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NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY

COMPANY LAW
[CIN 2106]

BY:

Mr. L.M. Sibanda, LLB [U.F.H.], LLM [U.F.H.]. &

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Mr. T. Makhuyana, LLB [U.Z.], MBA [N.U.S.T.], LLM [UNISA].

NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY

FACULTY OF COMMERCE
BACHELOR OF COMMERCE HONOURS DEGREE
COURSE OUTLINE FOR : COMPANY LAW I [CIN2106]
LECTURER: MR L.M. SIBANDA
TOPIC CONTENTS OBJECTIVES
1. What is a  What is a company?  Appreciate the definition of a
Company?  Types of companies and the concept of company
limited liability  Identify and evaluate the
 Private companies types of companies and
 Public companies roles played by the different
 The principle of limited liability guarantees attached to
them.
 Companies limited by guarantee
 Companies limited by shares
 Identify the formalities for
registering a company
 Formation of a company
 Asses the reasons behind
 Functions of company legislation
the conditions for company
 Formalities for the registration of a company names
 Requirements for registration of the name of  Explain the significance of
the company the name to the formation of
 Conditions for a company name company.
 The significance of a name to the formation of
a company.
2. The Concept of  The Concept Of Legal Personality  Examine the role &
Legal Personality significance of the legal
 Consequences of incorporation persona, its characteristics,
consequences, and the
 Characteristics of a legal persona courts’ approach to the
concept
 The courts’ approach to the concept of  Explain the significance of
separate legal persona the Salomon v Salomon case
in company law.
 Facts of the Salomon Case.
 Synthesize the courts’
reasoning when lifting the
 The court’s reasoning and ruling lifting the
corporate veil.
corporate veil
 Familiarize with instances
where the corporate veil has
 Instances where courts lifted the corporate
been lifted
veil (cases) -common law

 Statutory provisions for lifting the corporate

veil

 Common law exceptions, (grounds) for

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TOPIC CONTENTS OBJECTIVES

lifting the corporate veil

3. Company  Evaluate all important

Documents  Constitution of a company. company documents and
appreciate their effects on
 Memorandum Of Association the company
 Illustrate how company
 Articles of association documents are altered.
 Critically analyze the courts’
 Importance of the memorandum and the approach in the
articles of association interpretation of such
documents.
 Contents of the memorandum of association  Apply the concept of
presumption of regularity
 Name of the company when dealing with
companies
 Objects of the company

 Liability clause

 Share capital clause

 Association clause

 Provisions as to articles

 Effect of memorandum of association and

articles of association

 Court’s approach to the interpretation of the

articles of association

 Alteration of articles of association

 Capacity and powers of a company

 Presumption of regularity in dealing with

companies
4. Company  Examine the regulation of
Membership  Membership membership
 Explore the rights and duties
 Regulation of membership of members.
 Compare and contrast the
 How does one become a member/ how is allotments and transfer of
membership to a company is acquired? shares.
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TOPIC CONTENTS OBJECTIVES

 Subscription to the memorandum

 Allotment of shares

 The prospectus

 Transfer of shares

 Rights of members in a company.

5. Company  Evaluate the significance
Meetings  Meetings Of Companies of meetings
 Compare and contrast the
 Meeting of shareholders different types of
meetings.
 Issues dealt with in a general meeting  Explore the powers of
resolutions towards policy
 Types of general meetings making in a company
 Discuss the issue of proxy
 Significance of the GM and voting processes at
meetings.
 Statutory meeting

 Annual General Meeting

 Extra – ordinary general meeting

 The process of holding a meeting

 Quorum of meeting

 The issue of proxy

 Voting at meetings

 Company resolutions
6. Shares and Share  Define shares
Capital  Shares And The Share Capital  List the different types of
shares
 General  Evaluate the importance
of capital in relation to
 The nature of shares shares and to companies
at large
 Effects of shareholding  Assess maintenance of
share capital
 Types of shares  Explore the similarities
and differences between
 Allotment and issue of shares debenture holders and
shareholders.
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TOPIC CONTENTS OBJECTIVES

 Explain instances where
 Capital shares and debentures reduction of capital is
allowed.
 Capital

 Maintenance of capital

 Share certificates

 Loan capital: Debentures

 General rules on maintenance of share

capital

 Reduction of share capital

7. Directors  Explore general principles
 Directors relating to directors.
 Evaluate roles of directors as
 General principle as to director agents of the jurist person.
 Explore the directors’
 Roles of non-executive directors external relations.
 Explain the processes of
 Directors as the agents of the company appointing directors and
removing them.
 External relations with the directors

 Appointment of directors

 How a director is appointed?

 Statutory disqualifications from being a

director

 Decision to remove a director

RECOMENDED TEXTBOOKS:

1. Nkala and Nyapali, “Zimbabwe Company Law.”

2. Text and Chdwick, “Company Law.”
3. Gowe L.C,“Principles of Modern Company Law.”
4. Havenga and Vermus,“Hohlo’s South Africa.”
5. Hadden, “Company Law and Capitalism.”
6. Robin Hallington, “Minority Shareholder’s Rights.”(sweets and Maxwell)
7. Gwisai M. “Labour and Employment Law in Zimbabwe.”
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STATUTES:
1. The Companies Act Chapter 24:03.
2. Companies and Associations Trustees Act Chapter 24:04.
3. Labour Act Chapter 28:01.

COMPANY LAW I CIN 2106

1. WHAT IS COMPANY?

A company is defined as an entity formed by one or more persons for a

lawful purpose which through incorporation under the Companies Act which
is separate and distinct from its members such that it can sue or be sued in
its own name and whose purpose is for gain (profits) S7 CA.

Thus as denoted in the definition, the most important considerations in the

identity of the company are;

I. It must be brought into being by persons either natural or juristic.

II. It should have limited liability (in case of private companies) which is
either limited by shares or by guarantee.

III. It must be registered in terms of the CA.

IV. It must also be formed for lawful purpose.

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V. It must have as its objective, a gain (profit).

These considerations are what distinguish a company from the entities

such as cooperatives and NGOs.

It is in their incorporation that a company becomes an entity that is

separate or distinct from its members or owners and such that it can sue
or be sued in its own name. In other words a company becomes a legal
persona as opposed to a natural person.

Due to its incorporation the company attains what is termed corporate

personality.

It is this status which basically distinguishes a company from other

business associations such as partnership i.e. a partnership does not have
corporate personality because partners are liable jointly and severally have
unlimited liability.

Moreover a company must also be distinguished from a business to

transact; one can transact business without incorporating a company e.g.
Sole trading, partnership, private business corporation etc.

TYPES OF COMPANIES AND THE CONCEPT OF LIMITED LIABILITY

Essentially there are two types of companies In terms of the companies act
i.e. the public and the private company. Besides being public and private,
companies can be limited either by shares or guarantee. A person may also
choose to operate a business as a sole trader without forming a company
or as a partnership or he may register his business activities as a private
business corporation.
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PRIVATE COMPANIES

This type of company is suitable for establishing a business with a few

shareholders e.g. family business. Invariably the decision whether to form
a private company or a public company depends on the amount or source
of capital to be raised. There are statutory limitations on the size of the
share capital of private companies. The limitation is only on the size of its
membership which should not exceed 50.

Section 33 of the companies’ act (24.03) defines a private company as

company which by its activities;

a. Restricts the right to transfer its shares.

b. Limits the number of its members to 50.

c. Prohibits any invitation to the public for any shares or debentures of

the company.

NB: A private company must in terms of S34 of the Companies Act comply
with these provisions or lose its status as a private company along with
certain advantages and exemptions with private companies enjoy over
public companies.

What are these advantages and exemptions?

These include the right of private company to commence business as soon

as it is registered, whereas public companies cannot do so unless all the
provisions of the companies act in respect of starting a company have been
complied with and the Registrar has certified the company as entitled to
commence business –S 114CA.
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The right of a private company to appoint directors of their choice, even if

they do not hold shares in the company S171 CA.

A private company need not hold the statutory meeting required by

S124CA, its initial directors need not lodge their consent to be appointed as
such with the Registrar: nor is there any need for a registrar of directors’
share holding to be kept.

PUBLIC COMPANIES

In terms of S2 of the companies act, a public company is defined as any

company, including a cooperative company which is not a private a
company licensed under S26 of companies act. Generally a promoter who
wishes to float a company with a very large share capital is likely to open
subscriptions of the shares of the proposed company to the public that
form a public company.

A public company does not have restrictions as those imposed on a private

company by its articles of association on the transferability of its shares
and offer of those shares to the public.

There is no limit to the size of membership of a public company.

N.B. because a public company is entitled to offer its shares to the public,
the need for protection of investors is at its greatest. Consequently the
exemptions given to the private companies are not enjoyed by public
companies.

THE PRINCIPLE OF LIMITED LIABILITY

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The CA does not permit a company to be created in which the members

are free from liability whatsoever. Thus S7 of the CA recognizes two forms
of companies limited by either guarantee or shares.

COMPANIES LIMITED BY GAURANTEE

The companies act further recognizes two forms of companies limited by

guarantee namely;

a. The guarantee company without a share capital.

b. The guarantee company with share capital.

The former is a guarantee company in its pure form whereas the latter is
something of a mixture hybrid.

In the case of a pure guarantee company, a member is under no obligation

to subscribe up to the amount of his guarantee while the company is a
going concern (liable). It is only on the event of the company being wound
up that a contribution is needed to enable debts to be met, that any
liability on the guarantee arises.

However, in the case of a guarantee company having a share capital, a

member is under a two-fold liability. While the company is a going concern
he is liable to pay up the nominal amount of his shares and once the
company goes into liquidation he is liable on the guarantee as in the case
of a pure guarantee.

COMPANIES LIMITED BY SHARES

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NB: A company limited by shares is more ideal where the primary

objective is to carry out business for a profit and divide that profit among
the members. The members who subscribe for shares will be under a duty
to pay the company in money or monies worth their shares and hence the
company is said to be limited by shares.

NB: This means to say that, the members’ liability to contribute towards
the company`s debts is limited to the nominal value of shares which they
have subscribed and once the shares have been paid up liability is
extinguished i.e. the members will be under no further liability.

The fundamental distinction between the company limited by shares and

the company limited by guarantee is that; the law assumes that the
former`s working capital will be to some extent, at any month, contributed
by the members. These contributions float at the launching of the company
and may serve to protect creditors in the event that the company sinks or
gets into liquidation.

FORMATION OF A COMPANY

The person who forms a company is called a promoter. On the initial

stages of the formation of a company the promoter of the company
prepares certain documents expressing their desire to be formed into a
company with a special name and objectives (of course legal) and these
documents are lodged with the Registrar of companies. If these documents
which are; the memorandum and articles of association, are in order, they
are registered and the certificate of incorporation is granted.

Once the certificate of incorporation is granted, a company is formed and it

has to comply with the CA.
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FUNTIONS OF COMPANY LEGISLATION

Company law in Zimbabwe is mainly regulated by the companies’ act which

is our main company legislation. The functions of company legislation
include; enabling and the regulatory functions. The enabling function
empowers people to do what they could not otherwise achieve in person,
namely to create a body with distinct corporate personality.

The regulatory function prescribes the conduction which has to be complied

with, to obtain incorporation and the rules that thereafter have to be
observed to protect members, creditors and the public against dangers
inherent in such a body.

FORMALITIES FOR THE REGISTRATION OF A COMPANY

In terms of S7 of the companies act anyone or more persons associated for

lawful purpose may by subscribing their names to a memorandum of
association and otherwise complying with the requirements of this act in
respect of registration, form an incorporated company.

NB: in terms of this section there are two conductions precedent to the
formation of a company i.e.

a. Subscription to the memorandum of association

b. Registration in terms of the CA

After these two requirements are met it brings about the incorporation of
the company.

Section 22 of the CA finalizes the registration process. How?

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In terms of this section (22) on registering the memorandum of

association, the Registrar shall certify under his hand that the company is
incorporated at the date of such incorporation. This in short, gives a
company a corporate personality.

NB: In other words S7 of the CA outlines the procedure for registration of

the company and S22 finalizes the incorporation process.

Q. How is a company incorporated?

Incorporation of a company comes in two ways which are complementary.

a) Subscription and registration in terms of S7 of the CA.

b) Certification in terms of S22 of the CA by the Registrar.

NB: without a certificate of incorporation even with subscription and an

application, to register, there is no corporate personality i.e. the concept of
legal persona does not rise.

A corporate body only comes after certification in terms of Section 22 as

read with section 23 of the CA.

REQUIREMENTS FOR REGISTRATION OF THE NAME OF THE

COMPANY

The proposed name of a particular company must not be identical with that
of another company. S 24 of the CA prohibits the use of an undesirable
name.
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In other words, the proposed name of a company must not nearly

resemble that of another company so as to deceive the public.

NB: a trader who feels aggrieved by the use of a deceptive name can find
recourse under the common law remedy of ‘passing off’ in the law of delict.

This was attempted in the case of Pick and Pay v Pick and Pay stores in
1974 (1) SA 597 (RA). In that case Pick and Pay stores SA sought an
interdict against Pick and Pay Rhodesia on the bases of the use of its
name; however the court declined to grant the interdict that ruled that the
requirements of passing off were not satisfied.

NB: The mischief sought to be blocked by the delict of passing off is to

prevent a new company from riding on the goodwill and popularity of an
established company.

A company generally may not register in the name “Zimbabwe”. However

this is discretional because there are companies like OK ZIM, RIO ZIM
which are so named because they are operating in more than one country.
A company may not include the term “international” unless it operates as
an international company.

A company may not be blasphemous. However in the current environment

of human rights what is blasphemous to A may not be blasphemous to B.

A person who is aggrieved by the use of a deceptive name can get relief
i.t.o. S24 (7) of the companies` act which empowers the Registrar to
compel the offending company to change its name. A company which fails
to comply with the Registrars` directive to change its name becomes
criminally liable and can be penalized (fine). However, the principle of
natural justice namely and alter an pertain rule, which simply means “hear
the other party” should be complied with in dealing with rogue companies
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by ensuring that the company concerned is given the opportunity to be

heard.

CONDITIONS FOR A COMPANY NAME

The rational for rejecting undesirable names or names that closely

resemble with those of established companies is to protect public members
from misleading names.

Furthermore the established companies’ goodwill and clientele base must

be protected. The registrar of companies is also given the powers to
decline to register companies which are politically offensive.

A company name may be rejected if it includes a misleading view of the

business e.g. Kwekwe millers while the company operates in Harare. The
registrar of companies may reject the name of a company which is
superficial or which cannot be pronounced.

THE SIGNIFICANCE OF A NAME TO THE FORMATION OF A COMPANY

A name is central to the formation of a company, this is because without a

name a company cannot assume or acquire a legal persona. It is the name
that signifies the status of a company. A name is also vital to identify the
company and be able to distinguish it from other companies or entities. In
fact, the name itself can act as a bait to lure/attract clients to want to
associate with a particular company and its product.
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2. THE CONCEPT OF LEGAL PERSONALITY

NB: the concept/principle of corporate legal personality forms the bedrock

of the company law. The concept of legal personality is given effect by S22
of the Companies Act. This corporate personality has it root in the case of
Salomon v Salomon (which we shall examine later).

What is clear from this case is that once a company is properly registered it
exists on its own as a separate entity from those who incorporate it.

NB: this principle of corporate personality is intrinsically related to the

concept of limited liability. Thus, since a company has no physical body, it
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has to act through human agents. Where it incurs debts, the members are
only liable to the extent of their shares of liability if limited by shares or to
the extent of their guarantee if limited by guarantee.

In summary, the corporate personality means that the corporation is in law

equally to a natural person, as long as it acts within the law. Its assets are
distinct from those of its members and are to be exclusively for its own
purposes. In the same manner its liabilities are separate from its
members; the mere fact that a person is the controlling shareholder of a
company does not render him liable for the debts of a company.

Regard should be given to the point that, the corporation as an artificial

person can only act through human agents, the directors, who control
policy and are responsible for its business activities. However, this may
have problems in that these agents may do anything wrong in the name of
the company and still be free from the liability.

CONSEQUENCES OF INCORPORATION

S 22 of the CA refers; once incorporated company becomes a legal entity

distinct from its members.

Question: what are the characteristics of a corporate legal

persona?

CHARACTERISTICS
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1. LIMITED LIABILITY- It follows from the fact that a corporation is

separate legal persona from its members who are not as such liable for
its debts. In the absence of express provision to contrary members will
be completely free from personal liability. Liability can either be limited
by shares or guarantee S7 [already done].

NB: This means that when obligations are incurred on behalf of the
company the company is liable and the members are only liable to the
extent of their liability.

2. PROPERTY- a company is capable of owning property in its own name.

the corporate property is clearly distinguished from its members`

property and members have a direct proprietary rights to the
company`s property but merely to their shares. A change in the
membership which causes inevitable dislocation of the partnership
leaves the company intact. The shares will be transferred, but the
company`s property remains un touched. Similarly the claims of the
company`s creditors will be against the company`s property.

3. SUING AND BEING SUED (LOCUS STANDI INJUDICIO)

The company is a legal persona which can take legal action to enforce
its rights or to be sued for breach of its legal duties.

4. PERPETUAL SUCCESION- A company cannot become a incapacitated

by illness, mentally or physical problems that does not have any allotted
span of life. Put differently, company is an immortal being. This
therefore means that the death or illness of its members does not result
in the dissolution of a company.
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5. TRANSFERABLE SHARES- With any incorporated company freedom of

transfer shares both legally and practically can be readily attained. A

company can be incorporated with its liability limited by shares and
these shares constitute items of property which are freely transferable
in the absence of any express provision to the contrary. Such as S33 (1)
(a) of the CA which restricts a private limited company to transfer
shares.

6. BORROWING- It is easier for a company to borrow money than a sole

trader. The company is able to get more security to secure

indebtedness.

THE COURTS APPROACH TO THE CONCEPT OF SEPARATE LEGAL

PERSONA

The approach of the court to the idea of a company as a separate legal

persona was set up in the monumental and celebrated English case of
Salomon v Salomon and co. ltd (1897) AC 22 (HL).

FACTS OF THE SALOMON CASE

Salomon had for many years carried on a prosperous business as a leather

merchant. In 1892 he decided to convert into a limited company and for
this purpose Salomon and company limited was formed with Salomon, his
wife and fives (5) off his children as members and Salomon as the
managing director. The company purchased the business as a going
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concern for £39000. The price was satisfied by £10000 in debentures,

conferring a charge over all the company assets, £20000 in full paid £
shares and the balance in cash. Seven [7] shares were subscribed in cash
by the members and the result was 5 held 20001 of the 20007 shares
issued and each of the remaining 6 shares was held by a member of his
apparently as a nominee for him.

The company almost immediately ran into difficulties and only a year later
the then holder of debentures appointed a receiver and company went into
liquidation. Its assets were sufficient to discharge the debentures but
nothing was left for the unsecured creditors.

THE COURT’S REASONING AND RULING

In these circumstances, the court of Appeal ruled that the whole

transaction was contrary to the true intent of the English Companies’ Act,
and that the company was a mere pawn and an alias agent or trustee/
nominee for Salomon who remained the real proprietor of the business. As
such the court ruled that, he [Salomon] was liable to indemnify the
company against its debts.

Salomon appealed against this finding. On appeal, the House of Lords

unanimously reversed this decision. The Law Lords held that the company
had been validly formed, since the Act merely required 7 members holding
at least one share each. It said nothing about their being independent or
that they should take a substantial interest in the undertaking or that they
should live a mind of their own or that they should be anything like the
balance of power in the constitution of the company and hence the
business belonged to the company and not to Salomon and Salomon was
its agent and not the agent of Salomon.
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In concurrence with the Houses’ (court) finding Lord McNaughten at P 51

said;

“The company is at law is a different person altogether from

the subscribers…..and though it may be that after
incorporation, the business is precisely the same as it was
before and the same persons are managers and the same
hands receive profits, the company is not in law the agent of
the subscribers or trustee for them. Nor are the subscribers
as members liable, in any shape or form, except to the extent
that in the manner provided by the Act”.

The Salomon decision has been criticized by several critics. The main basis
for the criticism is that it can allow a dishonest or an unscrupulous person
to register a company merely for the purposes of fleecing creditors by
hiding behind corporate personality.

However, the decision does not mean that a promoter can defraud the
company which he forms or swindle his existing creditors. In the Salomon
case it was argued that the company was entitled to rescind in view of the
overvaluation of the business sold to it.

However, the House of Lords differed with that view and held that there
was no fraud at all since the shareholders were fully conversant with what
was being done. Had Salomon made a secret profit which he concealed
from his fellow shareholders the question would have been different. There
was no fraud on Salomon`s existing creditors, all of whom were paid out of
purchase price.

SIGNIFICANCE OF THE DECISION

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NB: The decision in the Salomon case is an epitome of fundamental

principle of company law that a company is a separate legal persona which
is distinct from the members that comprise it.

Not only did the decision establish the legality of the one–man company
but it also showed that incorporation was readily available to a Sole trader
to enable him to benefit from limited liability. The decision further shows
that one can avoid serious risk in the event of a company’s liquidation by
subscribing for debentures rather than shares.

The other justification for the Salomon decision is that, the public deal with
limited companies at their own peril and should know what to expect, be
cautions and prudent.

In particular a search for the company`s files at the company`s Registry

will show whether there are any changes to the company`s assets, and in
its balance sheet and profit and loss account. However it must be pointed
out that not everyone having dealings with a company has the time and
knowledge needed to search for company files.

Generally the experienced business man with is trade protection antics, can
care of himself but the little man, whom the law should particularly protect
rarely has any idea of the risk he is involved in when he grants credit to a
company with a high surrounding name and impressive nominal capital
which is not paid up in cash.

Since the Salomon case, the complete separation of the company and its
members has never been doubted. For instance the principle of corporate
legal persona was observed Dadoo ltd. v Krugerstorp Municipality Council
1920 ad 53, which is a case about ownership of property in an area
specifically designated for certain races of people in apartheid SA.
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In case the court ruled that Dadoo Ltd was a separate legal persona from
the Dadoo the human being and hence the former could own property in
Transvaal despite the prohibition which applied to the latter because the
company had no race.

Although the Salomon case set had undoubted principle of corporate legal
personality which is still applicable to date, there are some instances,
however, where the courts have cracked the corporate shell by lifting the
veil of incorporation.

LIFTING THE CORPORATE VEIL

The purpose of incorporation is to avoid full liability in the event of the

collapse of the business. Thus limited liability allows people to make money
without suffering the full financially consequences of failure.

The company as an artificial persona can only act through human agents.
This could have serious consequences in that the directors could do
anything wrong in the name of the company and still be free from liability
as agents because the company as the principal will be the curiously be
liable. Thus, the directors could commit any crime; evade any tax law and
commit any administrative misconduct in the name of the company
because the company will be liable.

Such a situation will be unpalatable or undesirable and this is one of the

reasons why the legislature and the courts have made inroads in the
concept of corporate personality, by lifting the corporate veil were
necessary and see the culprits behind it.

Lifting of the corporate veil was defined in Cape Pacific Ltd v Lubner
Controlling Investments and Others 1995(4) SA 791 as follows:
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“Lifting the corporate veil means disregarding the separation between a

company and natural person behind it (i.e. in the control of its activities)
and attributing liability to that person where he has misused or abused the
principle of corporate personality”.

The law is not settled with regard to the circumstances in which it is

permissibly to piece the corporate veil because each case involves a
process of enquiry into its own unique facts.

However, general factors which the court takes into consideration before
lifting the corporate were stated in the case of Mukombachoto v CBZ and
Another 2002 (1) ZLR 21 (H), where the court ruled that the corporate veil
and separate legal personality of a company may only be disregarded in
limited in circumstances such as fraud or manifest injustice. [However, in
that case the court refused to lift the corporate veil].

INSTANCES WHERE COURTS LIFTED THE CORPORATE VEIL (CASES)

-COMMON LAW

Also In OrKin Broilers Ltd v Bell 1921 TPD 92, the court remarked that -
“courts are prepared to disregard the notion of a legal entity where it is
used to defeat public convenience, justify wrong or protect fraud”.

Thus in the case of Cattle Breeders Farm (Pvt) Ltd v Veldman 1974 (1) SA
169. The court lifted the corporate veil due to the grossly unjust nature of
the facts at hand.

Facts briefly: Veldman was owner of Cattle Breeders Farm Ltd and had a
wife and a company house where they lived as their matrimonial home.
Due to matrimonial squabbles Veldman decided to evict his wife from the
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company house. The wife objected that, it was her matrimonial home and
the husband at common law had a duty to provide suitable accommodation
for his matrimonial wife.

Veldman, alternatively used the company to try and evict her wife on the
grounds that, it was not his (as a husband) house, but the company`s
house, therefore the company was the one evicting her.

Bear in mind that the company was owned by Veldman. On going to court,
the court held that: the company was nothing more than the husband`s
alter ego (face or façade behind which the husband had control) and
possessed no greater rights to reject the respondent than the husband
had.

COMMENTS:

This case clearly shows the attitude of the court in wanting to reach a fair
and just solution; it shows that from a practical point of view the existence
of a company as a distinct entity may often be immaterial.

Having failed to find any traditionally recognized bases for lifting the veil, it
follows that, the only valid reason on which the judge could lift the veil was
on policy and justice grounds.

On policy and justice considerations it appears unfair, unjust and

unreasonable for a man to avoid his common law marital obligation or duty
such as providing suitable alternative accommodation for his wife before
evicting her from the matrimonial home, thus fiction or technicality of the
law.

STATUTORY PROVISIONS FOR LIFTING THE CORPORATE VEIL

26

The corporate personality of a company is not sacrosanct / holy in view of

the present company legislation. These are instances where statutes may
be used to lift the corporate veil for various reasons:

1. In terms of S32 of the companies act, where a company a trades with

no members for more than 6 months, any person who knowingly causes
it to do so will be liable jointly and severely with the company for all
debts incurred by it after 6 months have elapsed.

2. In terms of S318 of the companies act, where people are knowingly

parties to the carrying of the company`s business in a manner designed

to defraud creditors or any on the business, recklessly or with gross
negligence, the veil may be cast aside and the court will disclose them
personally liable for the company`s liabilities.

3. Where the company has issued misleading and untrue statements in a

prospectus to the detriment of the public it becomes criminal and civilly

liable in terms of S58 and 59 of the companies act respectively.

4. For purposes of investigating operations of a company the veil may also

be lifted in terms of S156 - 159 of the companies act.

5. In terms of S113 of the CA where a company official signs or

authorizes a signature on behalf of the company on inter alia, a cheque

promissory note and the name of the company is not mentioned in
27

eligible form, then that official may be held liable personally to the
injured third part if the company fails to meet its obligations.

If you put your signature on a purported company letter with no letter

heads of the company, you become liable by caveat subscriptor (signer
beware) signing a cheque with no (Pvt) Ltd, you will be personally liable
to third parties.

6. In terms of S196 of the CA members or shareholders of a company

may apply to the court arguing that, the company affairs are handled in
an oppressive or prejudicial manner (manifest injustice).

N.B. this is a powerful tool for the protection of minority shareholders in

the company.

7. If the Master of the HC makes a report that in his opinion a fraud has

been committed by a company the corporate veil may be set aside in

terms of S238 of the Companies Act.

NB: The corporate veil is also lifted in terms of other statutes other than
the company’s act such as:

8. The Reconstruction of State-Indebted Insolvent Companies Act

(Cp 24.27) - which imposes liability on people who are knowingly part to
reckless or negligent management of the companies.
28

9. S16 of the Labour Act also lifts the corporate veil to protect employees

in the event of the transfer of an undertaking.

10. S15 of the Prevention of Corruption Act, which imposes liability on

all the members of a group of a company where one member of such

group has committed an offence.

COMMON LAW EXCEPTIONS, (GROUNDS) FOR LIFTING THE

CORPORATE VEIL

a. Where the veil is being used to defeat public convenience, justify a

wrong or protect fraud e.g. where a person is using the company to do

what he cannot do himself Orkin Bro`s Case.

b. Where the veil is being used to run away from a contractual or legal

obligation,-Veldman case.

c. Where there is fraud or improper conduct, thus the corporate entity

principle cannot be used as an instrument of fraud e.g. where company

29

promoters conceal profits which they are making by operating their

dummy companies.

___________________________________________________________
_

3. COMPANY DOCUMENTS

CONSTITUTION OF A COMPANY

A company is mainly constituted by two documents, namely, the

Memorandum of Association and the Articles of Association. The
memorandum is the primary founding document of a company that forms
it, Constitution. In parastatals the Enabling Act will constitute the founding
of the document e.g. ZESA Act, NUST Act, ETC.
30

MEMORANDUM OF ASSOCIATION

In terms of S7 of the CA, anyone who wants to form a company must

subscribe to the memorandum of association. This is the constructive
document of a company. The memorandum sets out, the basis upon which
the company is to operate. It determines the nature and the scope of the
company.

It is an external document as it communicates with the outside world or

the general public. It has the name of the company, the share capital, the
names of the shareholders etc. This document should of necessity be
registered and this is a compulsory requirement.

ARTICLES OF ASSOCIATION

These deal with administrative issues of a company i.e. internal regulation

of company affairs. They are essentially company by-laws or internal
documents covering how business is run e.g. how funds are used etc.

Anything that the articles propose or say that does not conform to the
memorandum is invalid. It is the memorandum that must definitely be
registered when forming a company. It is optional to register the articles
of association. However, in practice the memorandum and the articles are
registered pasi pasu (i.e. simultaneously).

The articles of association usually regulate the internal management, the

rights and duties of shareholders, vis-a-vis the company and each other,
they deal with matters such as transfer of shares, meetings, voting and
31

other rights of shareholders, dividends and the directors’ powers of

management.

IMPORTANCE OF THE MEMORANDUM AND THE ARTICLES OF

ASSOCIATION

This is set out in S27 and 28 of the CA. Section 27 creates a three
pronged relationship i.e.

i. The memorandum binds the members and the company.

ii. The memorandum and the articles of association when registered

shall bind the company.

iii. The memorandum and the articles bind the company and its
members and members among themselves inter se.

In terms of S28 it is mandatory for every member of the company to have

a copy of the memorandum. It is the responsibility of the member to know
what took place before he became a member of that particular company.

CONTENTS OF THE MEMORANDUM OF ASSOCIATION

Section 8 outlines what goes into the memorandum of association.

1) Name of the company

2) Objects of the company

32

3) Liability clause

4) Shareholding clause

5) Association clause

NAME OF THE COMPANY

This facilitates registration in that no company is registered without a

name. Before submitting the memorandum for registration the parties
must propose the company`s name and the Registrar will go on a name
search and give them a recommendation on the name. The proposed name
should not be identical to an already existing registered name or a
reserved name or the name of a foreign registered company in Zimbabwe.

The Registrar also makes sure that the names are not misleading S24 (3),
e.g. the name that does not suit the business that you intend to carry out
or that is offensive and offends public morality.

It is only after the name search that you can then submit the consent
forms which would show the name and place of the business, names of the
shareholders and the directors stating how many shares they have
subscribed to. The name protects the company from the delict of passing
off besides its vitality as to company identity.

OBJETCS OF THE COMPANY

33

These are the things that the company is set out to do and as a general
rule, the company cannot do anything outside these objects. Of course the
objects must be within the law.

LIABILITY CLAUSE

This clause in the memorandum states to what extent the person`s liability
is limited. Liability may either be limited by shares in which case the clause
states the number of shares that an individual has or by guarantee in
which case the person guarantees the extent of his limitation. Liability also
connotes/ means that the memorandum should show whether the liability
is limited or not.

SHARE CAPITAL CLAUSE

This clause provides for nominal arbitrary amount that is given just to
show some respect or allegiance to the concept of limited liability or the
fact that a shareholder will contribute to the share capital. It enables
members to divide shares for administrative purposes e.g. the payment of
dividends.

ASSOCIATION CLAUSE

It is the clause that actually forms the company. It spells the intention of
subscribers to form the company.
34

PROVISIONS AS TO ARTICLES

Articles should enshrine democratic participation. Articles like the

memorandum must be signed by each member i.e. full name and signature
of each member. In practice members can initial each page of the articles.

It symbolizes that each member has read, understood and agrees to the
provisions and undertakes to abide by them. The caveat subscriptor rule
comes into play. In terms of the S19 of the CA, articles must be in English
language, printed, typed and divided into paragraphs.

EFFECT OF MEMORANDUM OF ASSOCIATION AND ARTICLES OF

ASSOCIATION

S27 of the CA provides for the effect of the memorandum and articles. The
members are binding themselves. By signing members acknowledge
awareness and that they will bound by the contents thereof and by so
signing they are entering into a multilateral contract.

COURT’S APPROACH TO THE INTERPRETATION OF THE ARTICLES

OF ASSSOCIATION

The critical question is whether the general and strict principles of contract
should apply to the interpretation of articles of association. Generally, it
has appeared that, courts do not want to usurp the powers of the company
and interfere in the internal administration of the companies.

This was illustrated in the case of; Matanda and Others v CMC
Packaging (Pvt) Ltd and Others HH 113/03, where the court said,
35

“before a member invites the court to interfere in the internal arrangement

of the private company that member must remember that, it is not part of
the business of a court of justice to determine the wisdom of a course
adopted by the company in the management of its own affairs”. HANDS OF
APPROACH.

In light of that hands off approach, there are reasons for the argument that
articles of association do not constitute a contract.

a. Articles should not be interpreted too literal. In the interpretation of

contracts the literal approach is the starting point but in interpretation

of articles of association the valid principle approach is used e.g. for
business convenience.

b. Articles are not legal documents like contracts and therefore the strict

literal approach must not be used.

These two reasons are supported by the case of Holmes v Keyes [1958]
2 ALL ER 129 (Per Jenkins L.J.) where it was stated that;

“Articles should be regarded as business documents and should be

construed so as to give them reasonable business efficacy such that
an approach which would make the result admissible would be
preferable to one which would prove unworkable”.

The doctrine utres magis valeat quam pereat (i.e. it is better to give life to
the contract than allow it to perish) as per Chikons v Mukweza becomes
instructive.
36

ALTERATION OF ARTICLES OF ASSOCIATION

Once registered, a company can alter its articles. A company cannot make
it impossible to alter its articles. It is required that there must e a clause in
the articles giving the company powers to alter it articles.

These are guidelines in the alteration process;

A company does not have unfettered discretion to alter its articles. Any
alteration must not bring into effect an illegal provision. In terms of S18 of
the CA a fraud should not be committed to the minority shareholders in the
alteration process.

The alteration must be in the best interest of the company. However, there
is no clear cut definition of what is in the best interest of the company. In
the event of a prejudicial alteration of the articles an aggrieved party, may
have recourse in terms of S196 of the CA. Alteration of the articles
requires a simple majority vote whereas alteration of the memorandum
normally requires not less than 90% votes.

CAPACITY AND POWERS OF A COMPANY

The capacity of a company is determined by the objects clause of the

company. As a result a company cannot, generally, do what is outside its
objects.

The memorandum of association sets out the objects of the company and
when the company does acts which are beyond the objects as defined in
37

the objects clause, such acts are deemed ultra vies and therefore not
binding and void.

This position however has now been altered by the recent changes made to
the companies Act. S9 of the CA gives the company the power and the
capacity “of a natural person of full capacity in so far as a body corporate is
capable of exercising those powers”. This means that a company, although
an artificial person has now the powers of a natural person and therefore
all its acts will be intra vires as long as it is allowed by law to exercise
those powers.

However the reason why the Companies Act insists that the memorandum
of association must state the objects of the company, meaning it must
specify and identify the objects, is that it enables a member to identify the
field of industry within which the company activities could be classified. The
purpose of this is that the intending investor will know exactly within what
field his capital is to be put to risk.

The justification of the ultra vires doctrine is found in the case of Cotman v
Broughman 1918 AC 514 (HL), where it is stated that;

“…a company’s objects in its memorandum are intended to serve a

double purpose. In the first place, it gives protection to subscribers
who learn from it the purpose to which their money can be applied.
In the second place, it gives protection to persons who deal with the
company and who can infer from it the extent of the company
powers”.

PRESUMPTION OF REGULARITY IN DEALING WITH COMPANIES

The argument for holding that any contract entered with a third party on
behalf of the company which exceeds what is provided for in the objects
38

clause, is void, is based on the Constructive Notice Doctrine. This doctrine

states that because registration emphasizes on the public nature of a
company, people should be able to know what a company can and cannot
do by checking with the Registrar of companies. This doctrine has however
been changed both by common law and statute. Under common law this
has been dealt with in the case of Royal British bank v Turquand and has
now been crystallized into what is now commonly known as Turquand Rule.

This rule states that when a person is dealing with a company he is

entitled to assume that all internal procedures have been followed and that
what is being done is within the capacity of the company.

He is not supposed to go on an investigative procedure to ensure that what

is being done is within the capacity of the company. This has also been
termed indoor management rule in that, the contract entered into with a
third party is binding and the company will then have to deal with a person
who does so as an internal issue.

The Turquand Rule has now been crystallized into a statutory provision by
S11 of the CA which states that no person shall be deemed to have
knowledge of the contents of a company’s memorandum, articles of
association or any other documents by reason only of the fact that, the
memorandum, articles or any other documents has been registered with
the Registrar or is available for inspection at the company registered office.

This aspect of having no constructive notice of company documents is

further strengthened by the presumption of regularity as embodied in S12
of the CA. In terms of this section, any person having dealings with a
company or with someone deriving title from a company shall be entitled
to make the following assumptions;
39

a. That the company’s internal regulations have duly complied with.

b. That every person who the company represents to be an officer or agent

of that company, has been duly appointed and has the authority to
exercise the functions customarily exercised by an officer or agent of
the kind concerned.

c. That the secretary of the company and other officer or agent of the

company having authority to issue documents or certified copies of

documents on behalf of the company, has authority to warrant the
genuiness of the documents or the accuracy of the copies so issued.

NB: S12 of the CA, the company and anyone deriving title from it shall be
estopped from denying their truth. Doctrine of estoppel is evoked when the
company purports renegade or to disown liability resulting from anyone
who has misrepresented in acting for the company.

S13 of the CA states that a company shall be bound in terms of S12 not
withstanding that the officer or agent concerned acted fraudulently forged
a document purporting to be sealed or signed on behalf of the company i.e.
liability not affected by fraud.

_____________________________________________________
_
40

4. MEMBERSHIP

[Q] What is a member of a company and how does one become a

member?

In terms of S30 of the CA, the subscribers to the memorandum of a

company, shall be deemed to have agreed to become members of the
company and on its registration shall be entered as members in the
register of members.

Also every other person who agrees to become a member of a company

and whose name is entered in the register of members shall be a member
of the company.

S7 of the CA, anyone is capable of being a member and the term anyone
denotes any person whether natural or artificial. [Of course mental
incapacitated natural persons cannot be members].

A body corporate can be a member subject to the limitation that;

i. It cannot be a member of a company which is its holding company.

ii. It cannot allot or transfer shares to its subsidiary company.

iii. Where membership is limited by statute or by articles it cannot be a

member.

REGULATION OF MEMBERSHIP
41

The memorandum and articles of association are used to guide the

company in the way of doing its business. The documents also regulate the
issue of membership. A member in relation to a company means one
whose name appears in the company register of shareholders.

If one does not appear in the register it is difficult to say that one is a
member. Once one is registered he remains a member until his name is
removed from the register – Browns v Nanco 1976 (3) SA 832.

HOW DOES ONE BECOME A MEMBER / HOW IS MEMBERSHIP TO A

COMPANY IS ACQUIRED?

1. Subscription to a memorandum of association in terms of S7 of the CA.

2. The allotment of shares to that person. Once you subscribe shares are

allotted.

3. By transfer - Shares can be donated or sealed from one person to

another because they are incorporated property.

SUBSCRIPTION TO THE MEMORANDUM

A person must sign the memorandum in terms of S14 of the CA i.e. you
put your surname and the first name- also S7 of the CA.

A person may be subscribing to the memorandum automatically become a

member. However a person can be a shareholder upon registration, when
their names are entered into the register or upon agreeing to be a member
and registration thereof as such.

Generally the ordinary principles of contract apply on who can be a

member.
42

ALLOTMENT OF SHARES

This is the appropriation of shares to a person by a company. Allotment

also raises the question of rights, which the person gets. It does not
automatically make that person a member.

There has to be transfer and payment for the shares, so that the
shareholding process becomes complete. The process of allotment normally
takes place at the public instance. This normally happens with public
companies i.e. those listed on the stock exchange.

The company will prepare the prospects offering shares and the public will
take forms and fill in the application for shares and submit the form to the
company. The company will decide whether or not to give shares. When
the company gives shares to the public thus allotment.

NB: in terms of S33 of the CA a private company is restricted and

prohibited from transferring its shares – hence issue of allotment to the
public is out for private companies.

THE PROSPECTUS

Normally issued by a public company inviting members of the public to

apply for shares. Once a prospective member fills in the application form,
that form together with payment goes to the company which in turn
considers whether or not to sell shares to that member.
43

If the company refuses to sell the shares to the prospective member, that
member cannot insist on allotment. The company will accept the offer by
allotting shares to the prospective member.

In terms of S65 of the CA, shares may not be allotted unless the minimum
subscription is received – this is a pre condition to get shares. The money
that is advanced for the shares must be received by the company and it
must be in cash.

If an offer is accompanied by a cheque, unless the cheque is liquidated, the

shares may not be received by the prospective member. However
allotment on its own does not make a person a member. It brings into
effect a contract between the company and an offer whereby the company
is bound to take up the offer or not.

TRANSFER OF SHARES

A share can be transferred or ceded because it is an incorporeal right. As in

the case of allotment the agreement to transfer shares is separate and
distinct from registering.

A separate form for transfer must be completed first before registering –

S99 of the CA. Once registered; a transferee can then demand transfer of
the shares. S100 of the CA, makes reference to the application by the
transferor for registering of the name of the transferee and that the
transferee becomes a member.

The process limits fraud as there is cross-checking of person who is

ultimately entered in the register. It protects the seller’s shares. The seller
is given discretion to decide when to transfer the shares. However this
position has been criticized because it gives unlimited options to the seller
44

and there must be a specific time limit or a reasonable period within which
shares must be transferred.

S101 of the CA provides a safe guard to a limited extent by giving two

months period whereby if a company refuses to register a transfer of
shares it must notify the transferee.

In SA it is the transferee who must demand registration and not the

transferor. It is respectively submitted that the SA position makes sense
because registration is more important to the transferee than to the
transferor.

RIGHTS OF MEMBERS IN A COMPANY

Generally the main reason why a person acquires shares is to obtain a

return on the capital invested and this return comes in the form of
dividends.

Thus the primary rights of a member may be seen as the right to payment
of a dividend when declared. A dividend is a proportion of the distributed
profits of the company payable to shareholders when declared. Thus the
dividend received by a shareholder is share of a company profits legally
available for and distributable among members.

The amount of dividend distributed to each member is proportional to the

nominal value of shares he holds or the amount paid up if they are partly
paid.

If no profits are made or none is distributable, no dividend is declared

shareholders can not insist on the company declaring a dividend because
this is a matter, is entirely at the discretion of directors.
45

NB: the shares which one has are incorporeal property and one has all the
rights which an owner has under property law. The most important of
these rights is to attend all meetings of the company and vote at such
meetings.

When voting however, the number of shares that one has determines his
vote.

Under corporate democracy a decision is made through shares i.e. one

share one vote and not one man one vote. However there is nothing that
precludes the company from giving rights on another type of shares where
it has created class rights by categorizing their shares into different
classes.

At the end of a day it is a person who has the majority of shares who has
to final say in the running of the company and the majority decision in a
meeting is binding.

NB: how does one cease to be a member of a company?

 Death;

 Have transferred or sold shares;

 Dissolution of a company e.g. through winding up.

____________________________________________________________
_
46

5 COMPANY MEETINGS

A meeting is an assembly of people to discuss agreed business with a

common purpose. Generally there two types of meetings e.g. meeting of
shareholders and meeting of board of directors. Different considerations
apply to these meetings.

MEETING OF SHAREHOLDERS

This is usually referred to as a General Meeting. It is the fundamental and

ultimate repository of power in a corporate body. The General Meeting
(GM) is usually referred to as the Parliament of a company where
ultimately all policy decisions pertaining to the company are made

The basic rules of a company are decided in the GM. The GM tackles or
deals with major issues regarding strategy and structure of the company.
47

ISSUES DEALT WITH IN A GENERAL MEETING

1. Alteration of the memorandum and the articles of association.

2. Reduction of Capital.

3. Variation of shareholders rights.

4. Disposal of major assets e.g. selling of underperforming branches,

redundant machines and upgrading equipment as well as such issues
as amalgamating, reconstruction, compromises, acquisitions and
mergers.

5. The winding up of the company.

6. The laying down of procedures to be followed by the directors and

review of performance of executive directors.

The GM is vested with residual powers which are not delegated to

directors.

TYPES OF GENERAL MEETINGS

a. Statutory Meetings;

b. Annual General Meeting;

c. Extra – Ordinary General Meeting.

Of the three above types of meetings it is mandatory that a company holds

a statutory meeting and an AGM. However, it is discretional to hold an
exra-ordinary general meeting.

SIGNIFICANCE OF THE GM
48

It is the mind of the company, enabling the co to decide on issues like the
mergers and acquisitions. In the case of, Meyer Constables & Company of
Staple England v Governor of England (1888) 21 QB 160. It was said that,

“The acts of a corporation are those of the major part of the

corporately assembled. By corporately assembled it means that the
meeting shall only be held upon notice which gives every corporater
the chance to attend. The company will act through shareholders in a
meeting. It is only when shareholders are in a GM that they can
make decision for the company. Shareholders outside the GM and
who are not corporatoty can not purport to act on behalf of the
company”.

STATUTORY MEETING

It is a meeting that must be held by a public company in terms of S124 of

the CA. A private company is exempted from holding this meeting. It must
be held within 3 months of the commencement of business. The statutory
must consider a statutory report that must be prepared by the directors of
the company.

Failure to hold a statutory meeting is an offence in terms of S124 of CA.

The failure to hold a statutory meeting may result in a company being

wound up in terms of S206 of the CA.

ANNUAL GENERAL MEETING

It is supposed to be held by all companies including private companies. It

is provided for in terms of S125 of CA. In terms of that section the first
49

meeting must be held within 18months from the date of incorporation. The
period within which to hold an AGM is longer than the period for the

statutory meeting. The AGM is there to assess the financial performance

of the company in the preceding year, competitiveness of the company and

its human resources policies.

The AGM will also consider reports of auditors and directors. Some
directors will step down at the AGM. Directors are required to call for the
AGM. If directors fail to call for the AGM, a member can apply that the AGM
be held i.t.o. S125 (5).

N.B. An AGM is there to ensure accountability of directors to the

shareholders.

EXTRA – ORDINARY GENERAL MEETING

It is provided for in terms of S126 of the CA. The EGM is a meeting which
is held upon request i.e. it is optional whereas the other two meetings are
mandatory. The EGM may be held upon request of not less than 1/20 of
members or not less than 5% of members with paid-up capital of the
company. Where the request is made by the members, the directors must
not be seen to frustrate the process.

THE PROCESS OF HOLDING A MEETING

A notice must always precede the holding of a meeting, S127 of CA. This is
in compliance with the fundamental principle of natural justice i.e. the qud
50

alteram partem rule [right to be heard, hear the other party]. Notice can
categorize business to be dealt with in a company as ordinary business or
special. Notice periods of meetings differ in accordance with the type of
meeting to be held. A company’s AGM must be held after 21 days notice

which notice must be in writing 21 day notice also applies to statutory

meetings.

A meeting of a company other than an AGM, may be called by 14days’

notice in writing or in the case of a private company, by 7days’ notice in
writing. The key purpose of a notice is to define the issues before the
meeting i.e. it pre-empts the meeting’s purpose e.g. setting the agenda.

The information given to shareholders must not be scanty i.e. it must be

enough to cover all issues. The failure to give adequate notice renders the
meeting and the resolution passed in that meeting invalid. However, if
notice is not given and one attends the meeting and does not object to that
meeting taking place, he/she would be deemed to have consented to that
meeting.

The chairperson of the meeting must raise the issue of inadequate notice
of the meeting promptly like this, “Ladies and gentleman; welcome to the
meeting held at short notice”. If there are no objections the meeting, it
must proceed.

There are basically 5 issues to be considered in a notice:

1. What is the notice period?

2. Who calls the meeting?

3. How is the meeting called?

51

4. Who attends the meeting?

5. What is the business of the meeting?

N.B. Notice of the meeting shall be served on every member of the

company.

QUORUM OF MEETING

A quorum is the number of people who can validly pass a decision at a

company’s meeting. In terms of S128 of the CA, two, members personally
present at the meeting of a company shall be a quorum unless the articles
provide otherwise. However, if the meeting is to consider the class rights of
individuals and there are two people from the same class, there is no
quorum. Generally, the people must hear the view of people being
affected.

In the case of In re Hartley Bard 1955 CH 143. The court ruled that a
quorum need only to be present at the beginning of that meeting-to
validate the business of the meeting. If a meeting does not have a quorum
it cannot pass a valid decision.

THE ISSUE OF PROXY

A proxy is a person who attends a meeting in the place of a shareholder.

He/she needs not be a member of the company. Once a proxy attends a
meeting, the proxy will have the same rights as those of the member who
52

sends him. When a company is calling for a meeting it must always give an
option to appoint a proxy.

N.B. A member who sends a proxy cannot allege that he was absent and is
bound by the decision of that proxy. S129 of the CA – where a company is
a shareholder it must send a person with authority to represent the
company.

N.B. A person representing a company in a meeting is not a proxy. The

person who attends on behalf of a legal person must be one with the
powers to bind the company.

The Company cannot send a general hand to represent it in a meeting.

Usually one of the directors of the company send, failing which the
company secretary goes.

VOTING AT MEETINGS

All members who attend the meeting have a right to vote on a decision.
Usually the number of votes equals the number of shares. S128 – every
member shall have one vote in respect of each share. The company can
accept votes by show of hands but under common law the only way of
disposing of an issue is by poll.

N.B. Where a vote by a show of hands differs from the vote by poll, the
vote by poll will prevail. The consideration is to what extent members are
influenced by others. If there is an deadlock / stalemate on a issue the
chairman has a casting vote i.e. he can vote twice to tilt the decision.
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COMPANY RESOLUTIONS

The decision which a company comes up with by a poll or show of hands is

called a resolution. In other words a resolution is a formal decision of a
company in a general meeting.

Usually companies come to a resolution by a simple majority which

resolution is called an ordinary resolution. An ordinary resolution can be
defined as a decision passed by a simple majority of not less than two-
thirds (2/3) of the members entitled to vote and present at a meeting.

In order for a company to pass a special resolution, the articles usually

require ¾ majority.

NB: members must be informed prior to the meeting of the desire to pass
a special resolution. This means that there must be adequate notice that
whatever is going to be discussed pertains to a special resolution.

In terms of S133 (1) of the CA – a resolution must be a special resolution

when it has been passed by a majority of not less than three fourths (3/4)
of such members entitled to vote as are present in person or by proxy at
the GM of which not less than twenty one (21) days notice has been given
specifying the intention to propose the resolution as a special resolution.
Once a special resolution is passed it must registered with the Registrar of
companies and the registration must be effected within a month.

A special resolution is only valid upon registration, before registration it is

of no force and effect, but it has retrospective effect after registration.

A special resolution can be passed for various important reasons such as,
to remove a director from office, to vary class rights of a group of certain
shareholders; amending the memorandum of association, appointing a
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director at a general meeting; to reducing a company's share capital in

terms of S92 of the CA.

S87 of the CA- to alter the conditions of its memorandum; so as to

increase its share capital by new shares; consolidate and divide all or part
of its shares capital into shares of larger amounts than existing shares ETC.
S25 of the CA – a company may by special resolution and with the written
approval of the Registrar change its name.

6. SHARES AND THE SHARE CAPITAL

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What is a Share?

A share is an interest of a shareholder or member in a company measured

by a sum of money. It is a bundle of personal rights entitling the owner to
a monetary interest in a co.

GENERAL

Shareholders contribute to the start up money of a company which is that

company’s capital. The capital is divided into shares which may be held by
its shareholders. Company regulates its own classes of shares in
accordance with its memorandum and articles.

THE NATURE OF SHARES

A share is a form of property. It simply means that the holder of that share
has a claim to part of the share capital of the company and it does not
mean that the shareholder is entitled to any part of net assets of the
company.

A share is an item of incorporeal movable property owned by the

shareholder to whom it is issued or transferred and entitling him to such
rights and subjecting him to such duties as may be created by the
memorandum and articles, the companies’ act and the common law.

These rights and duties are contractual and a shareholder, even if he is

affected the sole shareholder, has no proprietary interest in the company`s
property - Macaura v Northern insurance Company Ltd (1925) AC 619.
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A share confers certain rights to the holder depending on the particular

class of shares under which the shareholder falls.

Shareholders generally have;

a. A right to vote.

b. A right to dividends when declared

c. A right to return of contributed capital and surpluses assets on winding

up.

The issue of shares is one way in which a company raises capital.

Shareholders undertake to contribute an agreed amount of capital to the
company and this is then the limit of the shareholders’ liability.

EFFECTS OF SHAREHOLDING

Profits may be shared among shareholders by way of dividend. Each

shareholder has the right to vote. If the company is wound up when not
insolvent, capital may be returned to members.

Shares in a public company may be offered to the public – Prospectus.

DELTA- authorized and issued share capital of $10 000 divided into $ 1
share, and shareholder A owns 1000 shares, he owns 10% of the company
and will on poll, command 10% of the vote.

TYPES OF SHARES
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Shares are categorized based on the nature of rights afforded a

shareholder. Categories may be in relation to dividends.

Generally there are four types of shares namely:

a. Ordinary Shares - under this type of share each member shall have one

vote on a show of hands and one vote per share on a poll. The dividend
on this share is that recommended by the directors and the amount
payable on a distribution of assets on winding up is proportional to the
nominal value of the shares. These only come into consideration for a
dividend after provision for the dividend on preferred shares has
already been made.

b. Preference Shares - these can only exist in the presence of other classes

of shares over which these are preferred. Usually this type of shares
entities the holders to a dividend of a fixed amount per share to be paid
in priority to other shareholders. These may be;

 Cumulative - if the dividend is not paid in one year, then the

shareholder will be entitled to double the following year and so on.

 Non cumulative – the dividend will lapse if the company is unable to

pay it in any one year.

c. Redeemable Shares – as a general rule a company may not

repurchase / buy back its own shares, as this would constitute an
unauthorized reduction of capital. However, redeemable shares are an
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exception. These are shares that are issued with a provision that they
may be bought by the company at a later date, at the option either of
the company or the shareholder.

d. Deferred Shares – these are now rare. They are also called founders

shares. Generally these are shares taken by promoters and they do not
qualify for a dividend until ordinary shareholders have received one.
Usually deferred shares are issued by way of remuneration to promoters
for services rendered in the formation of the company and to persons
who have sold assets to the company. Deferred shares are usually
issued for consideration other than cash.

ALLOTMENT AND ISSUE OF SHARES

When a company sells shares in its registered capital it is said to issue

those shares, and the initial issue of shares following the publication of a
prospectus or lodging of a statement in lieu of prospectus is known as an
allotment, but the two terms overlap.

Closely linked to the restriction on reduction of capital is the rule of a

company is not entitled to purchase its on shares, a rule which is necessary
to maintain the status of the issued capital as a fund brought into the
company by the shareholders.

This rule is extended by prohibiting a company from directly or indirectly

giving financial assistance for the purchase of its own shares or the shares
of its holding company.
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Further protection of the issued capital is provided by three closely linked

sets of ceils concerning the issue of shares.

1. First, shares may not be issued at a discount, unless the procedure laid

down in the CA is followed which involves passing a special resolution

and applying to the HC for an order sanctioning the issue.

2. Second, when shares are issued at a premium. The premiums must be

paid into a share premium account which may be reduced only by going
through the procedure for reduction of capital.

3. Third, redeemable preference shares may be issued redeemable only

out of the proceeds of a new issue of shares or out of profits, in which

latter case an equivalent amount from profits must be transferred to a
capital redemption reserve fund which id treated as if it were part of the
paid up capital.

The fund rule for the protection of the issued capital is that dividends to
shareholders, creditors by preserving the issued capitals as a fund to which
they can look for payment. However the protection may prove illusory
because the fund so presented may lose its value in circumstances which
the law cannot prevent e.g. land value, may reduce due to economic
depression, buildings may be destroyed by fire when in adequately insured,
machinery may wear out, and money may be lost by unprofitable trading
or the purchase of unsuitable assets.

Creditors can protect themselves against such business risks by limiting

credit or taking security. The main legal protection offered is the laying
down of a procedure for reduction of issued capital that gives creditors an
opportunity of objecting.
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If the articles do not authorize a reduction of capital, they must first be

altered to do so. A special resolution must then be passed, setting out the
extent and method of reduction.

Normally the court will issue a rule nisi calling on objectors to show cause
why the reduction should not be confirmed, but in special circumstances a
final order may be issued without a rule nisi.

In confirming the reduction the court may impose such condition as it

thinks fit. The reduction of capital takes effect when the court`s order and
a minute approved by the court for inclusion in the memorandum.

CAPITAL SHARES AND DEBENTURES

CAPITAL

In the broad sense of the word a company’s capital includes its land,
buildings, plants, machinery and basic stock of money – everything in fact
which makes up what has been described as its “income – producing
machine” – New State Areas Ltd v CIR 1946 AD 610.

The main sources from which the company can build up this machine are
the proceeds of issuing shares (share capital), borrowing (loan capital) and
ploughing the profits back into the business (capitalized profits).

The promoter must declare his intentions for the company’s share capital
by stating in the memorandum its capital and the division of the capital
into shares.

This figure known as registered nominal or authorized capital, may

subsequently be increased or decreased or restructured into shares of
different denominations or into stock, by special resolution. When the
company is registered one of its first concerns will be to put the promoter’s
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intentions into effect by issuing shares in exchange for cash or property or

services rendered.

The nominal value of shares issued is known as the company’s issued

capital and as more shares are issued this figure increases until the ceiling
of the amount of registered capital is reached.

SHARE CERTIFICATES

A company within two months of issuing any share prepare for delivery to
the shareholder a certificate.

A certificate is a prima facie evidence of the shareholders title to shares

and company that has issued an inaccurate certificate will be estopped
from relying on the true facts against a person who was relied on the
certificate in good faith - Bloomenthal v Ford (1897) AC 156.

LOAN CAPITAL: DEBENTURES

A company can also raise capital by borrowing often by way of debenture.

A debenture is a document evidencing a loan or an acknowledgement of
debt. Issue of a debenture is generally used to obtain long term funds for a
company. It is a form of a loan to a company. Shares constitute internal
capital. Ordinarily the debenture denotes a document or certificate issued
by a company in which the company acknowledges its indebtedness to a
sum of money.
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The document may also specify a rate of interest and repayment date as
well as conditions of repayment. A company may only issue a debenture if
authorized by the memorandum and articles of association.

This is the significant difference between shares and debentures:

 Shares create rights of membership, for example the right to attend

general meetings and vote, a debenture holder is a creditor of the
company, whose rights are fixed by contract;

 A shareholder is entitled to a dividend if one is declared, a debenture

holder is entitled to payment of interest;

 Shares constitute capital of a company whereas a debenture-loan

external capital.

A debenture may be secured or unsecured.

Security may be by means of a fixed or floating charge:

 A fixed charge may be created over certain company property such as

buildings (mortgage bond).

 A floating charge may be created over fluctuating assets, allowing the

company to deal with the property until crystallization (similarly to
notorial bonds over movables).

A floating charge crystallization when;

a. The company no longer carries on business.

b. The security is enforced by nature of a clause in the debenture.

c. The company goes into liquidation.

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GENERAL RULES ON MAINTANANCE OF SHARE CAPITAL

These are rules designed to protect creditors;

1. Dividends can only be paid out of profits.

2. Shares must not be issued at a discount.

3. Company may not purchase its own shares.

4. Company may not give financial assistance for purchase for its own

shares.

5. Company may not own shares in a holding company.

However theses being general rules, there are also exceptions to some of
them.

In terms of S75 it shall be lawful for a company to issue at a discount

shares in the company of a class already issued; but under the conditions
that:

i. That issue must be authorized by special resolution of the company and

must be sanctioned by the court.

ii. The special resolution must specify the maximum rate of discount at
which the shares are to be issued.

iii. Issue must be done by a company which has been operational not for
less than a year from the date of commencement of business.

iv. The shares to be issued at a discount must be issued within 30 days

after the day on which the issue is sanctioned by the court on which
such extended time as the court may allow.
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In terms of S78 – a company may, if authorized by its articles, purchase its

own shares, including redeemable shares.

78 (3) a company shall not purchase its own shares if as a result of the
purchase they would be no longer be any member holding any shares
other than redeemable shares.

S79 authority required by company to purchase its own shares.

1. A company shall not purchase its own shares unless the purchase has
been authorized in the advance by the company in a general meeting.

2. An activity granted by the company in the general meeting shall not be

valid unless it specifies:

i. The price – minimum and maximum price - at which the shares may
be acquired;

ii. The maximum number of shares which may be acquired and the class
therefore;

iii. The date on which an authority will expire.

REDUCTION OF SHARE CAPITAL

S92 of the CA refers;

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A company may, if so authorized by its articles, by special resolution,

reduce its share capital in any way. In so doing without prejudice to that
exercise a company may;

a. Extinguish or reduce its liability on any of its acts shares in respect of

share capital not paid up.

b. Either with or without extinguishing or reducing the liability on any of

its shares, cancel any paid-up share capital which is lost or

unrepresented by available assets.

c. Either or without reducing liability on any of its shares, pay off any paid

up share capital which is in excess of the wants of the company.

A special resolution to reduce share capital shall accordingly be referred to

as “a resolution for reducing share capital” 92(2).

S93 - where accompany has passed a resolution for reducing share capital
it may apply to the court for an order confirming the reduction.

Creditors are given an opportunity to object to the reduction of share

capital, where the proposed reduction involves diminution of liability in
respect of unpaid share capital.

S76 of the CA – a company may if authorized by its articles issue shares

which are to be redeemed or which are liable to be redeemed at the option
of the company or the shareholder concerned.

S76 (2) – No redeemable shares shall be issued at a time when there are
no issued shares of the company which are not redeemable.

S76 (3) Redeemable shares may not be redeemed unless they are fully
paid.
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7. DIRECTORS

In terms of S2 of the CA the term director includes any person occupying

the position of a director or alternate director of a company by whatever
name he may be called.

Generally speaking a director is an office, it has more to do with the job

that is being done. If a person in a particular position is fulfilling the role of
director, he/she is a director.

GENERAL PRINCIPLE AS TO DIRECTOR

A director facilitates transition of duties from the board of management. A

director is directly involved in the management of the company’s affairs by
way of delegation.

Directors act collectively as a board, if the director passes a decision, it is

presumed that, this is the decision of the board. The business of the
company is managed collectively by the directors.

The directors are empowered in terms of the law to exercise all their
powers except those which had to be exercised by a company in the
General Meeting. As a rule non-executive directors attend and vote at the
meetings of the board but do not work full-time for the company and have
no service contract. Executive directors have a service contract and they
work full time for the company - run day to day events.

ROLES OF NON-EXECUTIVE DIRECTORS

1. They bring their special expertise and knowledge to assist in the

business of the company.

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2. They can monitor and review the performance of the management more

objectively than the executive directors.

3. They can play a pivotal role in resolving conflicts of interest situations.

4. They can act as checks and balances against the executive directors.

DIRECTORS AS THE AGENTS OF THE COMPANY

The relationship between a company and a director can be equated to the

principal agent relationship. The directors as agents act on behalf of the
company. A director is also considered to a paid servant, - thus creating
the master servant relationship/ employer/ employee relationship.

A director is also considered a managing partner of the company. The

executive directors manage shares on behalf of shareholders. The articles
of association would determine the relationship between the director and
the company, and the directors and the shareholders. Sometimes acts of
the directors are said to be acts of the company.

EXTERNAL RELATIONS WITH THE DIRECTORS

Directors are merely agents of the company. What a director does can only
bind the company to the extent of that director’s authority.

This is a subject to the Turquand Rule and S11 and 12 of the CA which say
that there is no constructive knowledge to the company’s documents and
therefore using the presumption of regulatory. When dealing with
outsiders, the directors bind the company e.g. when a director signs a
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cheque on behalf of the company it is as if the company has signed that

cheque.

APPOINTMENT OF DIRECTORS

Appointment of directors is complete upon such action by those having

authority and acceptance of that appointment. The principles of contract
law viz offer and acceptance applies.

Whoever appoints a director must have authority. A person may have

control to some extent but that does not make him a director in the
absence of the actual appointment on proper authority.

In terms of S170 of the CA the acts of a director or a manager shall be

valid not withstanding any defects that may afterwards be discovered in
this appointment or qualification.

HOW A DIRECTOR IS APPOINTED?

In terms of Article 74 of the model articles, directors must be appointed in

writing by the first subscribers to the memorandum of association.
Subsequently the directors are appointed by the General Meeting.

Before the appointment of a director a special notice has to be circulated.

The question of appointment of director is put as a special item of the
meeting.

According to section 174 of the CA the resolution of appointment of a

person as a director stands its own (individually). The law discourages
omnibus appointments. If a company would like to make a dual
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appointment, it must pass a special resolution to do so. The merits of each

appointment must be considered separately so that some director’s
incompetence may be assessed.

In terms of S169 (3) of the CA - every person who signs the memorandum
at its inception assumes the position of a director until other directors are
appointed.

STATUTORY DISQUALIFICATIONS FROM BEING A DIRECTOR

These are contained in S173 of the CA and include:

a. A body corporate may not be a director.

b. A minor or a person under legal disability cannot become a director.

c. Unrehabilitated insolvent.

d. Ex convicts of offences such as theft, fraud.

DECISION TO REMOVE A DIRECTOR

The decision to remove a director is made by the ordinary resolution in a

GM.

DUTIES OF THE DIRECTORS

Students To Go and Research Then Discuss In Class.

THE END.