1. ISIAH MURERIWA LLB (UP-SA) LLM (UP-SA) Advocate of the High Court of South Africa Legal Practitioner of High Court of Zimbabwe SCANLEN AND HOLDERNESS SOLICITORS

2. Introductory Remarks Protection of shareholders- Act // common law- why a discussion. The concept of a company at law = an association of people and legal subjects into a single entity. Formation of a company – Basic Procedure (1)Preparation of prescribed documents (2)Lodging at Co Registry (3)Prescribed fee WHAT DOCUMENTS?

3. What Is Effect of Registration Issuance of certificate – Sec 21 Conclusive proof of regularity- Sec 23 – fly by nights Creation of a new legal subject with right and duties with perpetual succession - Sec 22

4. INITIAL PROTECTION OF WOUD BE MEMBERS Concept of a promoter Why protect against promoter - opportunity Entitlement to recoup costs BUT Limitation on secret profit. When is profit at law secret

5. RAISING CAPITAL Arguably main initial concern for promoter PRIVATE COMPANY Negotiate with friends and associates and banks Sec 33 and 34 See effect of non-compliance with sec 33

6. Public Company Requiring cash from the investing general public – so called share capital and debentures Immediate need for public protection – prospectus- 1.Contents thereof – sec 54 2.Consent by expert where statement by him used in a prospectus –sec 55 3.Registration of prospectus – sec 56 4.Civil liability for misstatement- sec 58 5.Criminal liability – sec 59 6.Residual common law delictual remedy 7.Deeming provision on any documented offer –sec 61 8.Restriction on salesmanship of shares- sec 64

7. CONCEPT CAPITAL Refers o the income producing machinery of a company –eg land, buildings, plants, machinery, stock of money. Built from three sources:- 1.Share capital- proceeds from issue and sale of shares 2.Loan Capital- borrowed money 3.Capitalized Profits – profits ploughed back as capital Ratio of loan capital to share capital = gearing of the company – determines the confidence of shareholders in the business- how much of their own money as opposed to borrowed money they are prepared to risk in the business. Not so true in countries facing liquidity crunch.

8. Maintenance of Capital Need to protect creditors by creating a pool to which they can look for payment – It is that desirable that capital be maintained for the benefiot of creditors :- How done is a business decision taking into account several factors From a legal perspective – the law commences from point that capital should not unnecessarily be reduced. Thus any decision resulting in reduction is regulated by law:-

9. LEGAL PROTECTION OF CAPITAL Sec 92 – 97 lays down a procedure for reduction of capital which gives creditors an opportunity to object. – In short is it requires (1) authorization in the article (2) special resolution for that specific purpose (3)confirmation by a court (4) an opportunity for objections by creditors [sec 93] and determination by court (5) registration of court order and minutes of decision to reduce by Registrar [sec 95] (6) regulation of liability of members i.r.o reduced shares [sec 96] Criminal liability for concealment of reduction proceedings [sec 97]

10. LEGAL PROTECTION CONTINUED Sec 77 (1) & 78 (2) - restriction on redemption of shares except from profits otherwise available for dividend; or from a fresh issue of shares --- it means a company’s issued share capital is maintained since issued share capital may not be used to purchase or redeem its own shares; Sec 73 – restriction on giving financial assistance for the purchase of its own share (or shares of its holding company); - unless special resolution and co remains able to pay debts Sec 75 – prohibition on issuing shares at a discount – unless authorized by special resolution and sanctioned by court; Requirement that when shares issued at premium, proceeds to be paid to share premium account- reducible only in the same way as capital account Dividend to shareholders payable only out of profits and not capital

11. THE CONCEPT OF A SHARE Defined as an item of incorporeal moveable property owned by the shareholder to whom it has been issued or transferred and entitling him to such rights and subjecting him to such duties as may be created by the memo and article of association, the Act and the common law Rights and duties attaching to a share are essentially contractual A share essentially entitles its holder to membership of a company at law Shares acquired by subscribing to memo of association, receiving an allotment or taking transfer from another shareholder. NB: A shareholder even if effectively the sole shareholder, has no proprietory right to the company’s property. NB In the new Constitutional dispensation it is arguable that a share qualifies as property for purposes of constitutional protection – compare the position in SA.

12. OBLIGATION OF MEMBERS/SHAREHOLDER To meet any call that I made on the amount unpaid on their shares To fulfil the terms of their guarantee in a company limited by guarantee NB: this position takes cognizance of the fact that beyond these basic contractual duties, any further liability as may arise ordinarily attaches to the company and not to the member in person since the company as a separate legal entity bears its own rights and duties. NB Further that: the appellation that a person can be held liable for liabilities of the company operating without members actually means, the person so held liable is liable only to the extent that he allowed the company to operate for a period in excess of 6 months without members in which case he is not liable as a member because none exists

13. RIGHTS OF MEMBERS GENERAL 1)To payment of dividend when one is declared; 2)To vote at meetings. NB These are the basic contractual rights of shareholders in general: Any further discussion of rights of shareholders is strictlya discussion of the rights of minority shareholders who are otherwise aggrieved by the decision taken by vote of the majority

14. Rule in Foss –v- Harbottle (1843) 67 ER 189 Establishes the general principle of majority rule in the conduct of company affairs and forbids individual shareholders from suing for a wrong done to the company, it being for the company, by the majority vote of members, to decide whether to sue or to condone the wrong.

15. Effect of the rule- Followed to its literal meaning the rule essentially entails that the majority shareholders are at an advantageous position as to dictate how the company should run, the direction it should take and further and most disturbingly, whether or not, in instances q=where a wrong is committed to the company, the company should or should not sue. The position would obviously be untenable and seriously prejudicial to minority shareholder; Moreso in the light of indigenization legislation which reduces foreign investors to perpetual minority shareholder as a result of the 49/51 rule in Zimbabwe. Obviously our law has provision for protection of the minority shareholders against the majority otherwise the rule will become a cloak of fraud-

16. PROTECTION OF MINORITIES 1.Common law permits a minority shareholder to sue if the actions of the majority shareholders in control of the company amount to a fraud upon him:- HOW FRAUD (a)He can allege that the co, manipulated by shareholders or directors in control has caused harm on him (or other shareholders) – representative action. (b)Can allege that shareholders or directors in control have caused harm to the company, and therefore to him as a shareholder of the company, but he company being prevented from acting by the controllers, it must be joined as a defendant before the court – derivative action (shareholder’s standing derives from the company which has suffered the loss)

17. PROTECTION CONTINUED Statutory provisions:- (1)Sec 16 – Holders of 15% of issued share capital or 15 % of debentures can object to alteration of the memorandum; (2)Sec 91 – holders of 15% shares can object to any variation of their rights; (3)Sec 126 – Holders of 5 % of paid up capital can requisition an extra ordinary general meeting (4)Sect 157 – 100 members or holders of 5% of issued shares can apply to the Minister for appointment of inspectors to investigate the company affairs (5)Sec 194 – a dissenting shareholder can object to acquisition of his shares in a takeover scheme (6)Sec 207 – a member as contributory can petition winding up of the company.

18. TERMINATION OF MEMBERSHIP Voluntary transfer of shares; Transmission by operation of law (death /insolvency); Rectification of share register; Winding up of the Company;