New Companies Act: Far-reaching changes to Company Law in Zim

 ISAAC MUNYUKI

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 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 note seeks to highlight only those key changes introduced by the new Companies Act which impact on com

Shares and share capital

The new Companies Act abol­ishes par value as a concept in share capital. From the effective date of the new Companies Act, shares will no longer have a par or nominal value and pre-existing companies may not authorise any new par value shares or shares having a nominal value.

Despite the abolishment of the concept of par value, all shares is­sued with a par or nominal value 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 par 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 unmasking corporate secrecy, compliance with the same could prove to be difficult in some cases. This particularly because nom­inee agreements by their very nature are confidential and the company is not a party to such agreements. The company is therefore left to presume the existence of such nominee ar­rangements and unless probed, 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 pre-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 ex­punge 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.

Directors’ duties

Sections 54 and 55 of the new Companies Act make provision for the partial codification 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 codification 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 onerous 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 exhaustive, the nature of ‘interest’ contemplated 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 attributed.

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 merging into another existing company, or two or more companies consolidat­ing into a new company. Under the new Companies Act, companies proposing to amalgamate, 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.