Introduction
Businesses are carried out through different forms of arrangements such as sole trader, partnerships, private business corporations (“PBC”), private companies or public companies. In the case of companies the owners own shares. In this article I look at various issues concerning shares in a private company based on the Companies and Other Business Entities Act (Chapter 24:31), “the COBE Act”. The COBE Act has to be read together with a company’s memorandum and articles of association.
Legal nature and requirement to have shareholders
Section 95 of the COBE Act applies. According to the section a share issued by a company is movable property and transferrable in any manner provided for by the articles of association of the company or recognised by the COBE Act or any other law.
Unless otherwise provided elsewhere share does not have a nominal or par value. A company may not issue shares to itself. An authorised share of a company has no rights associated with it until it has been issued.
Authorisation of shares
Section 96 of the COBE Act applies. A company’s memorandum must set out the classes of shares, and the number of shares of each class, that the company is authorised to issue. It must set out, with respect to each class:
- A distinguishing designation for that class, and
- The preferences, rights, limitations and other terms associated with that class.
The above may be changed only by:
- An amendment of the memorandum by special resolution of the shareholders,
- The board of directors, in terms of the COBE Act, unless the memorandum provides otherwise.
Subject to the memorandum, the company’s board of directors may increase or decrease the number of authorised shares on a pro-rata basis to the shareholders of one or more classes of those shares by use of any one of the following expedients:
- Consolidation of shares into larger amount than existing shares.
- Conversion of paid up shares into stocks and reconversion of such stock into paid up shares of any denomination.
- Subdivision of shares into shares of smaller amount than is fixed by the memorandum.
- Cancellation of unissued shares.
Preferences, rights, limitations and other share terms
Section 97 of the COBE Act applies. All of the shares of any particular class authorised by a company have preferences, rights, limitations and other terms that are identical to those of other shares of the same class, except to the extent that the company’s memorandum provides otherwise.
According to section 97(3)(b) a company must always have ordinary shares and in addition to any class of shares as may be prescribed in the company’s constitutive documents.
Issuing shares
Section 98 of the COBE Act applies. The board of directors may resolve to issue shares of the company at any time, but only within the classes, and to the extent that the shares have been authorised by or in terms of the company’s memorandum.
If a company issues share in excess of the authorised shares, the excess issue may be authorised retrospectively otherwise the issue will be a legal nullity.
Subscription of additional shares in the company shall be offered to the existing shareholders first and in proportion or pro-rata to their current shareholding.
Consideration for shares
Section 100 of the COBE Act applies. The board of directors may issue authorised shares only:
- For adequate consideration to the company as determined by the board of directors, or
- In terms of conversion rights with previously issued shares or debentures of the company, or
- As capitalisation shares.
The consideration for shares may be in money, in other tangible or intangible property, other rights having monetary value, a binding obligation to pay money, or services previously performed.
Conclusion
Shares in a company give ownership or shareholding rights. Disputes over shareholding are common. Shareholders ought to ensure their shareholding documentation is adequate and up to date.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He was recently appointed to sit on the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@hofisilaw.com or gohofisi@gmail.com. Visit www//:hofisilaw.com for more articles.
