usually restricted to specified circumstances which directly affect them for example when the right of preference shareholders are being varied.

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In Liquidation, preference shareholders do not automatically have a right to prior return of their capital. If the articles are silent preference shareholders and ordinary shareholders rank equally.

Redeemable Preference Shares Section 76(1) of the Companies Act [Chapter 24:03] gives the company powers to issue redeemable shares of any class provided that the articles so allow and also provided that the shares are fully paid for.

Redemption of shares must be effected out of profits of the company which would otherwise be available for dividend or out of proceeds of the fresh issue of shares made for the purposes of redemption. In most cases, the terms of redemption of redeemable shares must be prescribed by the articles or to be determined as provided in those articles i.e. how the company would buy back its own shares.

Where the company is being wound up, the redemption or purchase may be enforced against the company unless the redemption or purchase was for a date later than that of commencement of winding up or the company could not, before the winding up is completed, have lawfully paid a dividend to shareholders of an amount equal to that of the costs of the redemption or purchase.

In a case where the company is being wound-up, all other creditors must be paid first and then shareholders who hold preferential shares before payment of amounts which are liable to be paid out for a redemption or purchase of shares; per s.110 of the Insolvency Act [Chapter 6:04]. Deferred Shares/Founders Shares: These are shares which the holder rights are deferred until the claims of other classes of shares are satisfied. Sometimes this class of shares is accepted by the sellers or vendors of business as part considerations for the sale. Deferred/founders shares have the same relationship with ordinary shares that ordinary shares have with preference shares. A significant amount of risk is attached to these shares given that they rank below ordinary shares. However, this risk investment is often rewarded by a large share of surplus profits assets after the ordinary shareholders have been paid their minimum dividend or repaid their capital on a winding-up or a reduction of share capital. Such shareholders often enjoy disproportionally large voting rights as compared to ordinary shareholders. It should be noted, however, that the rights which may be enjoyed by these shareholders is a matter to be determined from the document under which the shares are issued.

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Capital maintenance
The Companies Act [Chapter 24:03] contains a number of provisions which are meant to preserve the share capital structure of the company. The general principle is that a company must maintain its capital, it cannot give money which has been contributed by the shareholders back to those same people and there are a number of strict rules which seek to maintain adherence to that principle. If such money is returned to shareholders, except in a few specific and clearly defined situations, then it becomes an unlawful reduction of share capital. Some of the rules which are designed to preserve the share capital structure of a company are the following:

(a) Prohibition of financial assistance by the company for the purchase of its own or its holding companys shares (s.73) It is unlawful for the company to give whether directly or indirectly, whether by means of a loan, guarantee, the provision of security or otherwise any financial assistance for the purpose of buying shares in the company or where the company is a subsidiary company in its holding company unless: (i) such assistance is given in accordance with a special resolution of the company; (ii) the companys assets exceed its liabilities and it is able to pay its debts as they become due in the ordinary course of its business.

(b) The Share Premium Account (s.74) If a company issues shares at a premium whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account called the share premium account. The share premium account cannot be used anyhow and in terms of the Act, its use is restricted to the following (among others): (i) in paying up unissued shares to be allotted to the companys members, directors, employees or to a trustee for such persons, as fully paid bonus shares or (ii) in writing off the companys preliminary expenses or the expenses of or the commission paid or discount allowed on any issue of shares or debentures of the company.

(c) Power to Issue Shares at a Discount Whilst it is permissible for a company to issue shares at a discount of a class already issued, this has to be done in accordance with strictly laid down criteria which is as follows: (i) the issue of the shares at a discount must be authorised by special resolution of the company and must be sanctioned by the court and

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(ii) the special resolution must specify the maximum rates of discount at which the shares are to be issued.

(d) Prohibition of Loans to Directors (s.177) It shall not be lawful for a company to make a loan to any person who is its director or a director of its holding company unless: (i) the companys ordinary business includes the lending of money or the giving of guarantees in connection with loans made by other persons to anything done by the company in the ordinary course of that business or (ii) where the company is a non-subsidiary company and the consent of members holding at least nine-tenths of the issued share capital has been secured. (e) Payment of Dividends As a way of preserving the share capital structure the Companies Act makes it clear (Article 16) that No dividend shall be paid otherwise than out of profits Even if a company makes profits, shareholders are not automatically entitled to a dividend until and unless the directors have declared one. Members in general meeting cannot outride or veto a decision of the Board of Directors over matters pertaining to a declaration of a dividend. Ultimately the provisions cited above are meant to ensure that as far as possible, the share capital structure of the company, is not unlawfully interfered with.

Increase share capital

(i) The initial decision to increase the share capital of the company will have been taken at a Board Meeting by the Board of Directors. The matter is then referred to members in a general meeting of the company. If it is agreed that the share capital of the company be increased, the notice of increase in share capital is then submitted to the Registrar of Companies. The meeting which preceded the submission of the notice to the Registrar was probably an Extraordinary General Meeting at which all the registered members of the company were eligible to attend. (ii) The meeting would have been held in terms of s.126 of the Companies Act. Theoretically the meeting could have been an Annual General Meeting convened in terms of s.125 of the Act although this is highly unlikely. (iii) A special resolution to increase the share capital was passed in terms of s.89 as read with s.133 of the Companies Act, Chapter 24:03. (iv) The resolution should be passed by a majority of not less than 75% of such members entitled to vote as are present in person or by proxy at a general meeting of which not less than 21 days notice has been given. Members holding not less than 25% of the total votes of the

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company are required to be present in person or by proxy

New share certificates and the documents required

The manner in which shares are transferred is laid down in the Articles of the company. The general rule is that shares are freely transferable in the manner prescribed by the Articles, and the Board of Directors accordingly has no discretion to refuse to register a bona fide transfer. In brief, the procedure is that a written instrument of transfer must be delivered to the company (s.99). The transfer form contains the names and addresses of the transferor and transferee and their signatures, the number of shares to be transferred and the price payable (if any). The first thing that is required is the original share certificate bearing the name of the deceased. This must be accompanied by a transfer form signed by Mr Brown in his capacity as executor of the estate. Before allowing an executor to deal with the shares of a deceased member, the transfer secretary must satisfy himself that the person claiming the right is properly entitled to do so. Thus, unless Mr Brown has obtained the consent of the Master of the High Court and has been issued with Letters of Administration, he does not have authority to act in this matter. In terms of s.102 of the Companies Act, transfer of the shares of a deceased person by the executor is as valid as if he himself had been a member. In terms of articles 30 and 31 of Table A, the heirs must elect whether they personally wish to be registered as the holders of the shares or whether to nominate some other person. If they elect to be registered themselves, they must send to the company written notice of their decision.

Once all the relevant documents have been presented to the company secretary, the old share certificates will be cancelled and new certificates will be issued in the names of the heirs. The company is obliged to issue new share certificates within two months after the transfer document has been completed (s.103). Each share is distinguished by its appropriate number (s.98). The share certificate must be signed by either two directors or by one director and the secretary (s.104). The register of members must be updated accordingly.

Posting share certificates

An offer is an unconditional declaration by the offeror of his intention to conclude a contract and the offer must comply with the following requirements. It must be: (a) clear and unambiguous (b) complete (c) communicated to the offeree (d) made with the intention that it will serve as an offer that it may be accepted and that a valid contract will result

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there from. From our case law it is clear that an advertisement (as in this case) is merely an invitation to do business (to treat) and not a firm offer.

In Crawley v R (1909) Smith J ruled as follows: the mere fact that a tradesman advertises the price at which he sells goods, does not appear to me to be an offer to any member of the public to enter the shop and purchase goods nor do I think that a contract is constituted when any member of the public comes in and tenders the price mentioned in the advertisement. It seems to me to amount simply to an announcement of his intention to sell at the price he advertises . . .. It is clear from the facts of the case that Adolf is the offeror and Egoli Mines Limited is the offeree who is at liberty either to accept or reject the offer. If an offer is made by post and acceptance also takes place postally a contract comes into being at the place where and at the time when the letter of acceptance is posted. In the case of Cape Explosives Works Ltd v SA Oil and Fat Industries Ltd (1921) the court ruled that the expedition theory is to be applied in the case of postal contracts where in the ordinary course the post office is used as the channel of communication, and a written offer is made, the offer becomes a contract on the posting of the letter of acceptance. Kotze J based his judgment on practical considerations because the applications of the expedition theory gives rise to fewer problems. Where an effective postal system exists, there is a reasonable level of certainty that a letter which is properly posted will reach its destination. The decision that the expedition theory applies to postal contracts was ratified by the appeal court in Kergeulen Sealing and Whaling Company Ltd v CIR (1939) and is now generally accepted as the ruling principle in our law. It is now clear that with postal contracts, the expedition theory applies and the contract comes into existence where and when the letter of acceptance is posted unless the offeror expressly states that he required notice of the acceptance. It is also settled law that the offer may therefore not be withdrawn after the letter of acceptance has been posted even if the offeror has no knowledge of the posting (A to Z Bazaars v Minister

of Agriculture (1942).

Principles governing the payment of dividends in a

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company.

A dividend is a share in the profits of a company. The manner in which profits are to be divided is determined by the articles of the company. The articles may provide for the declaration of dividends by the company in a general meeting with the right of directors to pay such interim dividends as are justified by the profits of the company or they may authorise the directors to declare dividends without reference to a general meeting. Usually the articles prescribe that no dividend may be paid otherwise than out of profits. It is now settled law both in terms of the common law and statutory law that dividends may not be paid out of capital even if the memorandum or articles purport to authorise payment because such payment would constitute an illegal or unauthorised reduction of capital. Article 116 of Table A of the Companies Act Chapter 23.04 says no dividend shall be paid, otherwise than out of profits . . . . Whilst the company in general meeting may declare dividends, no dividend shall exceed the amount recommended by the directors (Article 114, Table A). Thus, while the shareholders can vote to reduce the amount of the dividend, they cannot vote to increase it.

The directors may before recommending any dividend set aside out of the profits of the company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors be applicable for any purpose to which the profits of the company may be properly applied and pending such application, may, at their discretion either be employed in the business of the company or be invested in such investments, other than shares of the company as the directors may from time to time think fit.

In the case of Buenos Aires Great Southern Railway Company Ltd v Preston after incurring heavy losses on its trading account for several years, a company made profits in one year sufficient to pay the full dividends on preference shares. The directors however considered that it would be unwise to pay such dividends and decided to transfer the profits to reserve. The court held that they had power to do so and that the preference sharesholders were not entitled to claim their dividends.

Romer J made the following observation: having regard to the articles it is clear that the dividends on the ordinary capital were payable only out of the net profit of the company in the sense that the powers of the company or the board to carry profits to reserve override the rights of the shareholders to dividend. The procedure would be that the board would consider the profits of the company on the one hand

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and its requirements as to maintenance and so on, on the other. Having decided the amount of profit, if any, which was available the directors would make the necessary recommendation to the company and the company would consider the matter . . . .

Whilst it is true to say that dividends are declared at the sole discretion of the directors and that shareholders cannot insist on the company declaring a dividend, once a dividend is declared a company becomes indebted to its shareholders in the amounts of their dividends. However such dividends are debts which bear no interest against the company. This is as a result of article 122 of Table A which states that no dividend shall bear interest against the company. Whilst the legal position is that dividends may only be paid out of profits it is also clear that if the directors have, without negligence, formed the bona fide belief that the company has earned sufficient profits to pay a dividend when in fact it has not, no liability will accrue to them. On the other hand, if they were negligent in declaring a dividend, they can be held liable.

Finally, the directors may deduct from any dividend payable to any member all sums of money, if any, presently payable by him to the company on account of calls or otherwise in relation to the shares of the company.

Dividends declaration
Dividend is paid to a member of a company as opposed to interest which is paid to its debenture-holder. Thus there are two fundamental distinctions between interest and dividend. In the first place they are payable out of different funds, interest being payable out of any of the companys monies, while dividend is payable only out of profits. On the other hand interest is a debt while a dividend is not a debt until it is declared. There are a number of propositions which together will tell us what, in law, constitutes profits and these are: (i) provided trading profits have been made, a dividend may be declared out of them without making good losses of fixed capital; Verner v General and Commercial Investment Co Ltd (1894) 2 Ch. 239. (ii) losses of circulating capital, however, must first be made good before a dividend is declared,

Verners case (above).

(iii) provided that the dividend can be declared out of the trading profit for that particular year, or out of other distributable funds, trading losses incurred in previous years can be disregarded. (iv) revenue reserves, that is, profits which have not been distributed but retained by the company, possibly to maintain the dividend over a difficult trading period, may lawfully be used for dividends.

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(v) a dividend may be declared out of a realised profit on a fixed asset because, although this is not a trading profit, it is still profit. It is not, however, lawful to use a realised profit on a single asset for dividend purposes unless the companys whole financial position is sound, Foster v

New Trinidad Lake Asphalt Co. Ltd (1901) 1 Ch. 209.

The above rules apply subject to the companys articles which often restrict the payment of dividends further. Thus they may stipulate that dividends may only be paid out of trading profits or the profits of the business. Under the articles of most companies, it is the company which declares the dividend, but the directors recommend its amount. The articles usually provide that the dividend shall not exceed the amount recommended by the directors and article 114 of Table A does this, so that while the shareholders can reduce the amount of the dividend, they cannot increase it. Unless the company takes advantage of s.85 (c) of the Companies Act and inserts a clause similar to Table A, article 118, in its articles, dividends are declared either as a percentage based on the nominal value of the shares, or, less frequently, as a specific sum per share.

Once declared by the company, the dividend becomes a speciality debt due to the members but the period of limitation is twelve years. Sometimes the articles authorise the directors to pay interim dividends to the members, that is, dividends which are paid in between two annual general meetings, usually six months after the final dividend.

Transfer of shares in a private company to someone outside the company.

Generally shares are personal property and are transferable subject to any restrictions contained in them. Although it is not clear from the facts of the case whether Nhapitapi Investments (Pvt) Ltd has such restrictions in its articles of association in practice, most private companies (if not all) invariably restrict transfer of shares. Indeed s.33 of the Companies Act which defines the term private company says that (1) The expression private company means a company other than a co-operative company, which by its articles restricts the right to transfer its shares. In this case it is safe to assume that the articles of Nhapitapi Investments restrict the right to transfer shares. Where the articles of a company restrict transfers, then a transfer must be submitted to an approved person by the board of directors.

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Thus any decision to sanction a transfer must be made by the directors. Article 24 of Table A of the Companies Act, Chapter 24:03 says that the directors may decline to register the transfer of a share, not being a fully paid share, to a person of whom they do not approve and they may also decline to register the transfer of a share on which the company has a lien.

The power to refuse to register a transfer can be challenged only on the ground that it was exercised in bad faith. (Re Coalport China Company (1895). If a company refuses to register a transfer of any shares or debentures the company shall, within two months after the date on which the transfer was lodged with the company, send to the transferor and the transferee notice of the refusal. If default is made in complying with this particular requirement, the company and every officer of the company who is in default shall be guilty of an offence and liable to a default fine. The directors may also refuse to sanction a transfer if there is a pre-emption clause in the articles of the company as is normally the case. A pre-emption clause or the right of first refusal entails that when a member of a private company wishes to sell his shares, he must, under the provision in the articles first offer them to the members of the company before he offers them to an outsider.

Share certificates

In terms of s.104 of the Companies Act a share certificate under common seal is only prima facie evidence of title to the security. This means four things: (i) that other evidence may be brought forward to show that it is incorrect or has become invalid by reason of subsequent events; (ii) that a share certificate is not a negotiable instrument because its transfer from one person to another does not affect the ownership of the shares. That can only be done by effecting an

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instrument of transfer which must be completed and lodged with the company and approved by the directors; (iii) the share certificate is just a statement by the company that, at the moment when it was issued, the person named on it was the legal owner of the shares specified in it and that those shares are paid up to the extent stated; (iv) that estopped is not a principle of substantive law but that it is a rule of evidence which prevents a person from denying the legal implication of his conduct. When we say a company is estopped, this means that it is prohibited from denying (as against a person who has innocently relied on a share certificate), that the certificate is a correct copy of the relevant particulars in its register, in terms of s.104 of the Companies Act. However, this principle does not apply in the following situations: (i) when the certificate is a forgery; (ii) when it has been issued without authority; and (iii) when the person claiming on it has not relied upon it (as in the case of a transferee who fails to obtain the certificate or other evidence at the time of transfer).

Private Business Corporation Act (Chap. 24:11)

It is true to say that the Private Business Corporation Act (Chap. 24:11) was introduced four years ago because it was thought that the Companies Act (Chap. 24:03) was too detailed and complicated and therefore not suitable for less sophisticated organisations which operate in the form of partnership.

The Private Business Corporation Act, in an attempt to achieve the above object, makes a private business corporation, on registration, a juristic person distinct from its members. In other words, it acquires a corporate status, but there is no need to appoint directors or draw up the founding documents like the memorandum and articles of association. These documents are replaced by a statement called incorporation statement and as such it abolishes the ultra vires doctrine. This is because, on registration, the business becomes a corporate body with all the powers of a natural person without limitations as normally set out in the companys founding documents. In such cases, unlike the registration of a company, there is no need to specify in the incorporation statement the objects of the business (corporation).

A private business corporation is not allowed to issue shares and instead each member is to hold an interest in the corporation which will be recorded as a percentage in the incorporation

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statement. In the event of the winding up of the corporation, a member will be entitled to a share in the assets of the corporation in proportion to his percentage. His liabilities will be measured likewise.

There is no requirement in the Private Business Corporation Act that the corporation must publish or submit accounts to the Registrar of Companies. This is so although each corporation is required to appoint, in terms of s.85, an accounting officer (not an auditor) in order to maintain accounting records. An ordinary book-keeper will qualify as an accounting officer.

There is also no requirement in the said Act that every corporation, once registered, must hold annual general meetings. It was felt by the Law Development Commission that this was an unnecessary formality. It should be noted, however, that the Private Business Corporation Act did not completely achieve its objective. The complicated provisions, in terms of s.56 of the Companies Act in respect of winding up a company, judicial management and the removal of defunct companies from the register, still apply to corporations. No doubt, the complicated company law doctrines, for example, the rule in Foss v Harbottle 1883 will still also apply to corporations.

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