The long-awaited Companies and other Business Entities Act [Chapter 24:31] (the new “Companies Act”) is expected to come into force in the first quarter of 2020. The new Companies Act cancels 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 note seeks to highlight only those key changes introduced by the new Companies Act which impact on companies
Shares and share capital
The new Companies Act abolishes equality value as a concept in share capital (funds raised by a company in exchange of shares). From the effective date of the new Companies Act, shares will no longer have equality or nominal value and pre-existing companies may not authorise any new equality value shares or shares having a nominal value.
Despite the abolishment of the concept of equality value, all shares issued with nominal value (value or price of a share) by a pre-existing company, and held by a shareholder will, subject to any regulations to be made by the Minister, continue to have the same rights associated with them, including that the shares will remain to have a equality or nominal value.
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.
Beneficial ownership register
For the first time under corporate law in Zimbabwe, the new Companies Act prescribes detailed requirements to identify and record those individuals who ultimately own or control the company. Companies will be required to keep and maintain a register of beneficial owners of the company and to file such information with the Registrar of Companies.
The new Companies Act defines a ‘beneficial owner’ to include, 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.
While these disclosure requirements are welcome and could go a long way in exposing corporate secrecy, compliance with the same could prove to be difficult in some cases. This is particularly because nominee agreements by their very nature are confidential and the company is not a party to such agreements. A nominee agreement is an arrangement between two parties where one person consents to acting as a director, secretary or shareholder for a company which is owned by someone else. The company is therefore left to assume the existence of such nominee arrangements and unless investigated, there is no obligation on shareholders to disclose these nominee arrangements or beneficial ownership. The fact that a director can be removed without reason under the New Companies Act could also be a disincentive for the proper implementation of these requirements.
Failure to comply with these disclosures and filing requirements is an offence and companies will need to carefully consider these requirements and put in place appropriate measures to comply. In the long run, amendments may be required to these disclosure requirements to give them teeth.
Companies to re-register
The new Companies Act requires all existing companies to re-register with the Registrar of Companies within a period of 12 months from the date on which the new Companies Act becomes effective. The re-registration by companies will not create a new legal entity or remove completely the company’s existing rights and obligations in any way. The re-registration exercise is an administrative process aimed at establishing a new and updated register of companies as well as to remove inactive companies from the same.
Sections 54 and 55 of the new Companies Act make provision for the partial laws or rules of directors’ duties. 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.
It is important to note that, for purposes of the new Companies 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.
Disclosure of Financial Interest
In addition to the laws or rules of directors’ duties, the new Companies Act also introduces significant changes to a director’s duty of disclosure and requires directors to disclose their ‘personal financial interests’ in certain circumstances. While the concept of disclosure is not new in our law, the new Companies Act goes a step further and expands on the director’s duty of disclosure making it more difficult than before.
In terms of section 57 of the new Companies 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 thorough and complete, the nature of ‘interest’ considered in section 57 of the new Companies Act is that which relates to matters of a financial, monetary or economic nature, or to which a monetary value may be regarded.
It is recommended that companies carefully consider these disclosure provisions as they impact on structuring and more importantly, board composition. For group companies and where applicable, these provisions also require a re-look at the concept of mirror boards. Failure to disclose a financial interest is a criminal offence punishable by a fine not exceeding level fourteen or imprisonment for a period not exceeding two years or both such fine and imprisonment. A breach of these disclosure provisions, in appropriate circumstances, could also result in the director being liable to the company in accordance with the common law principles relating to the breach of a fiduciary duty.
Mergers and acquisitions
The new Companies Act introduces a new form of statutory merger which is designed to ease the implementation of business combinations. Section 228 of the new Companies 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 Companies 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 Companies 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.