Mar 14, 2020 NEW COMPANY LAW LEGISLATION IN ZIMBABWE. WHAT YOU NEED TO KNOW ABOUT THE CHANGES BROUGHT BY COMPANIES AND OTHER BUSINESS ACT [CHAPTER 24:31]
Contributors: Farai Mushoriwa, Mwanatsa Masona & Nathanael Manjoro
The long-awaited Companies and other Business Entities Act [Chapter 24:31] (Hereinafter, C&OBEA or the New Act) came into force in the first quarter of 2020. The new Act repeals the Companies Act [Chapter 24:03] (“Old Act”) and introduces a number of important new concepts and far-reaching changes to company law in Zimbabwe. This article seeks to give a synopsis of New Companies Act in comparison with the Old Companies Act (No. 47 of 1951). This will enable business entities to understand and appreciate the key issues and requirements of the new law.
BRIEF SUMMARY OF THE OLD COMPANIES ACT
We will start by giving a brief summary of the old Act, that is the Companies Act, which came into effect on 1 April 1952, to consolidate and amend the laws in force in Zimbabwe relating to the constitution, incorporation, registration, management, administration and winding up of companies and other associations. The previous Act lagged behind Constitutional, technological, economical, and other developments that have taken place in Zimbabwe over the years. Consequently, the previous legislation lacked such progressive mechanisms as corporate governance and did not account for speed of execution by the deeds registry which are essential in today’s fact paced world. The conduct of shareholders and company officials, such as directors for instance, lacked adequate regulation that can effectively protect the interests of the company and those connected to it, in one way or another, resulting in possible prejudices to various stakeholders. The old Act had for nearly 70 years been tested in courts of law and its limitations clearly understood by commercial lawyers and corporate governance practitioners alike.
It is from many of these shortcomings and limitations that the new Act derives its innovations. Some of the key issues around the new Act are as follows;
- Corporate governance
- Transparency and accountability
- Conduct of shareholders
- Role of Directors
- Adequate regulation
CHANGES INTRODUCED BY THE NEW COMAPANIES AND OTHER BUSINESS ENTITIES ACT
What is a company according to the New Act?
Before defining a company, it is important for one to know that for the purposes of the new Act banking institutions are no longer governed by the Companies Act, being specifically excluded in the definition section. Section 4 of the New Act is exclusionary to the following entities
- Banking institutions
- Building societies
- Micro Finances
- Corporative societies
- Trade unions
It is significant to note that the formation, registration and management of the aforementioned are governed by their respective enactments, save as may be otherwise expressly provided in the New Act.
For the purposes of the New Act the following are Registrable business entities
(a) a public limited company;
(b) a private limited company;
(c) a company limited by guarantee;
(d) a co-operative company;
(e) a foreign company;
(f) a private business corporation
(g) subject to section 278 (“Voluntary registration of partnership agreements, etc.”), partnerships, syndicates, joint ventures and certain associations of persons.
Business entity means a company, private business corporation, a syndicate, a partnership or any other associations of persons, whether corporate or unincorporated, which has a business character.
“company” means— (a) a company incorporated under this Act or a repealed law; or (b) a foreign company, to the extent that the provisions of this Act apply to such companies;
The New Act repeals the old companies act and also repeals the Private Business Corporation (PBC) Act [Chapter 24:11]. It then incorporates provisions for the incorporation of Private business corporations as it seeks to encourage small to medium sized enterprises to register and be recognised as players in the market. The inclusion of the PBC into the C&OBEA recognises the PBC as a form of a registrable business entity and facilitates the acceptance of the Private Business Corporations, with their less stringent corporate requirements as a means of conducting business in Zimbabwe for the smaller corporate or family run business.
Registration and Incorporation of Companies
One of the key issues that the New Act seeks to address relates to the Registration of Companies. This part is governed by the following sections; S6 to 19 and S75 to 82. The new Act comes in to curb shortcomings of the manual registration process by the introduction of the Electronic registry as provided for in sections 279 to 291. The provisions state out the following;
- Requirements for registration
- User agreement systems
- Registered users
- Digital signatures
- Documentation and safe keeping
- Unlawful computer systems and related penalties
The efforts to computerize the Companies Registry were done under the e-Government initiative which is aimed at achieving quicker, simpler and more transparent turnaround in the registration processes. The new Act has provided the legislative framework which is aimed primarily at improving the ease of doing business in Zimbabwe.
A survey done under the 2012 World Bank’s “Doing Business” initiative concluded that prospective business persons in Zimbabwe could wait for about 152 days before all requirements for starting a business can be finalized. The 152 days’ account for all the registration processes that include the compilation and lodging of documentation.
Simpler and standardized documents that highlight critical information, such as the Memoranda and Articles of Association, can be adopted for initial registration processes, with details being presented at a later stage when the business is in operation. This would speed up the registration process.
The proposed amendments include provisions which permit the option of e-filing and e-registration of company documents. This will allow for speedier company registrations as is the case with other jurisdictions. The e-governance platform is in fact currently carrying out a parallel trial system for name search applications enabling the Registrar of Companies to process company name searches by online application.
Financial Reporting Structures
The new Act give a comprehensive and advanced accounting and auditing structures. This is provided in sections 182 to 194.Further, financial reporting structures, under the Old Act fall short of details that compel comprehensive reporting, leaving room for fraudulent activities to take place undetected over undesirable periods.
Directors and other officers
The old Act does not specify the exact numbers of required Directors in respect of respective types of companies. The new Act is however clear in this regard. it states the exact number of Directors required by a specified type of Company.it states as follows
private company with more than one and fewer than ten shareholders
shall have two or more directors, a private company with ten or more shareholders
shall have not fewer than three directors, and a public company shall have not fewer than seven nor more than fifteen directors.
The new Act in relation to the duties of Directors of companies clearly outlines the founding values or principles of their duty to the company. Section 195(4) states that Each or every director (as the case may be) shall exercise independent judgment and shall act within the powers of the company in a way that he or she considers, in good faith, to promote the success of the company for the benefit of its shareholders as a whole. The guiding values relative to decisions of officials as per the new act can be summed up as follows;
- a) the long-term consequences of any decision;
(b) the interests of the company’s employees;
(c) the need to foster the company’s relationships with suppliers, customers
(d) the impact of the company’s operations on the community and the
(e) the desirability of the company maintaining a reputation for high standards
of business conduct;
(f) the need to act fairly as between shareholders of the company.
An individual director may not assign or delegate his or her responsibility or accountability under this Act to another person.
In Public companies every Director that sits in more than 6 boards is mandated to declare that fact in every General Meeting, failure to do so attracting a civil penalty.
The new Act (per S196(2)) provides ease of holding a meeting in the event that one or more Directors are not present. This is by means of an electronic, conference telephone or other audio or visual communications equipment if all participants can hear and talk or otherwise communicate concurrently with each other.
Section 197 of the New Act intensifies liability of Directors and other officers. This is meant to protect the interest of the company through criminalising unbecoming conduct of Directors and other officers.
The old Act so often has been described as defunct in respect of its supervisory and regulatory aspects. The new Act seeks to model the supervisory effect of the enactment to such a manner that members of a company are held accountable. There are strict supervisory provisions in particular Part II of the Act which encompasses sections 38 to section 50. In respect of the supervisory effect of the Act the Registrar of companies is granted massive powers thereto reference to section 39. There are heavy penalties for unbecoming conduct of members. This part also gives power to minority stakeholders to instigate investigations through the Registrar – see section 40 where at least five per centum of the ordinary shares of the company can trigger investigation. This model aims at advancing corporate governance principles and attract large scale investment. Section 38 clearly spells out the intent of the strict supervisory provisions of the Act as follows;
- promote good corporate governance; and
- inspire confidence in investors in such entities that their investments are safe and are being dealt with transparently
In terms of section 42 the Registrar shall assign one or more inspectors to investigate the affairs of a registered business entity and to report thereon in such manner as he or she directs. It should be noted that unregistered business entities can also be inspected by the inspectors granted power in terms of section 43.
Share Capital and Debentures
Part III of the old Act does not clearly describe the nature of shares in Companies let alone define what a share is. Henceforth, the new Act in terms of sections 95 of Part II on the face of it starts by defining and describing the nature of shares to remove that ambiguity created by the old Act.
The new Companies Act also departs from the general practice under the old Act where the terms of certain classes of shares, particularly in preference share funding structures, could be recorded in agreements or other documents, separate from the memorandum or articles of association. The new Companies Act requires that all preferences, rights, limitations and other terms associated with a class of shares must be contained in the memorandum of association, failing which they may not be enforceable.
Under the new Companies Act, the board will have the right to increase or decrease the number of authorised shares of any class, to reclassify any authorised but unissued shares, to classify shares that are authorised but are unclassified and unissued and to determine the preferences, rights, limitations or other terms of shares which have been authorised but not issued.
Legal nature of shares and requirement to have shareholders
A share issued by a company is movable property and transferable in any manner provided for by the articles of the company or recognised by this Act or any other law. The history behind this concept is important in understanding it and coming to the realisation that it has now become unnecessary. Historically these concepts were related to providing protection by prohibiting a company from making distributions to shareholders if the company’s “share capital” was diminished. The modern trend has seen the adoption of the solvency test before distributions can be made.
Nominal and par value shares
Nominal share or par value has been outdated by the new Act. This means that post existing companies to the Act will no longer register their shares in terms of. nominal or par value. This is because of the economic changes that have taken place for the past decades. Nominal and par value shares are regarded having nominal share price which is arbitrary and therefore has no relation to its market price. However, section 304 states that pre-existing companies can maintain and otherwise can change through the minister.
Legal and fiduciary duties
Part IV of the new Act introduces new requirements on the members of a company which the Old Act did not focus on. This relates to the legal and fiduciary expectations on the members. It covers extensively the legal and fiduciary principles as operational requirements for companies. This relates to trust, especially with regard to the relationship between Directors and minority members, and emphasises heavily the duty of care of the members. This compels members of the company to act in the best interests of the company. Failure to act in the best interest of the company attracts civil penalties thereto. Section 55 covers on duty of loyalty. This duty encompasses the duty to disclose, the expectations of Directors not to use property of the registered business entity for his or her personal interests, to communicate to the board or members. It is also an offense for members to abuse office or position in such a way that knowingly causes harm to the entity. Transactions involving conflict of interest are prohibited unless declared in general meeting with other members.
At common law, directors are subject to fiduciary duties requiring them to exercise their powers in good faith and for the benefit of the company. They also have the duty to display reasonable care, skill and diligence in carrying out their duties. As such, a director will need to comply with both the duties set out in the new Companies Act and in terms of the common law, except where the common law duty is specifically amended or conflicts with the new Companies Act. They also have the duty to display reasonable care, skill and diligence in carrying out their duties. As such, a director will need to comply with both the duties set out in the new Companies Act and in terms of the common law, except where the common law duty is specifically amended or conflicts with the new Companies Act.
It is important to note that, for purposes of the new Act, provisions which spell out directors’ obligations, also apply to managers and ‘officers’ of a company who are not directors but persons in managerial positions in the company who, amongst others, represent and bind the company in transactions. The extension of duties and responsibilities to persons in managerial positions means that companies should take steps to ensure that those in managerial positions are informed of their duties and obligations as well as the consequences that may arise from a failure to properly perform these duties. A breach of these duties may render a director or an officer of the company personally liable to the company or third parties regardless of the director or officer’s knowledge of these obligations.
In terms of section 57 of the new Act, a director of a company will be required to disclose any “personal financial interest” that the director or an associate (of that director) has in a matter to be considered by the board of a company. For purposes of section 57 of the new Companies Act, an associate includes, but is not limited to, a second company which is controlled by the director either alone or together with others. Without being exhaustive, the nature of ‘interest’ considered in section 57 of the new Act is that which relates to matters of a financial, monetary or economic nature, or to which a monetary value may be regarded.
The issuing of a prospectus in terms of section 54 of the old Act is restricted to be in English writing only whereas the new Act broadens to any officially recognised languages. See section 104 of the New Act. Section 107 of the new Act provides for a penalty to contravention of the requirements of a prospectus and grants power to the Registrar to enforce such penalty. The aforementioned relates to non-registration of a prospectus. Section 108 and 109 goes on further to impose civil and criminal liability respectively on misstatements in prospectus. Businesses are encouraged to ensure that they seek legal advice before issuance of a prospectus to avoid falling foul of the new law.
Laws governing foreign investment should be identified and harmonised to promote accessibility by prospective investors, as well as coordination among the institutions charged with different aspects of foreign investment. The new Act maintains the requirements and the procedures for registrations of foreign companies in Zimbabwe.
The new Act does not mention the process of winding up of Companies. This aspect is dealt with by the Insolvency Act of 2018.
Accounting and auditing
This is covered in terms of sections 140 to 155 of the old Act and sections 271 to 277 of the New Act. It should be noted that the old Act has often been criticised for not fully covering the strict compliance of accounting and auditing of private companies. However, the New Act gives strict compliance provisions to financial accounting by private companies.
Mergers and acquisitions
The new Act introduces a new form of statutory merger which is designed to ease the implementation of business combinations. Section 228 of the new Act provides that two or more public companies or any combination of companies consisting of at least one public company and at least one private company may undertake a merger. A merger is defined in section 226 of the new Act as a transaction resulting in one or more existing companies joining into another existing company, or two or more companies consolidating into a new company. Under the new Act, companies proposing to combine, or merge must enter into a written agreement setting out the terms and means of effecting the merger. This includes the manner in which the shares of each merging company are to be dealt with.
The statutory merger regime also prescribes extensive disclosure requirements. For instance, the merging companies must publish notice of the proposed merger in the government gazette and in a daily newspaper circulating in the district in which the registered office of the company is situated. It must be noted that the new Act works complementary to the existing Competition Law and does not in any way dispense with the need for compliance with its provisions.
Effects of the New Act:
- Improves corporate governance practice by defining in greater detail, the corporate responsibilities of directors and boards of companies in terms of global best practice.
- Promotes disclosure of company directors’ remuneration and expose shareholders that hide behind investment vehicles.
- Promotes transparency and trust, which is in essence the way business is done as people will know the identities of people behind the companies they are dealing with
- Promotes computerisation of the companies’ office, which will promote decentralised and quick company formations and registrations.
- Provision for the issuance of non-par value shares rather than shares with a fixed value together with provisions for the valuation of non- par value shares.
- Improves ease of doing business through investor protection. Promotes increased accountability, disclosure and transparency of directors;
- Improves protection for minority shareholders; replacement of most criminal penalties with civil penalties,
- Promotes the licensing of business entity incorporation agents and business entity service providers;
What Companies should do
There are immediate compliance requirements under the New Act. A few are dealt with hereunder;
All existing companies are required to re-register with the Registrar of Companies within a period of 12 months from the date on which the new Companies Act became effective. By re-registration the companies will not be creating new legal entities or entirely removing the company’s existing rights and obligations. The re-registration exercise is an administrative process aimed at establishing a new and updated register of companies so as to safeguard that inactive companies do not appear on the updated companies register.
Record of Beneficial Owners
Companies are required to keep and maintain a register of beneficial owners and such information is required to be filed with the Registrar of Companies. A beneficial owner includes, without limitation, an individual who directly or indirectly holds more than twenty percent of the company’s shares or directly or indirectly holds more than twenty percent of the company’s voting rights. The new Companies Act further provides that not more than twenty percent shares in a company may be held by a nominee on behalf of a beneficial owner.
Any failure to comply with the filing requirements is an offence and companies are encouraged to put in place apt measures to ensure they are in full compliance with the requirements.
The New Act introduces several novel concepts while it expands on several existing ones. It is certainly an ambitious law aimed at improving the ease of doing business, as well as fine-tuning the legal regime governing business entities so that Zimbabwe can become a more attractive investment and business destination. The Act will require commitment for it to become effective and it is already evident that the implementing office is struggling with the new requirements just a few weeks into its operationalisation. The Companies office must therefore be adequately capacitated to meet the requirements of the new law.
A publication of the Litigation, Banking & Financial Services Law Practice Group in the firm Mushoriwa Pasi Corporate Attorneys
Disclaimer: The information and opinions in this publication are provided for general information only, and are not intended to, and do not constitute a substitute for legal or other professional advice. For specific advice, please contact your usual attorney or the Head of our Litigation, Banking & Financial Services practice group, Mr. Farai Mushoriwa on firstname.lastname@example.org
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 LAW DEVELOPMENT COMMISSION ISSUE PAPER ON THE REVIEW OF THE COMPANIES ACT [CHAPTER 24:03]