PART ONE

The Secretary,
Directors and
Members

LIST OF CHAPTERS

1. The role of the company secretary

2. The directors
3. The members

OVERVIEW
Part 1 looks at the respective roles of the company secretary, the directors,
and the members (shareholders).
The company secretary is senior manager within most organisations and is
sometimes a main board director in a large public company. He acts as the
gateway for information, communications, advice and arbitrations between
the company, its shareholders and regulatory authorities, such as the Registrar
of Companies. In order to fulfil these roles effectively, the company secretary
must be fully aware of the rights, duties and obligations of these groups so that
he can provide independent, impartial advice and support.
In this opening part we look at the administrative structure of the company
and the roles of the three parties who are responsible for it, the company
secretary, the directors and the members. Chapter one describes the core
duties and responsibilities of the company secretary and the skills and
knowledge that he requires. We the turn to directors, there responsibilities
and liabilities, and how they are appointed and removed from the office.
Finally, we look at the third side of the administrative triangle, the members, in
particular their responsibilities and their rights to information about the
company.
Throughout the text we will refer extensively to sections and provision
contained in the Companies Act Chapter 12:03, as amended, {the Act). Where
only section number is given it is understood that the Act is referred to. You
should also be familiar with the Listings requirements of the Zimbabwe Stock
Exchange and the Securities Regulation Code on Takeovers and Mergers.
 CHAPTER 1

The Role of the

Company
Secretary
CONTENTS
1. Who is the company secretary?
2. Core duties of a company secretary.
3. Appointment and removal from the office
4. The secretary and the board
5. Liabilities

LEARNING OUTCOMES
As an officer of the company at the centre of the decision-making process, the
company secretary is in a powerful position of influence. He should assist and
guide the directors in their pursuit of profit and growth but should also act
with integrity and independence to protect the interests of the company, its
shareholders and its employees. The company secretary is key to the efficiency
and effectiveness of the board and to the smooth running of the company. To
fulfil the role, he must not only keep up to date with relevant legal, statutory
and regulatory requirements but also be able to give impartial advice and
support to directors.
After reading and understanding the contents of the chapter and looking at the
Practice Questions, you should be able to:
  Explain the administrative role and implied powers of the company
secretary.
 Understand how the company secretary is appointed, and where his
express powers come from.
 Understand the statutory duties and responsibilities of the company
secretary.
 Understand the role of the company secretary in relation to the
Combined Code.

1. WHO IS THE COMPANY SECRETARY?

Section 169 of the Companies Act requires every public company to appoint a
company secretary. A partnership or body corporate can also be appointed as
secretary. In practice, the company secretary plays a central role in the
governance and administration of a company’s affairs, with particular
responsibilities in three main areas:

1. The board – the company secretary provides essential practical support

to the chairman and other directors, both as a group and individually,
ensuring that statutory and regulatory requirements are met for the
conduct and running of board meetings, and that the board has the
proper access to the information it requires.

2. The company – the company secretary is responsible for ensuring that

the statutory and regulatory requirements are met, particularly in
relation to the Companies Act [Chapter 24:03] and related legislation
which govern the reporting of the activities of the company, for example
filing statutory returns.

3. The shareholders (members) – the company secretary is the primary

point of contact for all shareholders and is principally responsible for the
maintenance and management of shareholder records (such as the
register of members) and organising shareholder-related events such as
paying dividends, the issue of the annual report and accounts and
organising general meetings.

The company’s Memorandum and Articles of Association contain requirements

and procedures which cover all three of the areas described above; it is vital
that the company secretary has a detailed working knowledge of these
documents. Throughout these three main areas of activity the company
secretary is charged with the responsibility for ensuring that the business is
carried on according to the principles of good corporate governance.

The earliest company secretary was effectively a Scribe, who in the course of
time became the keeper of secrets and the head of administration. At that
time the company secretary was very much a servant of the company (see
Newlands v National Employment Association (1885) 54 L.J.Q.B.428 –
subsequently in 1971 the company secretary was described as an officer of the
company with extensive duties who could be presumed to have the power to
bind the company in contracts connected with the administrative side of
company affairs. [Panorama Developments (Guildford) Ltd v Fidelis Furnishing
Fabrics Ltd (1971) 2 Q 711 (CA) : (1971) 3 All ER 16]

In recent times the company secretary has become widely regarded as adviser
to the directors, individually and collectively. Section 169 of the Zimbabwean
Companies Act makes the standing of the company secretary evident.

1.1. An officer of the company

The company secretary is an officer of the company.

The interpretation of “secretary” in Section 2 of the Companies Act Chapter

24:03
“includes any official of a company by whatever name called, who or which is
performing the duties normally performed by a secretary of a company”.

1.2. The powers of the company secretary

The company secretary can authenticate documents or proceedings of the
company; the signature of the company secretary on a written resolution is
evidence of the proceedings.

Ostensible authority
The court has been quoted as saying that the company secretary

‘regularly makes representations on behalf of the company and enters into

contracts on its behalf which come within the day-to-day running of the
company’s business . . . He is certainly entitled to sign contracts connected with
the administrative side of a company’s affairs . . . All such matters now come
within the ostensible authority of a company secretary.’
Ostensible authority extends to employing staff, ordering office equipment and
stationery and arranging the company’s insurance and administrative
contracts. Accordingly:
 If the company secretary enters into a contract of an administrative nature
on behalf of the company, the company will be bound by his acts.
 If the company secretary enters into a contract of a managerial nature on
behalf of the company and with express authority from the directors, the
company will be bound by his acts.
 If the company secretary enters into a trading contract on behalf of the
company without express authority, the company will be bound by his acts,
but he may be held personally liable by the company for any resultant loss.

In the British case of Panorama Developments (Guildford) Ltd v Fidelis

Furnishing Fabrics Ltd (1971) the Court of Appeal ruled that the company
secretary is ‘the chief administrative officer of the company’.

In summary, the company secretary can be seen as one point in the

administrative triangle, the two other points being the directors and the
members. Members and directors make the policy and the company secretary
administers the policy. In many ways the company secretary can be described
as forming the backbone of the organisation.

Ostensible authority
Apparent or seeming authority. The authority that one can assume a person
purporting to be an agent has.

CASE STUDY EXAMPLE 1.1

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics

Ltd (1971) 2QB 711

The company secretary of Fidelis hired a car from Panorama. He signed the hire
documents in his own name and added ‘Company Secretary’. Panorama believed
he was hiring the motor car for a meeting with Fidelis clients. In fact, he used the
car for his personal use. When Panorama presented the bill to Fidelis they
refused to pay, claiming that the secretary was acting contrary to his powers.

In this case the court described the status of the company secretary: ‘He is no
longer a mere clerk. He regularly makes representations on behalf of the
company and enters into contracts on its behalf which come within the day-to-
day running of the company’s business. So much so that he may be regarded as
having authority to do such things on behalf of the company. He is certainly
entitled to sign contracts concerned with the administrative side of a company’s
affairs.’

Fidelis had to pay Panorama and reclaim the money from their company
secretary.

THEORY INTO PRACTICE 1.1

You have been the assistant company secretary of XY Ltd for the last five years.
The previous company secretary retired recently and the board chose the
nephew of the chairman to fill the post. On his first day in the post the new
company secretary calls you into his office for a meeting. During the meeting he
is telephoned by the finance director who asks for specimen signatures. He asks
you what sorts of document he will be called upon to sign as company secretary
and whether he can delegate his authority.

Answer
Where the company secretary is obliged to sign a document, he is not able to
delegate this authority.-

Test Your Knowledge 1.1

a) Outline briefly the role and the powers of the company secretary.

b) What should a company secretary do before executing any document?

c) Under what circumstances will a company secretary become personally

liable after signing a company document?

2. CORE DUTIES OF A COMPANY SECRETARY

2.1 General

The duties and responsibilities of the company secretary vary from company to
company; the following list identifies certain of the core duties.

The company secretary:

1. should be present at all meetings of the company and of the directors,
and is the organiser of such meetings. He is responsible for collecting,
organising and circulating agendas and papers required at the meetings.
He is also responsible for organising board committees and for acting as
a channel of communication for non-executive directors.

2. is responsible for ensuring that the annual general meeting complies

with the appropriate procedures of the Companies Act, the Articles of
Association and, in the case of listed companies, the ZSE Listings
Requirements. He will usually coordinate the administration of the
meeting.

3. is usually responsible for preparation and circulation of the minutes of

meetings of the company and of directors’ meetings.

4. will execute the instructions of the board of directors, for example, as

regards notices for meetings.

5. is responsible for ensuring that the company complies with the

provisions of its Memorandum of Association and Articles of Association,
drafting and incorporating amendments in accordance with the correct
procedures, following approval by members and registration by the
Registrar of Companies.

6. is responsible, if the company is listed, for ensuring compliance with the

listings requirements of the ZSE and the Securities Regulation code on
takeovers and mergers through the company’s sponsor.

7. should ensure compliance with the Companies Act and all other relevant
legal requirements.

8. is responsible for the share registrar functions within a company, and

also in particular for the maintenance of the following statutory
registers, such as:

a) register of members, including monitoring movements to identify any

‘stake-building’ and the beneficial owners of holdings;
b) register of directors and secretary;
c) register of debenture holders (if applicable).
9. should file statutory returns and certain documents with the Registrar
of Companies, to comply with periodic filing requirements, or to notify
of changes regarding the company. Examples are:
a) annual returns;
b) report and accounts;
c) amendments to the Memorandum and Articles of Association;
d) changes to the issued or authorised share capital;
e) notices of appointments, removals and resignations of directors and
secretaries.

10. is required with the directors to ensure that financial statements and all
returns required in terms of the Companies Act are true, correct and up
to date.

11. coordinates the publication and distribution of the company’s annual

report and accounts and interim statements and the preparation of the
directors’ report.

12. may implement and administer directors’ and employees’ share

participation schemes.

13. ensures safe custody and proper use of the company’s seal, if this exists.

14 . is responsible for the administration of any subsidiary companies and for

maintaining the record of the group structure.

15. is the focal point for shareholder communication and is the

shareholders’ first point of contact with the company. He is responsible
for organising the distribution of announcements and circulars,
arranging payment of dividends, issuing documentation regarding rights
and capitalisation issues, and maintaining good relations with
institutional shareholders.

16. conducts correspondence with shareholders either directly or through

the share registrars, as regards dividends, calls, transfers and other
general enquiries in respect of shares.

17. is responsible for registering share ownership, dealing with transfers and
other matters affecting shareholdings.
18. is responsible for maintaining the statutory requirements for a
registered office address, ensuring public inspection of documents and
for ensuring that all business letters, invoices, signage, show the name of
the company, the names of directors and the name of the company
secretary and comply with the current statute and regulation.

In addition to the core functions, company secretaries can be involved in a

wide-ranging series of other responsibilities.

Memorandum of Association
Sets out the basic details of a company, the name, the place of incorporation,
the objects, the liability of the members and the authorised share capital.

Articles of Association
The regulations governing a company’s internal management, covering
matters such as, the rights of shareholders, the appointment, removal and
powers of directors and the conduct of meetings. Tables A and B contain a
model set of articles for public and private companies.

Statutory registers
Every company is required to keep and maintain certain specified registers
(also called statutory books) that reflect the operation of its business. They are:
register of members, register of mortgages and liens, register of directors and
secretary, register of directors’ interests in shares and debentures and books
containing the minutes of company and directors’ meetings, and written
resolutions.

Test Your Knowledge 1.2

List three statutory duties of the company secretary.

It should be remembered that directors come from diverse backgrounds and

disciplines, with a growth of directors being from engineering and sales
backgrounds.

In South Africa the shortage of skills has resulted in directors serving on a

multitude of boards, the consequence is busy directors with many interests.
There is a need for a company secretary to act as the adviser of directors.

2.2 Provisions of the King II Report on Corporate Governance

The Company Secretary’s key role in Board Procedures
The King Report on Corporate Governance recommends that the company
secretary should be a guide to directors, on their powers and responsibilities,
that directors should have easy access to the company secretary.
The King Report also recommends that the company secretary:

 should facilitate the business of the board by preparing the agenda and
minutes of the board;

 be responsible for the implementation of the code of corporate

practices and conduct, issued by the King Committee;

 monitor the share dealings of directors and officers, to reduce the

incidence of insider trading;

 receive notification by directors and officers of their intention to deal in

the Company’s shares;

 prepare a written record of each share dealing transaction of a director;

 make these records available, upon request, to the authorities, for

inspection purposes;

 submit a report on dealings to the next board meeting;

 draw the directors’ attention to closed periods (the period between the
financial year-end and the declaration of results and between the end of
the half-year and the declaration of interim results).

 is required to prepare agendas and minutes for the:

• Board;
• Audit Committee;
• Remuneration Committee;
• Board committees.

Director’s Right of Access to Independent Professional Advice:

Company Secretary to Co-ordinate

The King Report emphasised that it is desirable to provide directors with access
to outside professionals. This should:
 be at company expense
 be available to all directors. In order to ensure that the most relevant
professionals are consulted there is a need for co-ordination by the
company secretary to ensure:
• the best specialist is consulted;
• a proper, probably single, consultation could be expected to be the
consequence of a full briefing of the concerns of as many directors as
possible. Directors should discuss the need for the services of an outside
professional with the chairman and/or company secretary;
• that the most appropriate professional advice is obtained.

2.3 Provisions of the Companies Act

Summary of Section 268

 Directors are obliged to appoint a company secretary:
• for a public company (not only companies listed on the JSE
SecuritiesExchange South Africa)
 Subscribers of new companies are to appoint a company secretary
 Vacancies are to filled in 90 days
 A body corporate or partnership may be a company secretary
 Company Secretary to complete form CM27A
 The company secretary is to prepare minutes in respect of:
• Board meetings
• Shareholder meetings
• Committees of Board (audit and remuneration, etc.)
 The company secretary is to certify, in the annual financial statements that
all returns have been submitted to the Registrar and are true, correct and
up date
 The company secretary is to ensure that annual financial statements are
sent to all entitled to a copy
 The company secretary is to provide guidance to the directors, as to
relevant legislation provisions
 The company secretary is to:
• report failure to comply with legislation to next directors and members’
meeting
• guide directors as to their powers and duties.
•
DETAIL OF SECTION 268 OF THE ACT

The Companies Act states that the company secretary:

■ may be a body corporate;
■ should be named on all letterheads, trade brochures and catalogues;
■ should guide directors on their powers and duties;
■ should ensure compliance with legislation;
■ prepare the minutes of the Board and of the Audit and Remuneration
Committees;
■ should certify compliance with Companies Act requirements, in annual
report.

3. APPOINTMENT AND REMOVAL OF THE COMPANY SECRETARY

A form CR 14 with details of the appointment or resignation of the company

secretary, which may be a body corporate, is required to be sent to the
Registrar of Companies, within one month after the incorporation of the
company and within one month from any change thereof. The date which a
person is appointed as, or ceases to be, a secretary must be recorded in the
register by the company.

Section 187(6) provides that it shall be the duty of every director and company
secretary of a company to furnish the company with all particulars required for
inclusion in the register. Penalties are provided for non compliance.

As the company secretary may be one of the signatories on the company’s

bank account, the bank will require specimen signatures and it may be
appropriate to notify the company’s staff, suppliers and customers of the
appointment. The company’s auditor should also be informed.

3.1. Qualifications of a company secretary

Section 169 Companies Act provides that every company, shall appoint a
secretary who is permanently resident in Zimbabwe.

Secretaries of public company are now required to sufficiently qualified to hold

the office. Recognised professions are those of chartered secretaries,
registered public practitioners, public accountants and chartered accountants.

In the case of the secretary being a body corporate, its name and the situation
of the registered office must be stated.
Acting appointments for a period of six months or longer must be recorded in
the register and notified to the registrar in CR 14.

Where joint secretaries are appointed, sufficient particulars must be given in

respect of each of them.

Directors have a duty to appoint competent secretaries.

Should the directors not apply their minds, when determining that in their
opinion the knowledge and experience of the appointee is adequate, they
could be held liable for any subsequent damages caused by the inadequate
knowledge or experience of the company secretary.

Notification of death or resignation of the secretary must not be held over until
a successor is appointed but form CR 14 must be lodged with the Registrar one
month after the date on which the company is notified of such an occurrence.

Failure to fill a casual vacancy, following the resignation or removal of the

company secretary will result in the directors, who knowingly failed to comply,
being liable to punishment since the casual vacancy actually mean the
company is no longer in compliance with the Companies Act.

3.2 Removal from office of secretary

The secretary is appointed by the directors and may also be removed by them.
Therefore, unless otherwise stated in the company’s Articles of Association,
the secretary may be removed by a resolution of the board. A secretary may
also resign from office at any time. In either case forms CR 14 must be filed
with the Registrar of Companies.

The King II Report on Corporate Governance for South Africa 2002

recommends that the appointment of a company secretary should be a matter
for the whole of the board to decide.

3.3 Reporting lines

The company secretary is responsible to shareholders with but is generally

responsible to the board and should be accountable to it through the chairman
on all matters relating to his core duties as an officer of the company. In
connection with other non-core duties, the company secretary should report
to the chief executive or to any other director as chosen by the board. The
company secretary’s remuneration and benefits should be decided by the
board, or the remuneration committee of the board. This will prevent the
secretary from being exposed to the influence of a single director.

Test Your Knowledge

a) In terms of the Companies Act, who appoints and removes the

secretary?
b) For listed companies who should be notified on the appointment or
removal of a secretary?

4. THE SECRETARY AND THE BOARD

4.1. The secretary as adviser to the board

In listed companies, the King II Report 2002 emphasises the role of company
secretary in ensuring compliance with the proper board procedures and
regulation. It also requires that the secretary sits in attendance at all board and
board committee meetings. This places a considerable onus on company
secretaries and the position is not one to be accepted lightly or without an
appreciation of its implications. The secretary must not only keep up to date
with relevant legal, statutory and regulatory requirements and best practice,
but must be able to give impartial advice and support to directors. This will
include advising the board if it appears that (through the officers) it may be
acting in breach of legal requirements.

4.2. The secretary as the board’s communicator

One of the core duties of the secretary is to be the focal point for shareholder
communication. This is particularly important in a listed company. This will
include:

Preliminary results announcements and interim reports

Listed companies must maintain a six-monthly cycle of preliminary

announcements: the financial year-end results as soon as the financial
statements have been approved by the board, and the half-year results from
the first six months of the financial year. This ensures that information is
released to the market promptly and fully to minimise the likelihood of price-
sensitive information being leaked.

Board decisions regarding dividends must also be announced without delay

after board approval. The announcement must give details of the exact net
amount payable per share, the payment date, the record date (where
applicable). This information is required in the case of any interim dividend
being declared as well as the final recommended dividend.

Circulars and other notifications

Apart from directors’ report and the audited accounts, which are required by
law, a company must also circulate notices of meetings and any non-routine
resolutions to be proposed. There are certain instances where the law requires
the latter circulars to be accompanied by an explanation, often drafted by the
company secretary. There are also other instances when information is
required following an enquiry made by a member or the public. The inspection
of registers by the members and the rights of the public to information under
the provisions or the Listings Requirements are looked at in later chapters.

Changes in board composition and other material changes in the business of

the company

Listed companies must release information of any changes in board

membership without delay, on as this is considered to be of material
consideration to the company. In addition, information about any material
change to the business of the company, for example, if the directors become
aware that its profits will be considerably different to previous expectations,
must also be released without delay.

Investment advertisements

The publication by companies of financial information in newspaper

advertisements can be regarded as the issue of an investment advertisement
which requires approval by an authorised person.

The secretary plays a central role in the circulation of information to members

and to the public, making the company secretary, in effect, the coordinator for
the board. The secretary must always be ready to refuse requests for
information to members and outsiders if the law does not specifically entitle
them to it or it is not in line with best practice.

4.3. Electronic communications

Information to shareholders can be circulated electronically if the company’s

Memorandum and Articles of Association permit it and if shareholders agree
and supply the appropriate e-mail addresses. Shareholders may agree to
access annual reports including summary financial statements and accounts on
a website instead of receiving hard copies through the post. Shareholders may
also appoint proxies by e-mail and give them voting instructions, subject to the
provisions of the Articles.

As with all other forms of communication, steps should be taken to ensure that
it is available to all shareholders on equal terms. The invitation to members to
use electronic means of communication must include an explanation of all the
available procedures and details of exactly which documents will be available.
Communications which can be sent electronically include:
 accounts and annual reports;
 summary financial statements;
 notices of meetings;
 proxy appointments.

Test Your Knowledge 1.4

Apart from the directors’ report and the audited accounts, what other
information must a company circulate to its shareholders?

5. LIABILITIES

The current trend seems to be that public opinion and increasingly, legislation,
require that where accidents and/or incidents occur, someone should be held
liable. In this climate we may see a situation where employees as well as
officers become liable to pay damages to other employees, for example in a
case of discrimination or harassment of a work colleague. In the issues of
safety there have been cases where companies and directors have been found
guilty of manslaughter carrying a substantial fine and a prison sentence,
together with disqualification for several years.
CASE EXAMPLE 1.2

National Rivers Authority v Alfred McAlpine Homes East Ltd

Cement was being washed into a stream causing it to be polluted despite the
company’s efforts to ensure that employees complied with the legal and trading
guidelines. The Court of Appeal held that the company could not be held liable
for employees wilfully breaking rules, but the House of Lords overturned the
ruling, imposing heavier fines and threatening jail sentences for future cases.

Companies should have liability insurance cover, but officers or employees

cannot be held harmless for criminal acts and it is a serious offence to fail to
report suspicions of criminal acts. The largest part of the burden of compliance
with the various Acts falls therefore to the company secretary as advisor to the
board.

5.1 Offences and penalties for non-compliance

The secretary is held to be liable only where he himself is in default, or where

he knowingly and wilfully permits the default. There is no excuse if the
secretary allows himself to remain ignorant in an attempt to avoid liability.

It is the duty of the company secretary to ensure compliance with the

Companies Act, but as a matter of operating policy, the Registrar of Companies
does not generally proceed against the company secretary, unless he is also a
director.

Persistent failure to deliver statutory documents on time may also lead to a

director being disqualified from taking part in the management of a company
for a period specified by the court. The company secretary should therefore
take responsibility for coordinating and monitoring statutory filings on a timely
basis.

5.2 Summary of Company Secretary

The Company Secretary:

 is the right hand of the Board;
 is the champion of corporate governance;
 provides guidance to ensure that Directors and Officers are not accused of
insider trading;
 is the general compliance officer;
 is the securities exchange requirements implementer;
 maintains statutory registers;
 submits statutory returns
 is responsible for certification and despatch of reports and accounts;
 is personally in charge of share registration, either through share registrars
or
 by in-house transfer;
 ensures comprehensive shareholder communication;
 monitors share dealings, to reduce risk of insider trading and hostile take-
overs;
 is the risk and insurance manager;
 is the principle executive officer of the retirement funds.

Test Your Knowledge 1.5

 What period has the board to fill the position of company secretary, when
the position becomes vacant?
 What CM form is used to accept the position of company secretary?
 May a body corporate be a company secretary and therefore an officer of
the company?
 Does a company secretary who is removed have the right to insist that his
statement of the circumstances surrounding his discharge be published in
the annual report?

CHAPTER SUMMARY

 Every company must have a secretary. In a public company the secretary

must be suitably qualified for the position.
 The company secretary is responsible for his own actions as an officer of
the company.
 The secretary’s duties and responsibilities should be defined in his contract
of employment.
 The appointment or removal of the secretary is a matter for the board and
must be notified to the Registrar of Companies. In the case of listed
companies, a notice should be placed on SENS, thereby notifying the
securities exchange and shareholders.
 The onus is on the company secretary to advise the board if they are acting
in breach of certain legal requirements. In order to do this properly it is
essential that the company secretary has detailed knowledge not only of
statutes such as the Companies Act, but also detailed knowledge of the
company’s Memorandum and Articles of Association. Professional
knowledge should be kept up to date through reading materials and
continuing professional development programmes.
 The secretary should act as the board’s communicator, particularly in
matters of public awareness.
 The secretary is also a focal point of communication to the company’s
shareholders.
 CHAPTER 2

The Directors
CONTENTS
1. What is a director?
2. Appointment of directors
3. Vacation of Office and removal
4. Rotation of directors
5. Directors’ duty of care and disqualification of directors
6. Directors’ fiduciary duties
7. The powers of directors
8. Loans to directors
9. Directors’ duty of disclosure
10. Shadow and alternate directors

LEARNING OUTCOMES

This chapter looks at the different types of director and how they are
appointed and removed. It also covers their powers, duties, responsibilities
and liabilities. Company secretaries must be in a position to provide directors
with concise and accurate advice on these matters and directors will often rely
on such advice.

After reading and understanding the contents of this chapter and looking at
the Practice Questions, you should be able to:

 Distinguish between the different types of director.

 Explain the procedures for the appointment, removal and rotation of
directors.
 List the duties and powers of directors.
 Give details of the statutory records concerning directors and what they are
required to disclose.
1. WHAT IS A DIRECTOR?

Companies are incorporated to create a separate legal entity, but they cannot
act on their own; they need people to make the decisions and manage the
company. These people are the directors. Section 169 of the Companies Act
(Chapter 24:03) requires a public company to have a minimum of two directors
and a private company a minimum of one director.

Section 1 of the Companies Act defines a “Director” as “includes any person

occupying the position of director or alternate director of a company, by
whatever name he may be called”.

A director is an ‘officer of the company’ and is an agent of the company.

Directors are the company’s most senior level of management with the right to
take part in the board of management.

The Act does not specify any qualifications that must be held in order to qualify
as a company director. However, a company’s Articles may require that a
director holds a specified qualification, e.g. directors of a residents’
management company may be required to be property owners or tenants of
the particular development.

1 .1 Executive directors

Directors are often employees too. If this is the case, the company, as
employer, is represented on the board by a director who is also an employee.

This potential conflict of interest is anticipated in the specimen articles, which

form article 85 of Table A which prohibits directors from voting at board
meetings on matters in which they may have an interest. A company may
however adopt articles with such terms as it deems suitable.

Directors with specific executive responsibilities are usually denoted by a

special title, such as Finance Director, but their legal position remains the same
as any other director of the company. They are a member of the board of
directors, but are also full-time employees with a clear executive role.

The board of directors may appoint a managing director. Managing directors

have a special position and wider apparent powers.
1.2 Non-executive directors

A non-executive director (NED) is a member of the board of directors without

executive responsibilities in the company. A NED is not an employee of the
company of which he is a NED. However, because he is a director, he is legally
liable in the same way as an executive director. For example, he has the same
legal duties to the company, and carries the same duty of skill and care.

The criteria for selecting a NED are varied, and consideration needs to be given
by the board (or by any appointed nomination committee of the board) as to
the qualities and experience required for the role. NEDs are usually expected
to contribute judgement and objectivity to the deliberations of the board by
bringing relevant experience from outside the company. A NED has to
understand the company’s business, but the experience and qualities required
of a non-executive director can be obtained from working in other industries
or in other aspects of commercial and public life. Non-executives might
therefore include individuals who:
 are an executive director in another company;
 hold non-executive director positions and chairmanship positions in
other companies;
 have professional qualifications (for example partners in firms of
solicitors);
 have experience in government, as politicians or former senior civil
servants.

Non-executive directors may be considered to be “independent” under certain

circumstances. Please refer to Appendix 2 which consists of a summary of the
Code to the King II Report on Corporate Governance 2002.

It should be noted that the term “independent non-executive director” does

not appear in the Companies Act, but in the King II Report 2002, and in the
listings requirements of the ZSE.

A NED should bring an independent and objective view to board decision-

making and this is particularly important in respect of listed companies (see
below). However, it is possible for a NED’s independence to be compromised
under certain circumstances. Checklist 2.1 shows the potential relationships
and circumstances which the Combined Code states may affect the
independence of a NED in a listed company.
The selection and appointment of NEDs is a cornerstone of corporate
governance (see Chapter 9). The guiding principle is that there should be a
sufficient number of independent NEDs on the board of directors to create a
suitable balance of power and to prevent the dominance of the board by one
individual or by a small number of individuals. For listed companies, in which
the chairman/chairperson is an executive director, this may include one of the
NEDs acting as a lead or senior independent NED.

Non-executive director (NED)

A director, who is not an employee of the company, and who has no executive
responsibilities.

Duty of skill and care

The requirement that directors should show the skill of a person with his
knowledge and experience. Executive and non-executive directors are not
differentiated with regard to this duty.

CHECKLIST 2.1 NED INDEPENDENCE

Certain non-executive directors are “independent” and others are not independent.

A non-executive director would not be independent if the NED:

 has been an employee of the company in the last three years;
 has, or has had within the past three years, a material business relationship
with the company;
 has received or receives additional remuneration from the company apart
from a director’s fee, participates in the company’s share option or a
performance related pay scheme, or is a member of the company’s pension
scheme;
 has close family ties with any of the company’s advisers, directors or senior
employees; holds cross-directorships or has significant links with other
directors through
 involvement in other companies or bodies;
 represents a significant shareholder;
 is a professional advisor; or
 has any relationship which could materially interfere with his or her ability to
act independently.
CASE EXAMPLE 2.1

Re Continental Assurance Co of London plc [1997] 1BCLC 48

This was the first indication of the court’s approaches to the status of non-
executive directors. The case involved a holding company, its subsidiary and a
senior bank officer who was a non-executive member of both boards. Both
companies collapsed and it emerged that the subsidiary had made a series of
cash transfers to the holding company in breach of the British Companies Act
provisions on financial assistance. There was a note on the transfer in the
holding company’s accounts. The non-executive director stated that he did not
know of the transfers and that if he had he would have stopped it. The Court
held that any competent director, especially a banker would understand the
accounts and his conduct made him unfit to be concerned in the management
of a company. He was disqualified for three years.

1.3 Other types of director

It is possible for a company’s Articles to allow employees to have the word

‘director’ as part of their title, for example, divisional director, or associate
director, when they are not a director. The title is sometimes given to add
status to senior executives. Even if the position is absolutely clear from the
Articles, it is obviously misleading to have the word ‘director’ in a job title
when that person is not actually subject to the legal duties of a director.

A director may be a person who has not been formally appointed but who is
‘occupying the position of a director’. This type of person is treated as a
director and therefore bears all the responsibilities of being a director without
enjoying any of the authority. Please refer to the definition of “director” in
Section 2 of the Companies Act (Chapter 24:03).

Where there is a group of companies, the solution is often to appoint the

executive to the board of the particular subsidiary with which he is most
concerned. In that case there is no doubt about his status as a full director of
the subsidiary, but not of the parent company. Another practical alternative is
to use a different job title, for example, Head of Sales instead of Sales Director.

1.4 Who can become a director?

There are no formal requirements or qualifications to become a director but
certain categories of individual are excluded.

Section 173 of the Companies Act excludes certain persons from being
appointed as directors. These include, but are not restricted to, persons, if:
 They are bankrupt and not discharged. If a director becomes bankrupt after
appointment, he must immediately resign unless the courts give permission
for him to continue.
 They are disqualified by the court because they have committed certain
criminal offences.
 They are disqualified by the court because during the directorship of a
previous company now insolvent, they were declared unfit to manage.
 The auditor of a company cannot also be a director or company secretary of
that company.
 A minor or any person under legal disability may not be a director.

Test Your Knowledge 2.1

a) What is the difference between an executive and non-executive director?

b) Who is excluded from being a director?

2. APPOINTMENT OF DIRECTORS

The first directors of a company are the subscribers to the memorandum, on

incorporation. Subsequent appointments are governed by the company’s
Articles of Association, which usually state that the board may fill casual
vacancies or appoint additional directors up to the maximum number
permitted. A casual vacancy may arise from the death or resignation of a
director, if an elected director fails to take up office, or for any reason other
than retirement by rotation (see section 4 below). Elections or re-elections of
directors following retirement by rotation or removal must be approved by the
company in general meeting.

At the company’s first annual general meeting, all the directors retire from
office and may be re-elected by the shareholders at the meeting.

A director is appointed, therefore, by being:

 a subscriber to the memorandum when the company is formed;
 individually appointed by ordinary resolution of the company in general
meeting; or
 appointed by the existing board to fill a casual vacancy until the next annual
general meeting.

2.1. Appointment procedure

CHECKLIST 2.2: APPOINTING A DIRECTOR

 The board resolves to appoint the new director.

 The secretary writes to the newly appointed director confirming his
appointment by the board as follows:
a) Requesting personal details which are required to complete Form CR
14, specifically name, residential address, date of birth, nationality
business occupation and other directorships.
b) Requesting signature of the consent section of Form CR 13
c) Obtaining a specimen signature to be lodged at the company’s bank
if the director is to sign cheques on the company’s behalf;
d) Informing the director of the obligation to disclose any interests in
the shares or debentures of the company and to provide any
necessary information regarding these interests so as to make the
relevant entry in the register of directors’ interests in shares and
debentures;
e) Inviting the director to give the appropriate notice of interests in any
of the company’s contracts;
f) Getting the details of how the director wishes to be paid.

 If a listed company, the Zimbabwe Stock Exchange should be notified of the

appointment by the end of the business day following the decision to
appoint the director. The “fit and proper” Schedule Listings Requirements
must be completed, signed and sent to the Listings Department.
 The secretary should update the necessary entries in the register of
directors and secretaries and in the register of directors’ share and
debenture interests.
 The completed Forms CR 12, 13 and 14 should be sent to the Registrar of
companies.
 The company stationery / letter heading which shows the names of all
directors, should be amended.

The King II Report 2002 recommends that the company secretary shall arrange
for the induction of new directors. The induction includes providing the
director with general information, a copy of the Memorandum and Articles,
and copies of annual report and accounts and relevant circulars. A schedule of
the dates of forthcoming board meetings for the year and if appropriate, a
press announcement regarding the appointment should be sent to newspapers
or through the company’s press agents.

Induction arrangements and briefing materials should be prepared as

appropriate, for example, visits to any main operational sites for the business.
If the company is listed, the Listings Requirements require that:
 all directors should receive induction on joining the board and should
regularly update and refresh their skills and knowledge;
 it is the responsibility of the chairman to take the lead in providing a
properly constructed induction programme for new directors that is
comprehensive, formal and tailored, facilitated by the company secretary;
 the company should offer to major shareholders the opportunity to meet a
new non-executive director;
 specific induction and training may be required for non-executive directors
who serve on the key committees of the board (particularly the audit
committee).

Before a director accepts an appointment, the secretary should ensure that the
director is fully aware of his responsibilities, duties and potential liabilities.
There are several books available which could be provided to the director.
Alternatively, the company may prefer to produce in-house guidance.

Shareholder proposal to appoint a director

Subject to the provision of the Articles, shareholders may move the

appointment of an additional director at any General Meeting of shareholders.

Zimbabwean Company law does not prescribe a maximum age. UK law

however provides that directors may not continue to serve after their 70th
birthday.

The Articles of Association of certain Zimbabwean companies however often

prescribe a maximum age for directors.

2.2. Directors’ service agreements

It is useful to the director and the company if the terms of employment for
executive directors are set down in a formal service agreement. As non-
executive directors are not employees of the company, they do not have
service agreements. Instead they usually have simple letters of appointment.

Executive directors however may have service contracts, which the King II
Report 2002 recommends should not be for a period in excess of 3 years,
unless the consent of shareowners is obtained.

2.3. Directors’ remuneration

The King II Report 2002 recommends:

 Remuneration should be sufficient to attract and retain executives of the
quality required by the board.
 Executive remuneration should be considered by the remuneration
committee.
 Membership of the remuneration committee should be disclosed in the
annual report.
 Companies should list full detail of all benefits received by directors in the
annual report. (The JSE Listings Requirements have since made this
mandatory for all listed companies.)
 Performance-related elements should constitute a substantial part of the
earnings of executive directors.
 Non-executive directors may receive shares as part of their remuneration.
 Share options, however, because of the apparent dilution of independence,
should be subject to the prior approval of shareowners.

2.4. Change of particulars

The Registrar of Companies requires any change of residential or business

address to be contained in the form CR 14, submitted upon the next change in
the directorate.

SAMPLE WORDING 2.1

Special resolution validating acts of directors

That all appointments and reappointments of directors of the company made and
all acts of the directors prior to the date of this resolution be confirmed and
ratified, notwithstanding any defects in any such appointments or
reappointments that might otherwise cause their validity to be in doubt.
Test Your Knowledge 2.2
a) Which form is used to notify the Registrar of Companies of the
appointment of a director and when must it be sent?
b) What other documentation would you need to formalize the
appointment of a new director?

3. VACATION OF OFFICE AND REMOVAL

3.1. Vacation of office

A director may vacate his office by giving his resignation in writing to the
company, or by not offering himself for re-election when his term of office
comes to an end under the rules of rotation. The date of resignation is the date
the letter is received, unless it states a subsequent date, and does not have to
be approved by the board to be effective, although there may be further
provisions in the Articles.

The office of director is obviously vacated on death.

Where companies have only one director and that director resigns or dies, any
shareholder can request the company secretary to convene a shareholders’
meeting to appoint a new director. This would also be the case if a company
with more than one director found itself with no directors as a result of mass
resignations or some collective fatality.

3.2. Removal of a director

Section 175 provides that a company may remove a director at any time by
ordinary resolution with special notice regardless of anything to the contrary in
the Articles or any agreement with the director.

The director concerned however has the right to make representations, in

writing and at the General meeting.

Removal does not deprive the director of any right he may have to
compensation or damages payable in respect of the termination. The
provisions of the Act must be strictly complied with and it may be advisable to
obtain legal advice as to the precise procedure.
If the Articles allow, a director can be removed from the board by fellow
directors by a notice given to him by them all or by a board resolution. If the
Articles empower the board to call on a director to resign and cease to hold
office, and he does not, the other directors must act in the interests of the
company.

4. ROTATION OF DIRECTORS

The Companies Act imposes no general requirements for directors to retire by

rotation, but provisions do appear in the Companies Act’s Schedule 1, Table A,
articles 90 to 98. These are as follows:
1. At the first annual general meeting of the company, all the directors
must retire and be elected by the company in general meeting.
2. At subsequent annual general meetings, one third, or the nearest to one
third of the directors must retire and stand for re-election.
3. Those retiring will be the ones who have been the longest in office since
their last election. For directors appointed on the same day, the
retirement is decided by agreement or, failing that, by lot (i.e. by
random choice).
4. If nobody stands against a retiring director, the director is automatically
re-elected, unless it is resolved not to reappoint the director, or not to
fill the vacancy.

� Note: Companies can adopt Articles which have different terms to those
contained in Table A, at any time, by special resolution, in terms of the
provisions of Section 18.

Managing and other executive directors are exempt from the requirement to
retire by rotation. The rotation clauses enable the company not to re-elect a
director at the expiry of his period of office if it wishes to do so, although it
maybe useful to have alternative powers of removal in the company’s Articles.

4.1. Listed companies

The Articles of most listed companies provide for the election and re-election
of directors at the annual general meeting.

Section 174 of the Companies Act requires motions, for the appointment or
reappointment of directors to be voted on individually unless the meeting has
first agreed, without any vote against, the simultaneous appointment, or
reappointment of more than one director by a single resolution.

Test Your Knowledge 2.3

a) What are the provisions in the Articles of Association regarding the

retirement by rotation of directors?

5. DIRECTORS’ DUTY OF CARE AND THEDISQUALIFICATION OF DIRECTORS

Section 190 of the Companies Act provides that where a company has suffered
damages or loss as the result of any wrong, breach of trust or breach of faith of
a director, the director shall be liable.
CASE EXAMPLE 2.2

Re City Equitable Fire Insurance Co Ltd [1925] Ch 407

The directors of an insurance company delegated virtually all aspects of

management to its managing director. The director stole large amounts of cash
from the company, largely because of inadequate supervision by the other
directors. It was held that the directors had been in breach of their duty of skill
and care. In his judgement, Romer J laid down the directors’ duties of skill and
care:
 The director must exhibit the skill that would be reasonably expected of a
person of his knowledge and experience.
 The director is not bound to give continuous attention to the company
affairs.
 A director may delegate his duties to some other official in the company and
trust him to perform them properly.

CASE EXAMPLE 2.3

Re D’Jan of London Ltd [1994] BCLC 561

A liquidator brought proceedings in negligence against a director. Hoffmann LJ

stated that the standard expected of a director today was as stated in s. 214 of
the Insolvency Act 1986 (where the provisions regarding wrongful trading are to
be found), namely that a director must show the higher of either the skill
actually possessed by him or that which would objectively be expected of such a
director of such a company.

5.1. King Report 2002

The King Report on Corporate Governance provides the following guidelines

for directors:
 It is essential that directors have sufficient time to devote to their duties.
 They should be informed about the financial, social and political
circumstances in which the company operates.
 Need to take informed decisions.
 Must avoid conflicts of interest.
 Disclose potential conflicts of interest
 Act independently.
 Act with enterprise, while having regard to the interests of all stakeholders.
 Openly inform outsiders of all material matters which affect the company’s
business.
 Exercise utmost good faith, honesty and integrity;
 Exercise the care and skill which can be expected of them.
 Act in the best interests of the company as a whole.
 Ensure strategy is agreed by the Board.
 Insist board papers are sent timeously.
 Maintain confidentiality with regard to matters learnt as a director.
 If in doubt obtain independent professional advice (the company secretary
is usually the co-ordinater, to ensure the appropriate professional is
consulted, that he is properly briefed and that the questions of all directors
are simultaneously addressed).
 Ensure the company prepares budgets, against which to monitor
performance.
 Ensure that procedures are in place to verify information sent to the Board.
 Ensure that an affirmative action plan is being followed.

The director owes a fiduciary duty to the company and not to individual
directors.

5.2. Duties of the Director under Common Law

Each director has the duty:

 to act in good faith;
 to act with the requisite care, diligence and skill;
 to act within their powers, as set out in the Memorandum and Articles;
 to act as a Board;
 to retain their independence;
 to avoid conflicts of interest.
CASE EXAMPLE 2.4

Re Produce Marketing Consortium Ltd (No. 2) (1989)

This was a British company that imported and stored fruit on a commission
basis. Although initially successful, it lost customers and, by 1981 was trading at
a loss. By 1985 the directors knew that they had to find new business and
contracted with R Ltd, an importer of citrus fruit and an unsecured creditor. The
company persuaded the bank to extend overdraft facilities, which were
granted. In January 1987 the accounts for 1984/85 and 1985/86 were
submitted late and the auditors referred to the company’s present trading
position as insolvent and warned of fraudulent trading. The directors believed
that their company was the best placed to service R’s contract as it held R’s
goods in store. They continued to trade, paying off the overdraft and increasing
the credit line with R. R realised what was happening and put the company into
creditor’s winding up. The liquidator asked for the directors to contribute
£100,000.

The judge dismissed any defence that the directors were unaware because of
late submission of accounts. From their position the directors had access to the
relevant financial information, which they would be reasonably expected to
know. But they would also be expected to know more; their optimism that R Ltd
would wait forever for payment was unjustified.

The judge ordered payment of £75,000.

5.3. Section 267 of the Act: Directors to be summonsed to attend creditors’

meetings.

Section 267 provides that in every wind-up of a company, which is unable to

pay its debts, the Master or the Court may summon any director or officer to
attend the first and second meetings of creditors and every adjourned first and
second such meetings.
Test Your Knowledge 2.4

What are the main provisions for which a director may be disqualified?

6. DIRECTORS’ FIDUCIARY DUTY

Directors have a fiduciary duty in other words, a position of trust, and they
must act in the interests of the company (Re Lee Behrens (1932)). The duty is
owed to the company and not to individual shareholders or creditors, as seen
in Percival v Wright (1902).

Traditionally, the company has been seen as the shareholders acting in general
meeting, but this has now been modified by case law and by Companies Act.

 In Charterbridge v Lloyds Bank (1970) it was decided that if the company is

part of a group, the group interest can be considered.
 Section 189 requires directors to consider the interests of employees, as
well as the interests of members.

However, as outlined in Hutton v West Cork

Railway, the employees’ interests must coincide with those of the company.
The directors must consider the interests of the company’s employees, but not
to the detriment of the interests of the company.

A director is under a duty to retain his freedom of action; in other words, he

cannot contract to vote according to instructions from a third party. A director
must also exercise his powers for a proper purpose. Hogg v Cramphorn (1967)
and Bamford v Bamford (1969) both illustrate the most common abuse of
proper purpose: issuing shares to prevent a takeover bid.

Fiduciary duty
The duty of the directors to act in good faith in the best interests of the
company, avoiding any personal conflict of interest.

CASE EXAMPLE 2.5

Percival v Wright [1902] 2 Ch 421

The directors of the company bought some shares in the company from another
member. At the time of the acquisition negotiations were taking place in respect of
a takeover of the company by a third party, but the directors did not tell the
member from whom they bought shares about these negotiations. Had the
takeover gone through, the directors would have made a profit on the shares. The
member sued to have the sale of the shares to the directors set aside. It was held
that he was not entitled to have the sale cancelled. The sale was binding. The
directors had no duty to inform him about the negotiations for the takeover.

CASE EXAMPLE 2.6

Hogg v Cramphorn Ltd [1967] Ch 254

Directors of a company were anxious to fight off a takeover bid. They issued shares
to trustees to be held for the benefit of employees. The trustees were helped to
pay for the shares by means of an interest free loan from the company. It was held
that the directors had broken their fiduciary duty in making these arrangements.

The court accepted that the members, by a simple majority in general meeting,
could ratify (i.e. approve) the directors’ acts. If the directors were to seek this
ratification, the shares issued to the trustees could not be used to vote for the
ratification.

6.1. Conflict of interest

Sections 186 of the Act make provision for directors to declare their interests
in contracts.
 A general declaration may be made in writing, listing the director’s shares,
directorships and other interests. It gives notice to the other directors that
the provider of the declaration should be regarded as interested in a
contract entered into with any of the specified companies or organisations.
The declaration is only valid to the end of the financial year. The
declaration is circulated to directors, usually at a board meeting, with each
director signing that he or she has seen the declaration. The declaration is
retained by the company secretary.
 A director (regardless of whether or not a general declaration has been
provided) is required to make a specific declaration to the other directors,
upon the matter being discussed at a board meeting. The minutes are
required to contain details of the declaration. See section 186 of the Act.
6.2. Secret profits

Directors must not make secret profits or enrich themselves without the
knowledge and consent of the shareholders. The most extreme example of this
doctrine is found in Regal (Hastings) v Gulliver (1967).

The leading South African case is Robinson v Randfontein Estates Gold Mining
Co Ltd 1923 AD 155.

CASE EXAMPLE 2.7

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

Regal (Hastings) Ltd owned a cinema. Through their involvement in the cinema
trade, the directors learnt that the other two cinemas in the town were for sale.
Obviously anyone owning all three cinemas had something of greater value than
simply the three constituent parts. They wanted somehow to acquire the two
other cinemas with a view to selling all three. Regal (Hastings) Ltd had insufficient
capital to acquire the other two cinemas itself and so formed a subsidiary
company in which it held some of the shares. The other shares were bought by
directors of Regal (Hastings) Ltd. The cinemas were duly acquired and then the
shares in both Regal (Hastings) Ltd and the subsidiary were sold.

It was held that the directors of Regal (Hastings) Ltd who had acquired and then
sold shares in the subsidiary must account to Regal (Hastings) Ltd for the profit
that they had made. Had they not been directors of the company that owned the
first cinema, they would not have had either the knowledge or the opportunity to
make the profit on the shares. Had the directors disclosed this profit to the
members in general meeting, and had the members approved it, the directors
would have been able to retain it.

It follows from this that if the directors had obtained the consent of Regal’s
shareholders in general meeting, they could have retained the profit. The
directors’ profits need not be at the expense of the company before they have to
account for it. Essentially a director is expected to act honestly and in the belief
that he is acting for the benefit of the company. Directors must not make a
personal profit from a transaction, even if it also benefits the company.
CASE EXAMPLE 2.8

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

The directors allotted shares to alter the balance of voting power to allow a
takeover bid to take place. It was held that although they believed it was for
the benefit of the company, the board’s decision to alter the balance of voting
power was an abuse of their fiduciary duty to act in the best interests of the
company as a whole and not ‘some collateral purpose’.

6.3. Breach of fiduciary duty: remedies

The following remedies are available to a company:

 If failure to disclose an interest results in the company having the ability
to avoid the contract and make the director account for any profits;
there is also a criminal penalty of a fine to the statutory maximum.
 Directors are also liable for damages through negligence when it is
appropriate.
 If the company considers it appropriate, the director can be dismissed.

6.4. Robinson Case

In the well known South African case, which was decided in 1921, of Robinson
v Randfontein Estates Gold Mining Co. Ltd.: when the board could not finalise a
deal with the seller, the chairman purchased the farm, knowing that the
company would ultimately need to buy the land.

The Appellate Division ruled that the chairman was not justified in making a
profit from his office nor in placing himself in a position in which his personal
interest conflicted with the duties arising out of his fiduciary position. He was
accordingly ordered to repay the R430 000 difference between the purchase
price of R120 000 and the sale price of R550 000.

6.5. Zimbabwean Legislation

A. THE COMPANIES ACT AND THE COMMON LAW PROVIDES:

 Duties of Directors
• When a director has an interest in a contract he is required:
o to disclose his interest to the other directors;
o to usually do this in writing;
 o to ensure that any disclosure of an interest in a contact is
recorded in the minutes of the board meeting, if made at the
board meeting, or at the next meeting of the board.
• The director’s powers must be exercised independently and objectively.
• What serves the best interests of the company is what is important.
• The director is required to adopt the stance of a trustee, in which the
interests of the company take preference over his own interests.
• A director is not a dummy of the person/s who appointed him. A
director must exercise his or her discretion in the interests of the
company.
• Powers must be exercised for the purpose for which they were
conferred.
• Director’s powers exercised for an improper purpose:
o may result in the director being personally liable: which means
his estate will be liable for any damages incurred;
o if the third party knew the director was acting for an improper
purpose a transaction is voidable, at the company’s discretion.
 Directors must act within the limits of their authority. Directors who act
in contravention of the provisions of the Articles of Association or any
delegation of authority may be personally liable for any damages.
 To act in good faith.
 Avoid conflicts of interest.
 Not compete with the company.
 Act in the interests of the company.
o In S v Hepker and Another 1973 (I) SA472(w) at 484, the Court rule“
Directors are not knowingly to bind their companies to transactions
which are unprofitable to the company …”
 Directors may not act in the interests of the body of shareholders, but in
the interests of the company.
 The interests of certain shareholders should not be given preference
over others.
 Secret profits should not be made.
 Who may challenge the actions of a Director The actions of a director may
be queried:
 by his fellow directors;
 if the board does not act against a director who has acted
inappropriately, within one month, any shareholder may institute an
action;
 by the shareholders in general meeting;
 by the High Court;
  in certain circumstances the Registrar of Companies and the Master of
the High Court.
 Personal Liability of Directors
 Company’s name and registration number;
 Reckless carrying on of business;
 Failure to exercise proper control;
 Continuing to trade when in financial difficulties;
 Incurring debts which cannot be repaid;
 Actions in conflict with fiduciary capacity;
 Actions which exceed company’s limits of authority;
 Contravening the provisions of legislation.

B. CRIMINAL PROCEDURES AND EVIDENCE ACT

The Criminal Procedures Act provides that a director shall be:

 deemed to be guilty of any offence committed by the corporate body;
 prosecuted, either jointly or apart from the body corporate.

C. THE CRIMINAL LAW (CODIFICATION AND REFORM) ACT

Directors may be jointly criminally liable together with their companies for
certain criminal acts.

D. OTHER LEGISLATION

Company directors have a potential liability arising from the provisions of the
following legislation:
 Competition Act
 Income Tax Act
 Companies Act
 Insolvency Act
 Labour Act
 Access to Information Act and Protection of Privacy Act

6.6. Corporate Governance

Who is obliged to comply?

Although developed in South Africa, the King Code has relevance to

Zimbabwe in view of the two countries’ economic and legal similarities.
The code to the King Report on corporate Governance 2004 applies to:

 all companies listed on the main board of the JSE;

 all companies with shareholder equity of more than R50 million,
 banks, financial and insurance entities as defined in various financial
servicesActs; and
 large public entities as defined in the Public Entities Act.

Some aspects of Corporate Governance

Corporate Governance includes:

 the need for the board, as a body to retain effective control;
 the right of access by directors to the company Secretary, who may in
turnmake the services of other professionals available, at company
expense.
 the need for an Audit Committee and a Remuneration committee.
 Consisting of a majority of non-executive directors and a Chairman
who is a non-executive director.
 With powers delegated by the board.
 the responsibility of directors to maintain internal controls;
 risk management: both financial and operational;
 environmental impact of the company’s business;
 going concern: the need for directors to certify that there is no reason to
 believe that the company will not continue in operation for the coming
year;]
 employment equity is being effectively managed;
 ethics: i) of the highest standards;
ii) a code of ethics exists.
 Directors contracts are not for more than 5 years;
 Stakeholder communication is of the highest order.

6.7. Listing Requirements of the Zimbabwe Stock (“ZSE”)

The ZSE Listing Requirements (inter alia):

 exclude directors from voting on several matters;
 require all newly appointed directors to lodge a “fit and proper person”
declaration.
 Directors must not deal in their listed securities while they are in
possession of material price sensitive information;
 every appointment or change in directors is to be published on ;
  All listed companies are required to report on compliance with the
provisions of the King Code on Corporate Governance. Reasons for non-
compliance must be given, in the annual financial statements/annual
report.

7. THE POWERS OF DIRECTORS

7.1. Directors’ and Officers’ Liability:

Proviso (ii) of section 190 as read with section 349 of the Act authorises a
company to insure and pay the premium to indemnify a director or officer
against the financial consequences which arise from a claim being successful
against the personal estate of a director or officer.

7.2. Delegation

Directors may delegate any of their powers to any committee consisting of one
or more directors. They may also delegate to any managing director or any
other executive director any of their powers that they consider suitable,
although the King II Report 2002 recommends that certain specific matters are
reserved for whole board consideration only.

The courts have laid down the following principles governing liability where
directors delegate a matter:
 Directors have, both collectively and individually, a duty to acquire and
maintain a sufficient knowledge and understanding of the company’s
business to enable them properly to discharge their duties.
 While directors are entitled (subject to the Articles of Association of the
company) to delegate particular functions to those below them in the
management chain, and to trust their competence and integrity to a
reasonable extent, the director is not absolved from the duty to
supervise the delegated functions. In this situation it is therefore
possible to delegate authority, but not responsibility.

Questions may arise as to whether the delegation has been made to the
appropriate person; or whether the individual with overall responsibility
should have checked how his subordinates were discharging their delegated
functions.
Where there is an issue as to the extent of a director’s duties and
responsibilities in any particular case, the level of reward that he or she is
entitled to receive or which he or she may reasonably have expected to receive
from the company may be a relevant factor in resolving that issue. It is not that
the fitness or otherwise of a respondent depends on how much he or she is
paid. The point is that the higher the level of reward, the greater the
responsibilities that may reasonably be expected (prima facie, at least) to go
with it.

The company secretary has an important practical role to play in ensuring

authority is delegated responsibly by directors. For example:
 if authority needs to be delegated for a specific transaction, full details
of the delegated authority should be stated in the board minute. This
provides all parties with an understanding of which persons are
responsible for specific actions.
 if authority needs to be delegated for re-occurring transactions, formal
terms of reference for a committee should be drawn up specifying who
should be authorised to handle the transactions, the constitution and
the remit of the committee.

Test Your Knowledge 2.6

a) To whom does a director owe his duties?
b) What is a secret profit? What should a director do to make sure that a
profit that he is making is not secret?
c) What should a director do to avoid potential claims of conflict of
interest?

8. LOANS TO DIRECTORS

Section 177 of the Companies Act (Chapter 24:03) prohibits loans or the
provision of security to directors of the company, directors of its holding
company, directors of its subsidiaries and directors of subsidiaries of its holding
company, subject to certain exceptions.

The exceptions include, but are not restricted to, the following:

 Loans or security provided, with the consent of members holding at least

nine-tenths of the issued capital in the case of a private company wich is
not a subsidiary company.
  Loans or advances to a director to enable him or her to perform his or
her duties as a director or manager.
 Loans by a business which regularly carries on the business of making
loans.
 To enable a director to acquire shares in the company.

One category of transaction should be distinguished from loans. Articles of

Association commonly empower directors to use their company’s funds to
meet the expense of carrying out their functions as directors. When a director
spends the company’s money for that purpose, he does so as an agent of the
company and not as a borrower.

9. DIRECTORS’ DUTY OF DISCLOSURE

Disclosure for directors extends to statutory information about any interests

they may have in contracts or the company’s shares or debentures.

9.1. Statutory information

Register of directors and secretaries

Every company must keep a register of directors and secretaries at the

company’s registered office.

The register of directors must contain the following information:

 full name, including any previous names;
 nationality;
 residential address subject to a confidentiality order being agreed;
 date of birth;
 business occupation;

Register of directors’ interests

The Companies Act imposes certain duties on directors to prevent them from
exploiting their privileged position within the company and to avoid conflicts of
interest. To achieve this aim directors are obliged to make full disclosure of
certain interests so that others connected with the company are kept fully
aware of the true interests of the director.
Sections 186 of the Companies Act refers to the need for directors to declare
their interests in contracts. These obligations include, but are not restricted to,
the following:
 The requirements apply to any proposed contract which is the subject of
a resolution or in respect of which power to enter a contract has been
given to one or more director or officer.
 A written declaration of interest is sufficient provided it gives detail of
the nature and extent of the interest.
 A general written declaration of interest shall only be effective to the
end of the financial year.
 A declaration shall be made to any board meeting at which the contract
in question is considered.
 The declaration of interest shall be recorded in the minutes of the board
meeting.
 Any interested director of officer shall, before entering into the contract,
obtain a resolution by the board, noting his or her interest and
instructing that the contract be entered into.

Test Your Knowledge 2.6

Under what circumstances may a loan be granted to a director?

10. SHADOW AND ALTERNATE DIRECTORS

10.1. Shadow directors

A shadow director is defined in the British Companies Act 1985 s. 741(2) as
‘a person in accordance with whose directions and instructions the
directors of the company are accustomed to act’.

The Zimbabwean Companies Act does not define “shadow director” but
defines “director” widely. See Section 2 of the Companies Act.

The King II report on Corporate Governance 2002 recommends that shadow

directors should be discouraged.

A person who either controls the management of a company, or upon whose

instruction the directors act is referred to as a shadow director. A professional
adviser is not a shadow director as their advice is usually limited to a particular
part of the business such as accounts or commercial property transactions. In
the British case of Re Unisoft (1994) the definition was explained as requiring
that the outsider control the whole of the board or at least a governing
majority to qualify as a shadow director. A shadow director may be an outside
person or corporate body who for commercial reasons is influencing the
directors’ actions. Even a controlling shareholder or a creditor may be
regarded as a shadow director, but there is little case law for these instances.

Practical steps which can be taken to avoid potential shadow directorships

arising are:
 professional advisers should have a letter of engagement, explicitly
setting out their terms of reference and expressly stating that they are
not to be treated as directors of the company;
 it is good practice to ensure that third parties are made aware that
professional advisors are not acting as directors of the company;
andadvisors (and senior employees) should avoid frequent attendance
at board meetings if this is not necessary.

CASE EXAMPLE 2.9

Secretary of State v Deverell [2000] 2 All ER 365

A British company went into liquidation with £4.6 million of deficit.

Disqualification of the directors was applied for and also against two people
involved in the management of the company and described as ‘consultants’.
At first instance the judge held that the consultants were not ‘shadow’ or ‘de
facto’ directors, but this was reversed in the Court of Appeal. The Appeal Court
was unhappy with the use of phrases describing boards as the cat’s paw,
puppet or dancing to the tune of the shadow director. They implied more than
what the statutory definition required. The question was simply one of
whether the alleged shadow director had real influence in the corporate affairs
of the company.

Shadow director
Any person in accordance with whose directions or instructions the directors
are accustomed to act, except in those cases where that person gives advice in
a professional capacity.

10.2. Alternate directors

An alternate director is a person appointed by a member of the board to act

and speak during periods of absence or incapacity of the director. An alternate
may only be appointed if the Articles of Association provide for it, as in Table A,
Articles 79 and 80. During his or her appointment the alternate director is
certainly a de facto director. Table A, Article 79 states that a director can
appoint any other person as his alternate, subject to that person being
approved by the board of directors.

The particulars of an alternate director should be entered in the register of

directors and a form Cr 14 lodged with the Registrar of Companies. Alternate
directors are subject to the same rules as directors with regard to disclosure of
interests in shares and debentures of the company and transactions with the
company. They may act only in the absence of the appointing director, who
may also revoke the alternate’s appointment at any time by notice to the
company. If an appointing director ceases to hold office, for whatever reason,
the alternate director will automatically cease to hold office.

Alternate directors are entitled to:

• Attend and vote at any such meeting at which the director appointing him is
not personally present.
• Perform all the functions of his appointer as a director in his absence.
The alternate director will not, however, be entitled to receive any
remuneration from the company for his services, although this does not
preclude the negotiation of a separate fee.

Test Your Knowledge 2.7

a) Define the term ‘shadow director’.

b) An ‘alternate director’ is entitled to the same notice, attendance and
voting rights as his appointer. What is the sole difference between the
two?
c) What are the provisions in respect of the interests of an alternate
director? Why are these provisions necessary?
d) Explain the forms which have to be submitted, upon the appointment of
a director.
e) Set out the steps which a director should take to avoid claims that he hid
a conflict of interests.

CHAPTER SUMMARY

 Directors must act as a board and not as individuals.

 The final decision as to whether a person is a director or not rests on
interpretation of their functions (e.g. by the court) and not the
individual; directors cannot deny their true position or evade their
statutory obligations by removing the word ‘director’ from their title.
 There is no statutory distinction between an executive director and a
nonexecutive director.
 There are no statutory qualifications to become a director.
 The company’s first directors are the persons named in the
Memorandum, upon formation of the company. Subsequently, the
appointment of a director to fill a casual vacancy, arising from the
resignation of a director, is often made by fellow directors. The decision
as to whether to re-elect the director is a matter for the next annual
general meeting.
 The directors can exercise all the powers of the company except those
functions removed by statute or the Articles; if both are silent the
directors’ actions are the company’s actions.
 Directors can be disqualified if they fail to perform their duties.
 The directors are at the apex of company administration, accountable to
the shareholders.
 Loans to directors (with a few exceptions) are generally prohibited.
There are also restrictions on property transactions with directors.
 The fiduciary duties of the director include a duty to make full
disclosures of any matters which may give rise to a conflict of interest.
 Having someone who might be deemed a shadow director is an
undesirable situation.
 Company secretaries need to be aware of the law and regulation relating
to persons appointed to act as alternate directors in the absence of the
appointed director.
 CH APTER 3

The Members
CONTENTS
1. What is a member?
2. Types of shareholders
3. Members’ rights, duties and liabilities
4. The register of members

LEARNING OUTCOMES

This chapter looks at who is a member and the conditions which need to be
met for someone to become a member, including the different types of
shareholders and restrictions on membership. The section on the members’
rights explores members’ duties and liabilities. This chapter also deals briefly
with the register of members.

After reading and understanding the contents of this chapter and trying the
Practice Questions you should be able to:
 Define and explain the term ‘member’.
 Understand when to refuse entry to the register of members for certain
persons.
 Describe and appreciate the principal rights of the members.
 Understand the duties and liabilities of members.

1. WHAT IS A MEMBER?

Generally, the members of a company are the shareholders. They are:

 the subscribers to the company’s Memorandum of Association who
become members when the company is incorporated; and
 every other person who agrees to become a member and whose name
isentered on the register of members.
Two conditions have to be met for a person to become a member:
 A person cannot become a member unless he agrees to do so.
 The shareholder’s name must appear on the register of members. If his
name has not yet been entered, he may be the beneficial owner of the
shares concerned, but he is not entitled to the full rights of membership.

Member
A shareholder in a company with a share capital, or a guarantor in a company
limited by guarantee. A shareholder only becomes a member when his name is
entered in the register of members.

Register of members
The statutory register of information which is the definitive list of members of a
company.

The owner of shares in any company may choose to have their shares
registered in the name of a nominee. This applies to private, public and listed
shares.

The Zimbabwe Stock Exchange has not yet adopted the practice of the JSE in
regards electronic share transfers. Students may be interested in the JSE
STRATE

With the advent, for companies listed on the JSE Securities Exchange South
Africa (“JSE”), of STRATE (share transfers totally electronic) all shares traded on
the JSE are required to be in electronic form. Shareowners may choose either
to leave their shares with a STRATE CSDP participant, in electronic form, in
which case the shares will be held in a depository and registered in the name
of the CSDP participant, or alternatively the shareowner may ask for the shares
to be converted into a share certificate, by a process known as “materialised”.

Shareholders who hold shares in a certificate form would, should they wish to
sell their shares on the JSE, have to convert the shares into electronic form by
a process known as “dematerialised”.

A shareowner who chooses to have his shares registered in the name of a

nominee (including dematerialised shares held by CSDP participants) would
require a letter of authorisation from the nominee in order to qualify to vote at
annual general meetings of the company concerned.
As highlighted above, once the ZSE adopts the electronic mode of share
transfer, the system will most probably be similar to the JSE STRATE

1.1. Members of private companies

Although the principles of being a member of private company and a member

of a public company are similar, there are some differences, the most notable
of which are summarised below.

Where there is a single member, the quorum for general meetings is one, and
this overrides any contrary provisions in the Articles of Association. Any
decision taken by the single member that would usually be considered in a
general meeting must be evidenced by a written record. This is for the
protection of the individual, both as a director and as a shareholder.

Members of private companies are also permitted to approve matters by

written resolution, instead of in general meetings. This additional flexibility is
not available to members of public companies.

1.2. Members of public companies

The minimum number of members for a public company is one. If a public

company carries on business for more than six months without any member,
any person who knowingly causes it to do so shall be personally liable jointly
with the company for the company’s debts. See section 32 of the Act.

1.3. Members of companies limited by guarantee

In companies limited by guarantee, which include not-for-profit organisations,

incorporated in terms of Section 26 of the Companies Act, the members do not
hold shares but guarantee to pay a specified sum, of say $10, should it be
necessary. The subscribers to the Memorandum of Association become
members upon the company being registered. Subsequently, each person
becomes liable under the guarantee in the Memorandum of Association, that
in the event of the company being wound up, he or she will contribute an
agreed amount, typically of $10, to the company’s assets. As with members
holding shares, he or she does not acquire the status of member until he is
entered on the register of members.
Companies limited by guarantee
In a company limited by guarantee the Memorandum of Association contains
an undertaking by its members to contribute a specified amount toward the
payment of its debts and the expenses of winding up while he is a member or
within one year after he ceases to be a member.

1.4. Restrictions on membership

As a general rule, any person or legal entity may become a member of a public
company and their ability to do so is determined by the ordinary rules of the
law of contract. The members and the company are bound by the provisions of
the Memorandum and Articles as if they had been signed by each member.

The Articles of a private company however require:

 the right to transfer its shares to be restricted;
 the maximum number of members to be limited to 50;
 prohibition of any invitation to the public to subscribe for any shares or
debentures.

Partnerships, clubs and associations

An unincorporated body, such as a partnership, club or association, and a trust

not registered under the Companies Act, should not be accepted as a member
of a company because it does not possess a legal personality. If such a body
wishes to hold shares, the shares should be registered in the name of a trusted
individual or individuals of the unincorporated body (e.g. a club secretary, club
treasurer or trustee). Alternatively, the shares could be registered with a
person having a legal personality such as a bank nominee or a trustee
company.

Minors

Although the Companies Act does not prevent a minor from becoming a
member, it is not good practice to accept minors as members of a company in
their own name, as a minor does not have contractual power. Shares may
however be held by the legal guardian on behalf of the minor.

1.5. Letters of allotment

An allotment letter is confirmation that shares have been allotted to an
individual and that share certificates will be issued by a certain date.

The names of unregistered transfers, the holder of a letter of allotment and

the owner of a share warrant do not appear in the register of members, so
they are not members of the company. The Articles may confer any of the
rights of a member on the owners of share warrants and may impose any of
the obligations of a member on them. If the holder of a share warrant or letter
of allotment is not expressly put in the position of a member by the Articles, he
is not a party to the statutory contract between the company and its members,
in terms of which they undertake to conform to the provisions of its
Memorandum and Articles of Association.

Letter of allotment
Written confirmation that shares have been allotted to an individual and that
share certificates will be issued by a certain date.

1.6. Cessation of membership

A person ceases to be a member of the company when he ceases to be

registered in the register of members. This happens in the following ways:
 voluntary transfer of shares (i.e. the holder sells his shares);
 transmission of shares on death, bankruptcy or mental disorder;
 compulsory transfer of shares, i.e. enforcement of a lien;
 redemption of redeemable preference shares.

Lien
A notice of lien is a statement that share certificates have been deposited as
security for a loan or other advance. A company receiving such notice should
note it, but not acknowledge receipt.

2. TYPES OF SHAREHOLDER

2.1. Institutional shareholders

Shareholders (or members) are the owners of the company. This puts a burden
on institutional shareholders to act in the best interests of their investors. This
includes maintaining effective channels of communication with the board to
understand the company’s aims and objectives and to support the board by
positive voting, unless they have a good reason to do otherwise.
Institutional shareholder
Pension funds and insurance companies; this group of investors usually holds
shares in companies quoted on the ZSE.

2.2. Nominee shareholders

If the beneficial owner of shares does not wish to have the shares registered in
his own name, it is possible to have them registered in the name of a person,
group of people or a company as a nominee shareholder. The beneficial owner
of the shares has no contact with the company, since the company has to
address all communications to the registered shareholder, in this case the
nominee. The identity of the beneficial holder must be disclosed upon request
by the company to the nominee shareholder.

A company planning a takeover bid might also build a stake in the target
company through nominees.

Nominee shareholder
A person, group of people or company whose name appears on a company
register of members instead of the beneficial owner.

Test Your Knowledge 3.2

a) What is an institutional shareholder?
b) What is a nominee shareholder?
c) What are the key provisions in respect of joint shareholders?

3. MEMBERS’ RIGHTS, DUTIES AND LIABILITIES

Essentially the rights and liabilities of the members are expressed in terms of
the rights and liabilities attaching to the types of shares they hold. These are
usually defined by a combination of the Companies Act and the company’s
Articles of Association.

3.1. Members’ rights to information

The principal rights of members to information about the company are:

 to inspect, and receive copies of minutes of general meetings and of the
shareholders register;
 to receive a copy of the annual accounts at least 21 days before the
general meeting at which they are to be laid;
  to receive notice of all general meetings;
 to attend general meetings and to ask questions of the directors;
 to vote at general meetings;
 to appoint a proxy to attend general meetings as their representative,
provided that the form of proxy is lodged, in accordance with the notice
of meeting, 48 hours before the meeting, or such lesser period as
specified in the notice of meeting;
 in the case of a shareholder who is a body corporate, to appoint a
representative who may be counted in the quorum and vote by either a
show of hands or by a poll.

Preference shareholders are only entitled to vote when dividends due have
not been paid.

Preference share
A share giving its holder preferential rights in respect of dividends and
sometimes in respect of a return of capital on winding up. A preference
shareholder only enjoys the right to vote when dividends are not paid on due
date.

Ordinary share
A share entitling its owner to receive a dividend (if one is paid by the company)
only after the payment of a set dividend to the holders of preference shares.

3.2. Other members’ rights

These include the following:

 If a member considers that any act of the company could result in an
unfair prejudice to his interests, he can petition the court to obtain
relief.
 Members’ application for winding up – A member can apply to the court
for the winding-up of a company if it is unable to pay its debts, or on just
and equitable grounds.
 General meetings – A shareholder of ordinary shares and a preference
shareholder whose dividends are in arrears are entitled to attend
general meetings and to vote on any resolution. In addition, a member
can requisition a general meeting or require that a resolution be added
to the business of the annual general meeting. A member may appoint a
proxy to attend and vote at a general meeting on his behalf.
  Share certificates – Members are entitled to receive a share certificate in
respect of their shareholding.

3.3. Limitations of members’ rights

Members do not have a specific right to:

 be paid dividends, unless the board recommends one;
 increase a dividend above the amount recommended by the board;
 access the minutes of board meetings or other sensitive internal
documents;
 be consulted on every business issue affecting the company.

3.4. Duties and liabilities of members

Where a person or group of people have rights by virtue of their association
with a particular body, it follows that they will also have duties and
responsibilities and, in most cases, some liabilities.

Duties and liabilities include:

 Members of companies limited by guarantee will be liable to pay the
amount guaranteed, as specified in the Memorandum.
 A person who causes a company to continue to trade for more than six
month when it has become memberless shall be liable.

Test Your Knowledge 3.3

What are the main duties and liabilities of a member?

4. THE REGISTER OF MEMBERS

It is a statutory requirement that the details regarding members must be

recorded in the register of members. The company secretary is usually
responsible for maintaining the register, and for its safe keeping.

Sections 115(2) and 107(2) permit a company to keep its registers of members
and the index thereof at the office of the person who makes them such as the
transfer secretaries. Where registers are not kept at the registered office,
notice must be given to the registrar on Form CR 8 within 30 days of the
situation of the place where the register is kept. There is no obligation to lorge
from CR 8 if the register has at all times been kept at the registered office of
the company.
 CHAPTER SUMMARY
 The members are the shareholders of the company and whose name is
entered in the register of members.
 The minimum number of shareholders for a public company is seven, but a
private company need have only one shareholder. Any sole shareholder
may also be a sole director.
 Institutional shareholders have a responsibility to act in the best interests of
their investors, and are encouraged to participate in dialogue with the
companies in which they have invested.
 Nominee shareholders arise when the beneficial owner of the shares
decides not to have shares registered in his or her own name.
 Members are entitled to attend all the general meetings of the company.
 A member may apply to Court for the company to be wound up.
 Members may requisition general meetings, subject to the provisions of the
Companies Act.
 It is a statutory requirement that details regarding members must be
recorded in the register of members. The company secretary is usually
responsible for maintaining the register, and for its safekeeping.

PRACTICE QUESTION

Section A (4 marks each)

1. What are the provisions of the Articles of Association and the companies
Act with regard to the appointment, removal and remuneration of the
company secretary?
2. What are the provisions in the Articles of Association regarding the
retirement by rotation of directors?
3. How may the shareholders of a company remove a director from office?
4. Explain the main differences between an executive director and a non-
executive director.
5. What are the Registrar of Companies filing requirements with regard to the
appointment of a director?
6. What do you understand by the term ‘ostensible authority’ as applied to
the company secretary?

Section B (20 marks each)

7. You are company secretary of Blue Water Limited which is a wholly owned
subsidiary of a French company, Compagnie de l’Eau SA. Sir Reginald
English, chairman of Blue Water, has told you that he is concerned about
 the conduct of Mr Castigny, Blue Water’s managing director. Sir Reginald
has discovered the following facts:
 Two weeks ago Mr Castigny used a credit card provided by Blue Water to
purchase a car for his wife.
 Mr Castigny has not told Blue Water that until four years previously he was
a director of West Country Packaging Limited.
 Mr Castigny has not told Blue Water that he owns shares in Compagnie de
l’Eau SA.
 Blue Water has recently awarded a contract to ABC Ltd for the
 construction of a new reservoir. Mr Castigny’s wife owns shares in ABC. Mr
Castigny did not mention this at the board meeting which approved the
award of a contract and he voted in favour of awarding the contract to ABC.

Write a memorandum to Sir Reginald advising him on the extent to which

Mr Castigny has acted improperly, indicating what further information you
might require.

8. You are the company secretary of Everchange Limited, a large company.

The following matters have recently occurred with respect to the directors
of the company.

a) Mr Smith, the chairman has tragically died. Mrs Daisy, the chief
executive would like to appoint Mr Jones, a well-known businessman
as a director and to replace the late Mr Smith as chairman. You note
that there is a requirement in the Company’s Articles for directors to
acquire and to maintain qualification shares after appointment. Mr
Green, a non-executive director, is angry that Mrs Daisy has not
considered him as a suitable successor to the chairman and has
tendered his resignation, which he would like to take effect
immediately.

b) Mrs Lazy is aged 69 and is another non-executive director. Mrs Lazy

has been absent from board meetings without permission for four
consecutive meetings as she prefers to go on long holidays around the
world. The other directors are annoyed with Mrs Lazy’s lack of
commitment and have asked you whether there are any provisions
under either the Articles of Association or the Companies Act under
which Mrs Lazy’s directorship could come to an end.
You are required to provide Mrs Daisy with a detailed note advising her in
respect of (a) and (b) above, outlining any procedures, approvals and
documentation that will need to be dealt with. You should also advise her on
applicable timescales and the point at which any changes would become
effective.
 CHAPTER 4

Company and
Private Business
Corporation
Formation
CONTENTS
1. The company as a legal entity
2. Classification of companies and partnerships
3. Registration process
4. Conversion of companies and Private business corporations
5. Foreign Companies
6. Names, change of name and undesirable names

LEARNING OUTCOMES
The registration or incorporation of companies is an important area of the
company secretary’s work, so a clear understanding of the different types of
entity is essential. This chapter describes the general characteristics of a
company and looks in detail at the process of incorporation. It covers the
documents which must be filed with the Registrar of companies and Private
business corporations in order for a company and a Private business
corporation to begin trading.
After reading and understanding the contents of this chapter and looking at
the Practice Questions you should be able to:
 Recognise the different types of company that can be formed and their
characteristics.
 Understand the filling requirements for the incorporation of a new
company.
 Understand the procedures for re-registering companies.
1. THE COMPANY AS A LEGAL ENTITY
Companies are incorporated primarily to create a separate legal entity as
distinctfrom the members, directors, employees and creditors. This was
established in thewell-known UK case of Salomon v Salomon & Co. Ltd. A
company cannot act onits own however, and needs directors and shareholders
to make the decisions andmanage the company.

Businesses do not have to be incorporated; a person may choose to set up as

asole trader, which is a business run by one person. In this case, the life of
thebusiness extends only to the life of the owner, there is no separate identity
and nolimit to the liability of the individual.

Companies and Close Corporations, on the other hand, have perpetual

successionand will continue to exist, despite changes in members, until a
process of winding up is completed.

CASE EXAMPLE 4.1

Salomon v Salomon & Co. Ltd (1897) AC 22

Salomon ran a small British leather business as a sole trader. He then formed
alimited company in which he himself took up shares and then sold his business
tothe company. Payment was not in cash but by shares and a loan called
adebenture, which was secured on a floating charge. Salomon became
managingdirector. The company continued in business and raised further loans.
Then thecompany failed and went into liquidation owing over £7,000. There
wereinsufficientfunds to pay all the creditors. One of those creditors was
Salomon himself becauseof his debentures. The special feature of a debenture
which is secured by amortgage against the assets, is that it must be paid back
before unsecuredcreditors. At the same time that the company went into
liquidation Salomon’spersonal affairs were not much better – he had gone
bankrupt. So there were twosets of creditors: those of the company and those
of Salomon personally.

The liquidator, representing the unsecured trade creditors of the company,

claimedthat the company’s business was in reality still Salomon’s, the company
beingmerely a sham designed to limit Salomon’s liability for debts incurred in
carrying onbusiness, and therefore he should be ordered to indemnify the
company against itsdebts and payment of the debenture should await payment
of the other creditors.

The House of Lords held that a limited company is a separate legal

personalitydistinct from those who own, work in and manage it. This applied
even though thecompany was still in reality one man. The debenture was to be
paid first. Salomonv Salomon & Co. Ltd established something else, the second
important feature of the limited company: the reason limited liability can
operate is that the company isan independent legal person.

2. CLASSIFICATION OF COMPANIES ANDPARTNERSHIPS

We will now look at each type of company in turn and detail the
particularcharacteristics that govern each form of incorporation.

Before incorporating a company it is sensible to clarify the aims and objectives

ofthe company to decide the most appropriate trading entity.

2.1. Private companies

The great majority of companies are private companies. Private companies
musthave a name ending with the words ‘Proprietary Limited’ or ‘Pty Ltd’
because this isa visible sign that it is not a public limited company. A fixed
amount must be paidto the company for each share held by a member. When
that amount has beenpaid in full, the member has no further liability for the
debts of the company.

Because private companies do not offer their shares to the public, they can
benefitfrom a smaller legislative burden than public companies. For example,
they are notrequired to lodge audited financial statements with the Registrar of
Companies.

2.2. Public companies

Public companies are limited by shares.

Companies incorporated by guarantee, such as not for profit

companiesincorporated under Section 21 of the Companies Act are deemed to
be publiccompanies.
The Memorandum of Association must state that the company is a public
company.

A public company has access to capital markets and can offer its shares for sale
tothe public. It can also issue advertisements offering any of its securities for
sale tothe public. In contrast, a private company may not offer its shares to the
public.

Just because a company has been registered as a public company, does not
mean that it becomes listed on the ZSE. Companies must meet additional
criteriabefore they may be listed.

Key requirements: Public Companies

• There must be a minimum of two directors.
• There must be a minimum of seven shareholders.
• The company secretary must be suitably qualified and experienced.

2.3. Companies limited by guarantee

A company limited by guarantee:

‘a company having no share capital but the liability of its members limited by
the memorandumto such amount as the members may respectively thereby
undertake tocontribute to the assets of the company in the event of its being
wound up’.

Companies incorporated under Section 26 of the Companies Act are limited

byguarantee, these are charitable or non-profit-making organisations or
associationsnot for gain. This type of incorporation can also be used for trade
associations andfor management purposes – for example, a cluster
development, where theindividual owners become members to achieve road
and security services on anon-profit-making basis. It follows, therefore, that
companies limited by guaranteetypically have a low commercial risk.

In a company limited by guarantee, members are not required to provide

fundsupon becoming a member of the company. However, the Memorandum
of Association will contain an undertaking by its members to contribute a
specifiedamount toward the payment of its debts and the expenses in the event
of a windingup of the company.
The rest of the company’s Memorandum is similar to that of a company
withshares.

2.4. Partnerships and limited liability partnerships

A partnership can be formed by simple agreement and need not attract

substantialformation expenses. Other characteristics are as follows:
 There is no separate legal entity (partners are jointly and severally liable
for thedebts).
 Partnership accounts are private.
 The constitution of the partnership can be changed by agreement.
 Profits are subject to income tax (payable by the partners).
 Partners usually take an active part in the business.
 The partnership ends on the death, resignation or removal of a partner.

2.5 Holding and subsidiary companies

Section 143 effectively provides that a company is a holding company of

anothercompany if it:
 holds a majority of the voting rights;
 has the right to appoint or remove a majority of the board of directors;
 has the sole control of the majority of voting rights.

A company becomes a wholly-owned subsidiary if the holding or parent

companyowns all the shares by itself or through the holding company’s
nominees. A holdingcompany and its subsidiaries are collectively called a
‘group’. The importance ofthis classification relates to:
 the requirement to publish consolidated accounts which reflect the
performanceof the both holding company and all the subsidiary
companies regardless ofwhether or not these subsidiaries are private
companies.

Test Your Knowledge 4.1

a) Can you form a public company with a single subscriber?
b) How can you become a member of a company limited by guarantee?
c) Will the death of a shareholder in a single member company terminate
thecompany?
d) Why is a public company not necessarily a listed company?
3. THE REGISTRATION PROCESS

3.1. Registering a Company

The Companies Act has administrative regulations, contained in most
updatedcopies of the Companies Act. The administrative regulations set out the
forms andother requirements, access to which is necessary to produce an
acceptable answerto many problems and examination questions in this subject.

These notes will refer to the applicable sections of the Acts and the regulations
andexplain the meaning of provisions, but students should read and interpret
the fulltext of the Act.

 Registering a Company:

NOTE: There are different requirements for a company limited by guarantee.

Section 6 of the regulations to the Companies Act (the “Act”)sets out the
following requirements for registering companies:

• Memorandum and Articles of Association:

In the Companies Registration Offices in Harare, there shall be a printed

original and a signed duplicate copy thereof and in the Bulawayo offices,
there shall be a printed original and two signed duplicate copies thereof.

• Miscellaneous Forms
o The forms CR 21, CR 6, CR 12, CR 13 and CR 14 are very important.
Familiarise yourself with these forms.

 Copy of Reservation of Name: Form CR 21

 Notice of Registered Office and Postal Address: Form CR 6

 Power of Attorney: In favour of the person that lodges the documents,

bythe subscribers to the memorandum.

 Proof of Payment of Registration Fee

Obtaining a Certificate to Commence Business

In Zimbabwe, a public company may not commence business until the registrar
has issued a certificate to commence business. The company must satisfy the
requirements of section 114 of the Companies Act. These requirements on
whether the company has issued a prospectus or a statement in lieu of a
prospectus.

You are expected to familiarise yourself with the requirements of section 114.

3.2. Registering a Private Business Corporation

A PBC is established by registering it with the registrar of companies. An

incorporation statement must be registered. It contains the name of the BPC,
addresses names of members, percentage of each member’s and date of
financial year among other particulars. The incorporation statement must be
signed by every member and the accounting officer. The Registrar allocates a
number and will satisfy that the PBC isduly registered

3.3. De-registration of a Company

The Registrar of companies is empowered by Section 320 of the Act to

deregistera company if he believes, after enquiry, that it is not carrying on
business.

3.4. De-registration of a Private Business Corporation

The procedure for the de-registration of a Private Business Corporation,

uponthe Registrarbeing of the opinion that it is not carrying on business, is set
out in Private Business Corporations Act.

Stop and Think 4.1

The responsibility of directors and the secretary is no less in a company

limitedby guarantee than for other types of company. The secretary should
thereforebe familiar with the requirements of companies limited by guarantee
and beprepared to advise directors accordingly.

Stop and Think 4.2

Companies may be purchased off the shelf from a variety of sources,

mostcommonly from lawyers, accountants or formation agents. It is a good idea
tokeep a contact list of such sources in case you need to acquire or incorporate
acompany urgently.

Test Your Knowledge 4.2

Describe how to register a close corporation.

4. CONVERSION OF COMPANIES AND PRIVATE BUSINESS CORPORATIONS

4.1. Conversion of a Company into a private business ‘Corporation (or

theother wayaround) or a Private Company into a Public Company(or
the other way around)

It is possible to convert a private business corporation into a private or public

company, toconvert a public company into a private company or a private
business corporation, or toconvert a private company into a public company or
a private business corporation.

Section 20 of the private businessCorporations Act as read with Sections 46 of

the CompaniesAct set out the requirements for conversions.

Test Your Knowledge 4.3

Outline the requirements for converting a company to a private
businesscorporation.

5. FOREIGN COMPANIES

The expression ‘foreign companies’ applies to all companies incorporated

outside Zimbabwe, but which operate in Zimbabwe.

A company incorporated in another country, which sets up a place of business

oracquires immovable property in Zimbabwe, is required to register as a foreign
company.

Refer Section 329-333 of the Companies Act.

Every foreign company shall submit:-

(i) a copy, duly certified to be a true copy by a director residing in

Zimbabwe, or a registered legal practitioner practising in
 Zimbabwe, of its charter, statutes or memorandum and articles or
other instrument constituting or defining its constitution and, if the
instrument is in a foreign language, a certified translation thereof;

(ii) A list of its directors resident, or who will upon the establishment
of the business be resident, in Zimbabwe on Form CR 14

The minister shall, unless he believes it will not be in the public interests to do
so, issue a certificate authorising the foreign company to establish a place of
business in Zimbabwe.

Every foreign company will be required to lodge with the registrar its charter or
constitution together with the certificates issued by minister in Form CR 18
including the names and addresses of the persons who will be responsible for
managing the company’s affairs in Zimbabwe.

In addition the company must lodge form CR 6 showing principal place of

business in Zimbabwe.

Test Your Knowledge 4.4

Describe how to register an external company with the South African Registrar
ofCompanies.

6. NAMES, CHANGE OF NAME ANDUNDESIRABLE NAMES

6.1. Company Names

Section 24 of the Companies Act requires every company to be registered with

an appropriate name.

A Form CR 21 should be submitted to the Registrar of Companies, in order

toreserve the name. The reservation of the name is only valid for a period of one
month or such longer period as the Registrar may for special reasons allow.

You shouldperuse the requirements for electronic submissions on

[Link].

6.2. Change of Name

Section 25 of the Companies Act applies.
A company may change its’ name by Special Resolution, but before expending
allthe effort involved in a Special Resolution, a name should be reserved, using
a form CR 21.

A notice is sent to members, 21 days before the meeting is held.

A meeting is held: 25% of the votes constitute a quorum. 75% of those

presentmust agree.

A form CR 11 (special resolution) and CR 1 (notice of change of name) are

required to be lodged with theRegistrar.

6.3. Undesirable Names

Sections 24 of the Act as read with section 9 of the regulations (1984) contains
provisions with regard to undesirablenames. You should read those sections and
remember that names can be foundto be undesirable and therefore in need of
a change.

The ICSA in Zimbabwe has updated a guide to the practice and Procedure in the
Companies Registration Offices in Zimbabwe by [Link].J. Grant (formerly Registrar
of Companies Harare). The guide contains among other things guidelines applied
to names approved by the Registrar. It is in your best interest to obtain a copy
from the institute and familiarise yourself with it.

Stop and think 4.3

Describe the procedure for changing the name of a company.

Commentary on style of answers
This answer could be in the form of a timetable, which should include:

DAY ACTION

1 Obtain a list from the directors of 3 alternative

names.

2 Reserve name, by completing a Form CR 21, with

$10 000 fee.

23 Receive Reservation Form from Registrar and

inform Board of theoutcome. Then draft the
Notice of meeting to consider the Special
Resolution.

25 Board of directors meets to approve the Notice of

meeting and toauthorise the company secretary
to convene a meeting of shareholders,toconsider
the Special Resolution.

26 Post the Notice to members.

56 Hold the meeting. A quorum of 25% of the votes
represented at themeeting is required to be able
to validly conduct business. 75% of thevotes
represented at the meeting must vote in favour of
the SpecialResolution

57 Send the Registrar a Form CM26, with duty of R80

attached, togetherwith a form CM9, with duty of
R30 should be attached.

77 Upon receipt of registered forms from the

Registrar, inform directorsand employees, the
bank, debtors and creditors and change
letterheads, notices, telephone directory entries
and advertising.
 CHAPTER SUMMARY
 Registration or incorporation is the process of creating a separate legal
entity.A certificate of incorporation provides conclusive evidence that a
company hasbeen incorporated.

 Businesses may be set up as a sole trader.

 Companies can be private, limited by guarantee, or publiccompanies.

Companies can be formed with a single member.

 Companies cannot be incorporated with a name that already exists or

which istoo similar to another existing name. The company name must
not bemisleading and there are certain words which cannot be used or
wherepermission must first be sought. There are also rules which require
companynames to be displayed on documents and at places of business.

 Apart from the statutory forms, companies must also file copies of
theMemorandum and Articles of Association upon registration.

 It is possible to convert companies from private to public and from public

toprivate. In order to re-register as apublic company, minimum
requirements concerning the number of directorsand members, share
capital and a qualified company secretary must be met.

 Businesses which have been incorporated outside of may create

abusiness presence within Zimbabweby following the requirements
forforeign companies.
 Chapter 5

The Memorandum
and Articles of
Association
CONTENTS

1. Clauses of the Memorandum of Association

2. Alteration of the Memorandum
3. Change of Registered Office
4. Change of Company Name
5. Special Resolutions
6. Changes to the Articles of Association
7. The capital clause

LEARNING OUTCOMES

The Memorandum of Association is the company’s unique document. It is

astatutory requirement that it contains certain information. Both creditors
andinvestors will look to the Memorandum for the basic information of
thecompany’sname and objects. The company secretary needs to be able to
offer advice on themeaning and interpretation of the clauses in the
Memorandum of Association ofcompanies. Further, the company secretary
needs to be able to draft theMemorandum for a new company.
The internal rules which govern the company are found in the Articles of
Association, which, in many cases, are derived from the provisions in Schedule
1of the Companies Act, Table A for a public company and Table B for a
privatecompany. The Articles should be appropriate for the company and
itscircumstances and since the Act gives considerable freedom to adapt
Articles,many companies adopt Table A or Table B with modifications. In this
chapter weconsider Table A and Table B as a whole and its legal effect. Future
chapters dealwith the specific Articles as they occur.

After reading and understanding the contents of this chapter, reviewing

Appendix 2and looking at the Practice Questions you should be able to:

 Understand the legal significance of the Memorandum of Association.

 Know the statutory requirements for the minimum content in the

Memorandumof Association.

 Understand each statutory clause in the Memorandum of Association.

 Know the procedure and requirements for changing the statutory clauses
in theMemorandum of Association.

 Understand the significance and legal importance of the Table A and

theArticles of Association.

 Define the role of the Articles of Association in the relationships

betweencompany directors and members.

 Know the procedure and requirements for changing the Articles.

1. CLAUSES OF THE MEMORANDUM OF ASSOCIATION

1.1. The name clause

The name, which has previously been reserved on a form CR 21, is to
bereflected.

1.2. The capital clause

This clause states the amount of share capital with which the company is
registered and the division thereof into shares of fixed amount.
1.3. The objects clause

The objects clause is generally not one clause but a series of clauses which
setout a company’s objectives, i.e. the business (es) it proposes to carry on and
anyincidental or ancillary powers which may be required to achieve this.

The clauses can be split into three categories:

 The main objects clause(s). These clauses set out what the main business
(es)and activities of the company will be.

 The subsidiary objects clause(s) (powers). These clauses set out the
mainancillary activities which a company is authorised to undertake to
enable it toachieve its stated main objects. For example, the power to
borrow and lendmoney, purchase and sell property, acquire and promote
other businesses andto give guarantees.

 The ‘catch-all’ clause. This clause allows a company to do anything

whichcould be regarded as incidental to the main objects and is usually
included as aprotection against the company overstepping the
boundaries of the main andsubsidiary objects clauses.

The main purpose behind the objects clause relates to the doctrine of which
statesthat any act of a company which is outside the scope of its objects is ultra
vires(‘beyond the powers’).

Objects clause
The set of clauses in the Memorandum of Association which describes
thebusiness (es) the company proposes to carry on and any other powers which
maybe required. Objects clauses may sometimes take the form of a short single
paragraph in an all- encompassing ‘general objects clause’.

Stop and think 5.1

Please review Section 8 of the Companies Act.

1 .4. The limited liability clause

This simply states that ‘the liability of the members is limited’. The clause in
itselfdoes not specify to what extent the liability is limited.

In the case of a company limited by guarantee, in the event of winding-up,

themembers each undertake to contribute a fixed amount stated in the liability
clause.

Test Your Knowledge 5.1

a) What are the main clauses of the Memorandum of Association?

b) What are the three main categories of the objects clause?
c) What is the significance of the registered office?

2. ALTERATION OF THE MEMORANDUM

If a company wants to change any of the clauses of the Memorandum,

specificprocedures must be followed.

The procedures for making the most common alterations of the clauses in the
Memorandum of Association are listed below.

3. CHANGE OF REGISTERED OFFICE

Any change to the registered office is made by resolution of the Board.

CHECKLIST 5.1 CHANGE OF REGISTERED OFFICE

 Notify the change of registered office address to the Registrar on form CR6.

 Amend company headed stationery, and any signage outside a

registeredoffice. The company secretary should ensure that old stationery is
destroyed. Thecompany website should also be updated.

 Notify the company’s tax offices, bank, auditors, solicitors, customers

andsuppliers. If the company is listed it should also inform the Zimbabwe
Stock Exchange. It may also be appropriate to inform the
company’sshareholders.
 Make arrangements with postal authorities and if possible with the occupiers
of theprevious property to ensure that any further mail sent to the old
address isforwarded on to the new address.

4. CHANGE OF COMPANY NAME

A special resolution of members is required to change a company’s name.

Before the Board takes a decision an appropriate name must be reserved, using
aform CR 21. This means 21 clear days notice must be given, which notice shall
comply with the requirements of Section 127 and 133 of the Companies Act.
Members representing at least one fourth of the total votes must be present at
the general meeting, in order to constitute a quorum. At least 75 per cent of the
votes represented at the meeting must vote in favour ofthe special resolution.
Forms CR 1 and CR 11 must be submitted to the Registrarof Companies.

The change takes effect from the date of issue by the Registrar of a certificate
ofincorporation, or certificate of change of name.

During company reorganisations companies often exchange

namessimultaneously. This can be achieved by writing an explanatory letter to
the
Registrar of Companies enclosing the respective special resolutions.

It is often desirable to plan that the change of name takes effect from some
futuredate to give the company time to prepare and make the necessary
[Link] this case, the best solution is to pass the special resolution
“with effect from---”.

CHECKLIST 5.2 CHANGE OF COMPANY NAMES

 Check that the new name is available, using form CR 21.

 The directors resolve to convene a general meeting to consider the
necessaryspecial resolution to change the name, unless the special
resolution is to betaken as special business at an annual general meeting.
 The directors and the ZSE approve a circular to members, which explains
thereasons for the proposed change of name andincluding the notice of the
extraordinary general meeting.
 If passed, file a copy of the special resolution certified by the
chairman’ssignature with the Registrar of Companies.
 A new certificate of incorporation will be issued showing the effective date
ofthe change.
 Change the name displayed outside the registered office and other places
ofbusiness, and elsewhere such as on e-mail addresses or packaging.
 Reprint company stationery including company cheques. Destroy
obsoletestationery.

 Attach a copy of the special resolution to all copies of the Memorandum

andArticles. Although it is not necessary to file a new copy of the
Memorandum andArticles with the Registrar, people known to hold copies
of the Memorandum andArticles, such as directors or the company’s
professional advisers, should be sent acopy of the special resolution.

Test your knowledge 5.2

It is necessary for you to refer to, read and be well acquainted with the
provisions of Section 25 of the Companies Act.

5. SPECIAL RESOLUTIONS

Any amendment to the Memorandum or Articles of Association requires a

SpecialResolution, passed at a general meeting of members (also referred to
asshareholders, for companies with a share capital). The essentials of a
SpecialResolution, which are set out in Section 133 of the Act, include 21 days
notice tomembers/shareholders, a quorum of 25 per cent of votes are present
(in person orby proxy). 75 per cent of the votes represented at the meeting must
vote in favourof the Special Resolution.

Please note that the quorum for a special resolution is set, by Section 133 of the
Act, as one-fourth of the total votes of all members entitled to vote thereat,
arepresent in person or by proxy.

This should be contrasted against the requirements for a general meeting

(whichdoes not include a special resolution), see section 128(1)(c) of the Act,
which clearlyexcludes a proxy from forming part of the quorum and unless the
Articlesprovideotherwise, sets the number of members present in person.

The quorum set for a general meeting of a company which is not to consider a
special resolution is 2 members entitled to vote, presentin person.
A special resolution which is necessary to amend the Articles or the
Memorandum has to be registered with the Registrar of companies using a form
CR 11.

The special resolution only becomes effective once registered.

6. CHANGES TO THE ARTICLES OF ASSOCIATION

The Articles of Association may be changed by a special resolution.

As with all special resolutions a change to the Articles only becomes effective
uponregistration.

CASE STUDY

Salmon v Quin&Axtens Limited (1909) 1 Ch 311

The Articles provided that although the general management of the company
wasunder the control of the directors, no resolution could be passed by the
directors foracquiring or letting premises without the express consent of
Salmon, the managingdirector. A resolution was passed by the directors for
acquiring or letting premisesin circumstances where Salmon expressly
dissented. It was held that Salmon couldobtain an injunction to restrain the
company from acting in breach of this Article.

Hickman v Kent or Romney Marsh Sheepbreeders Association (1915) 1Ch 881

The Articles contained a clause stating that in the event of a dispute between
amember and the association the dispute was to be settled by reference
toarbitration. Hickman was expelled by the association and went to court.
Hickmanfailed. It was held that the Articles were to be treated as a contract
betweencompany and member. Hickman should have gone to arbitration and
accepted thedecision of the arbitrator.

TEST YOUR KNOWLEDGE

 State the requirements set by Section 199 of the Act for the quorum of
ameeting which is to consider a Special Resolution.
 How do the requirements for the quorum at a meeting at which a
SpecialResolution is to be considered differ from a general meeting at
which onlyordinary resolutions are to be considered.
CHECKLIST
♦ The board resolves to amend the Articles.
♦ They must convene a general meeting or wait until the next AGM, toconsider
the necessary special resolution.
♦ A company which is listed requires a circular to members explaining
theproposed alteration and include it with the notice of the meeting. If it
isproposed to adopt new Articles, the circular should summarise the
mainprovisions of the new Articles and state that a copy of the proposedArticles
is available for inspection at the company’s registered office or atthe company’s
solicitors and at the general meeting.
♦ As Articles are changed by special resolution, all amendments in
wordingshould be included in the resolution, together with the reasons for and
theeffect of the changes.
♦ If a significant proportion of the shares are held by financial institutions,
itwould be prudent to obtain confirmation that the proposed new Articles
areacceptable. This can be relevant where the changes proposed requiregreater
involvement of the shareholders, for example as part of thecompany’s
corporate governance strategy.
♦ A certified copy of the resolution, with a verified copy of the Articles
asamended or a certified copy of the new Articles must be sent to theRegistrar
with the form CR 11

7. THE CAPITAL CLAUSE

This clause states the amount of authorised share capital and how that capital
isdivided into shares of a specified amount, for example: $50 000 divided into
50000 ordinary shares of R1 each. The amount of the company’s authorised
capitaldepends on its business requirements.

The share capital stated is the total of the nominal value of the shares it
isauthorised to issue. A company’s authorised capital fixes the maximum
amount ofshare capital it may issue. A company need not issue the whole of its
authorisedcapital immediately it is formed. It may subsequently increase the
authorised sharecapital, by a special resolution. This requires a form CR 5
together with form CR 11.

In the case of a company limited by guarantee, the capital clause is a statement

ofthe amount each member undertakes to contribute in the event of a winding-
up,either whilst a member, or within one year of ceasing to be a member, if the
liabilitywas contracted during the membership.
Authorised share capital
The amount of share capital a company is registered with, and the number
ofshares this is divided into. Also known as nominal share capital.

CHAPTER SUMMARY
 The Memorandum of Association sets out the basic details of the
company, itsname, objects, liability of members and authorised share
capital.
 Sections 8 of the Companies Act sets out the requirements for
theMemorandum for a company which include the name, the objects
clause, thelimited liability clause and the capital clause.
 Alteration of the Memorandum is by special resolution.
 If there is a conflict between the Articles and the Memorandum
theMemorandum will prevail.
 A change of registered office does not require shareholder approval.
Aresolution of the board will suffice.
 The Articles of Association are the regulations governing a company’s
internalmanagement, covering matters such as the rights of shareholders,
theappointment of directors, and the conduct of board meetings.
 Contained in schedule 1 to the Companies Act is Table A, which is a model
setof Articles for public companies and part II of Table A, which is a model
set of Articles ofa private company. A detailed and thorough knowledge
of Tables A and B isessential for all company secretaries.
 It is not essential to incorporate a company with the prescribed Table Aas
its Articles of Association. Table A model Articles will howeverapply by
default, unless alternative Articles are registered.
 The Articles are treated as a covenant between the company and its
members.
 The Articles do not bind a person in any other capacity, except as a
member.
 Alteration of the Articles is by special resolution.
 It is the secretary’s responsibility to ensure that all practical matters
concerningalterations to the Memorandum and Articles are managed in a
timely,professional and effective manner.

CHAPTER 3
 STATUTORY
COMPLIANCE:
COMPANIES ACT
AND CLOSE
CORPORATIONS ACT
CONTENTS
1. Introduction
2. The role of Registrar of Companies
3. Filing Returns
4. The annual return
5. Statutory Registers
6. The Private Business Corporation Act

LEARNING OUTCOMES

This chapter is concerned with the regulatory environment for all companies,
publicand private, and the secretary’s responsibility in ensuring that the
legislation andregulations are followed. We look first at the function and role of
the Registrar ofCompanies, as the keeper of the key information and documents
for all registeredcompanies, and its role in making this available to the public.
We then look in detailat statutory requirements on all companies in relation to
the annual return, thestatutory registers and managing records.

After reading the chapter and working through the exercises, you should be
ableto:
• Understand the role of the Registrar of Companies.
• Find further guidance and information about requirements such as
statutoryforms and filing penalties.
• Know what is required for the annual return.
• Outline the information required to maintain the statutory registers and
wherethey should be kept.
• Understand the secretary’s crucial role in ensuring his company meets
itsstatutory obligations.

1 INTRODUCTION

We have seen in Chapter 2 that it is a general duty of the company secretary

toassist the directors in ensuring that the company complies with the provisions
of itsMemorandum and Articles of Association. Equally important is the
companysecretary’s responsibility for safekeeping and maintenance of the
company’sdocumentation to ensure compliance with the Companies Act. This
involves theperiodic updating of records held by the Registrar of Companies, the
submission ofstatutory returns, and the updating and maintenance of statutory
registers.

3.2 THE ROLE OF THE REGISTRAR OF COMPANIES

The Registrar of Companies has overall administrative responsibility for
theadministration of companies.

His website addresses are [Link] [Link].

3.2.1 Functions

The Registrar has a number of functions:

• Incorporation of new companies – this is a primary function.
Incorporationdocuments are checked and, if they are in order, a certificate of
incorporation isissued. The certificate of incorporation includes the company’s
name and thecompany’s unique registration number.
• Registration of documents – every company secretary has to ensure
thatcertain statutory documents are delivered to the Registrar of Companies as
andwhen specified by the Companies Act. For example, every company has
alegal obligation to provide an up-to-date annual return and, in the case of
publiccompanies, to file annual accounts. Filing requirements include details of
thecompany’s financial year-end and appointments, resignations and changes
inparticulars of directors and secretaries.
Other filing requirements include returns of allotments of shares and changes
inthe constitution of the company.
Staff check incoming forms to ensure that resolutions are in order and
accountsare complete. Because of the volume of returns, staff do not check
theaccuracy of all documents received, and in most cases they do not chase
upreturns that should have been sent.
• Provision of information to the public and monitoring certain
statutorycompliance – virtually all documents registered at the Registrar are
madeavailable to the public. An essential element of a limited liability company
is thatof the disclosure of information. In dealing with a company that has been
givenlimited liability status, the public must be able to make an assessment of
anyrisks.
• Dissolutions and striking off companies – if the Registrar believes that
acompany is no longer operating, he has the power after calling for comment
bythe company, to remove it from the register. This deprives the company of
itslegal status. Reinstatement in such circumstances can be time-consuming.
Thefailure by a company to file annual returns or to respond to a
communicationfrom the Registrar will often result in strike off action.
Companies which nolonger require to trade may apply voluntarily for
dissolution.
• Enforcement – The Registrar has considerable powers to enforce
compliancewith the Companies Act. To satisfy the public demand for
corporateinformation and to encourage the timely submission, penalties are
imposed forlate filing.

3.2.2 Finding help at the Office of the Registrar

The Registrar’s office is a public office that can be accessed at any time during
normal business hours. The offices are found in Harare and Bulawayo. Company
files may be inspected upon payment of the prescribed fee.

TEST YOUR KNOWLEDGE

What are the main functions of the Registrar of Companies?

3.3 FILING RETURNS

3.3.1 The forms

Information submitted must be on standard forms although accounts,
resolutionsand the Memorandum and Articles will naturally be individual in their
format (seebelow).
The forms may be obtained:
• via approved company secretarial software;
• purchased from firms of legal stationers.

Continuation sheets and other documents also have to accompany forms

onoccasion.

It is important to understand the system used for numbering company forms.

Tomake the registration of documents as easy as possible, a number starting
with CR appears on the forms.

3.3.2 Information submitted

Unlike South Africa It is not yet possible to lodge certain returns electronically.

Returns must therefore be physically submitted at the registrar’s office in Harare

or Bulawayo.

3.3.3 Delivery of documents

Every document filed has to have a live signature and be physically delivered.

Copies of the relevant CR forms are contained in the Companies Regulations,

1984 which are obtainable from Government publications (Printflow) and in the
case of annual return, included in the Sixth Schedule to the companies Act

3.3.4 Time limits and penalties

Filing is compulsory, and, as we have seen, there are time limits and penalties
forcompanies who do not meet the filing criteria.

3.3.5 Authorisation to file

The documents to be filed need in the main to be signed by an officer of
thecompany, i.e. a director or company secretary. The forms themselves
indicate whoshould sign them; for example, the annual return requires the
company secretary tosubmit.

TEST YOUR KNOWLEDGE

Where can CR forms be obtained?

3.4 THE ANNUAL RETURN

All companies must make an annual return each year to show the essential
factsabout the company for public record. Failure to submit an annual return
can lead toa company being struck off by the Registrar.

There is a common misconception that there must be a correlation between

theannual return date and the accounting reference date for a company. This is
notthe case, as annual duty is payable and annual returns should be submitted,
byuse of the website [Link], on the anniversary of the incorporation
of thecompany.
3.4.1 Contents of the annual return
Details of the annual return are clearly set out in the Sixth Schedule to the Act.

3.5 STATUTORY REGISTERS

Every company must, under the Companies Act, keep and maintain
certainregisters that reflect the operation of its business. It is the company
secretary’sresponsibility to see that these are kept safe and up-to-date.

It is the secretary’s duty to ensure that people who are entitled to inspect
thestatutory registers have access or receive copies according to the provisions
of theAct. The secretary should also ensure that improper access (e.g. to board
minutes)is not permitted.

Special forms are prescribed for notifying the Registrar of Companies of the
place where registers are kept e.g. CR 8 for the register of members.

TEST YOUR KNOWLEDGE

When must an annual return be made?

3.5.1 Specified locations

Statutory registers must be kept in specified places where they can be inspected.
Generally, the registers should be kept at the registered office, but the register
ofmembers may be kept where it is maintained, provided it is still within the
countryof registration. If the register is not kept in the registered office at all
times, theRegistrar of Companies must be informed of the place where it is kept
within fourteen days, using Form CR 8.
Companies are required to keep registers of individual share allotments
ortransfers, and to submit Form CR 2 for allotments, to the Registrar of
Companies.
3.5 .2 Register of members

The register of members of a company which is not listed, will normally be kept
atthe registered office. In the case of a listed company, the register will be kept
bythe Share Registrar.

The information to be kept in the register is:

• name and address of member;
• date that person became a member and the date on which that person
ceasedto be a member if applicable;
• number, class and purchase/transfer price paid.

Inspection and provision of copies

In terms of Section 116 to the Companies Act the register and any index must
beopen for inspection by any member without charge and by the public on
paymentof a fee for a minimum of two hours on business days. Companies allow
anyoneinspecting the register to take notes. As a practical precaution, only
copies ofdocuments should be made available for inspection. A copy of all or
part of theregister may be requested on payment of the prescribed fee.

Non-statutory information
It is not uncommon for additional information – such as dividend
mandateinformation – to be kept alongside the register of members for ease
ofadministration. Any such additional information does not form part of the
statutoryregister and is not therefore subject to Companies Act. Members and
the public arenot permitted to inspect or obtain copies of non-statutory
information relating tomembers.

Closing the register

A company may close its register of members for up to sixty days in any one
[Link] practice, this is unusual; instead, companies tend to rely on a record date
todetermine dividends or other entitlements. During the period of closure
thecompany need not accept certificates of transfer for registration and
inspectionrights are also suspended. Once the dates of closure have been
authorised, theymust be advertised in the Government Gazette and in a
newspaper whichcirculates in the area of the registered office.
Record date
The date used to determine the members who are eligible to receive a dividend
if(one is paid) or who are able to participate in any other corporate transaction.
Allmembers on the register of members at the specified date will be eligible.

3.5.3 Changes to the register of members

From time to time it will be necessary to make changes to the details in
theregister. These usually arise as a result of shares being transferred or new
sharesallotted.

Change of name
If a member changes their name they must submit the share certificate,
togetherwith evidence of change of name, for example, a statutory declaration
or marriagecertificate. On receiving the documents, the appropriate checks
should be madeand the necessary change/s, including date, made in the
register.

Change of address
Changes of address should be signed by the member.

Amending the register and rectification

In theory, amendments to the register (known as rectification) can only be made
bycourt order. Amendments are only likely to be necessary when there has been
anerror in recording the details of the member.

In practice, minor clerical slips which do not affect the identity of the member
canbe informally corrected under the authority of a responsible officer such as
thesecretary or registrar. The correction should not overwrite or erase the
originalentry. There should be a clear record of the person who authorised the
change,and the reason for the change. If the company receives a court order to
rectify theregister, for example as a result of an application by an aggrieved
shareholder, theamendments must be made, any incorrect share certificates
returned forcancellation and new certificates issued.

Overseas branch registers

A company may establish an overseas branch register of members resident
interritories where it transacts business.

DID YOU KNOW?

Company secretaries should take particular care when filing ‘glossy’ annual
reportand accounts of public companies which have been professionally
designed andprinted because they may not meet the requirements for the
Registrar ofCompanies. For example, they might have been printed in colours
which cannot beeasily scanned.

It may be necessary to produce a separate filing copy version of the

accountswhich includes plain black text, no graphics or photography.

3.5.4 Minute books

Sections 138 of the Companies Act requires every company to maintain minute
books. Any such minute,if signed by the chairman of the meeting, is deemed to
be evidence of themeeting’s proceedings.

Section 107 of Table A permits any resolution of directors ( commonly referred

to as a “round robin” resolution) to be pasted into the minute book and
confirmed at the next meeting of the Board.

Minutes of general meetings

Minutes of general meetings must be kept at the registered office and should
beopen to inspection by members free of charge.

The pages of the minute book are required to be numbered consecutively.

In addition to the rights of members to inspect minutes of general

meetings,members may also demand that copies of general meeting minutes be
sent tothem by the company. Section 139(2) states that any member must be
provided witha copy of the minutes of a general meeting within 14 days of
making therequest.

Sole member of a single member company

In the case of a company with only one member, suchmember or their proxy
shall constitute a meeting.

Minutes of board meetings

Minutes of general meetings must be kept separate from board minutes
sincemembers have the right to inspect the minutes of general meetings, but
not ofboard meetings.

Section 138 sets out requirements for minutes.

Minutes are conclusive evidence of decisions taken either in general meeting or
atmeetings of the directors. Accurate and concise drafting of minutes is
therefore anessential skill for the company secretary. The secretary’s duty also
extends topreparing minutes promptly after each meeting for approval by the
directors.

3.5.5 Register of directors and secretaries

Section 187 requires each company to keep a register of directors and
[Link] points to bear in mind in compiling the register are the
requirements for form CR 14.

3.5.6 Register of directors’ interests in shares and debentures

This register is prepared from notices given to the company by the directors
underSection 182. Section 186 requires any director who is in any way, directly
or indirectly, materiallyinterested in a contract or proposed contract to declare
such interest.

Section 186 requires any declaration of interest to be recorded in the minutes

ofthe board meeting at which it is made, or in the case of a matter arising
betweenmeetings, at the next board meeting.

TEST YOUR KNOWLEDGE

♦ Who may inspect the register of members?
♦ What is the maximum period that the register of members may be closed?
♦ At what level of shareholding must a shareholder in a listed company notify
the company of their interest? Why?
♦ What form should be submitted to the Registrar if registers are not
maintained at the company’s registered office.

3.6 CLOSE CORPORATIONS ACT

The Registrar of Private business Corporations works from the same offices as
the Registrarof Companies, with the two Registrar roles, from to time, being the
same person.

The Private business Corporations Act has its own forms, just like the Companies
Act.

Private business corporations do not have an auditor, but an accounting officer.

As with private companies (which are not part of a group) Private business
corporations, whilebeing required to prepare annual financial statements, are
not required to lodgeannual financial statements with the Registrar.

The member of a Private business corporation is entitled to exercise the powers

which wouldapply to a director of a company. Consequently a member of a
Private business corporationhas a fiduciary duty, unlike the shareholder of a
company. A Private business corporation mayonly have natural persons (and not
companies and bodies corporate) as itsmembers. Consequently while a Private
business corporation may own shares in a company,a company may not have an
interest in a Private business corporation.

The simplified reporting requirements of a close corporation result in

mostcorporate changes in the members or the percentage interest of members
requiringan amended founding statement.

CHAPTER SUMMARY
• All entities incorporated under the Companies Act must file returns with the
Registrar of Companies. When notifiable events take place they must benotified
to the Registrar and as filing is a statutory obligation, there are timelimits and
penalties for late filing and failure to file.
• The Registrar of Companies is responsible for the incorporation and
dissolutionof companies, for the registration and monitoring of documents and
theprovision of this information to the public. Regular filing and communication
hasbeen enhanced and made easier by the increasing use of
electroniccommunications.
• The annual return contains the basic details about a company. Every
companyis required to file an annual return each year, within one month of
theanniversary date of incorporation.
• Every company must keep and maintain statutory registers and the
companysecretary is responsible for their safekeeping. The statutory registers
must bekept at the registered office and if they are kept elsewhere, for example
at theplace where the work of keeping them up to date is done, the Registrar
shouldbe informed using the appropriate forms.
• Major shareholders of a listed company have a higher level of
disclosureobligation in respect of their shareholdings.
• The company secretary is responsible for retention and administration
ofrecords.
 CHAPTER 4

REGULATION OF
LISTED COMPANIES

CONTENTS

1. Introduction
2. The role of Zimbabwe Stock Exchange
3. Listing Requirements of Zimbabwe Stock Exchange
4. Continuing obligations
5. Takeovers and mergers
6. Insider trading and market abuse

LEARNING OUTCOMES

This chapter introduces the Zimbabwe Stock Exchange

By the end of this chapter, you should have a clear understanding of:
• The regulatory framework controlling financial services, including the
respectiveroles of the main role players.
• The process and procedures involved in applying for listing and bringing a
newissue to the market.
• The regulations governing takeovers and mergers, particularly in
listedcompanies.
• The Listing Requirements of the Zimbabwe Stock Exchange (“the
ZSE”): the regulations controlling directors’ and certain other
employees’personal dealings in securities.
• The role of the company secretary in listed companies.
4.1 INTRODUCTION

• You should, at this stage, be regularly referring to a copy of the Companies Act
[Chapter 24:03]

The takeover and mergers rules under sections 193 and 194 of the Companies
Act and the ZSE Listing requirements.
• Market abuse and insider trading is not permitted.
• The listings requirements of the ZSE setout the detailed requirements. Listed
companies are expected to follow theserequirements.

Securities
A general name for debentures and shares of all types.

ZSE
“ZSE” means the Zimbabwe Stock Exchange

Listings requirements
The rules made by the ZSE to regulate theadmission to listing and the continuing
obligations of listed companies

4.2 THE ROLE OF THE ZIMBABWE STOCK EXCHANGE

The ZSE provides facilities for the listing of the securities of companies and
provides its users with an orderly market place for trading in such securities.

Sponsor
A merchant bank, lawyer, accountant or broker. The sponsor’s role
includessponsoring capital issues and the sale of securities to the public
generally. Theywill advise on the form that the issue should take, timing, any
capital reorganizationthat may be required and the issue price. They will also be
responsible for theaccuracy of the information provided in the listing particulars.

4.2.1 The Zimbabwe Stock Exchange (“ZSE”) as a primarymarket

The new issue, or primary, market is used by companies for raising capital
byissuing shares. Capital raised is used either to fund the business or to purchase
theshares from the original shareholders. This method of bringing securities to
themarket is sometimes referred to an initial public offering.
The JSE is subject to a number of safeguards, and companies seeking
admissionhave to demonstrate the soundness of their business and its future to
convincesponsors to act on their behalf.
There are several methods by which securities can be brought to the market:
• Subscription – the company issues a prospectus inviting investors to apply
forshares.
•Placings – securities purchased by the issuing house are placed withinvestment
clients and a small proportion being sold through the market.
• Intermediaries offers – mainly private client investors who then allocate
thesecurities to their own clients.
• Vendor placing – a company acquiring a business can issue securities to
thevendor instead of, or in addition to, cash. This is sometimes referred to as
avendor placing. It is not uncommon for the vendor to then sell all the
sharesimmediately or to sell the shares in tranches in accordance with the terms
of anagreement to sell the business.
• Rights issues – a company offers new shares to its existing shareholders
inproportion to the number of shares they already hold
• Capitalisation (bonus) issues – fully paid shares are allotted for no payment
toexisting holders in proportion to their holdings. As the shares are allotted for
nopayment this method of issuing securities will not raise any capital.
• Exchanges and conversions – new securities are listed as a result of
existingsecurities being exchanged or converted into new ones.
• Exercise of options or warrants – rights for the holder to subscribe cash
forfurther securities which are issued when the rights are exercised.
• Other issues – anything apart from the above so long as the relevant
conditionsare fulfilled, for example, shares issued under employee share
schemes.

4.2.2 THE LISTINGS REQUIREMENTS OF THE ZIMBABWE STOCK

EXCHANGE(“ZSE”)
The ZSE listings requirements contain the requirements and procedures for
listingthe securities on the market. The continuing obligations apply while
securities arelisted and the circumstances could lead to the suspension of the
listing.

The following objectives and principles apply:

• to seek a balance between ready access to the market and protection
ofinvestors;
• to promote standards of disclosure that will give confidence to investors and
themarket as a whole;
• to facilitate an open and efficient market for trading in a number of securities;
• to ensure full and timely disclosure about its listed securities;
• to give holders of securities enough time to consider any changes in
thecompany’s business operations or matters concerning the
company’smanagement and Articles.
• to provide listings standards which will attract international investors.

TEST YOUR KNOWLEDGE

♦ What is the role of the ZSE Committee?
♦ What is the role of the ZSE Stock Exchange?

4.2.3 Conditions for listing

The main criteria for listing are:
■ Companies wanting a full listing must, in most circumstances, havefiled
audited accounts for the last 5 years.
■ The Applicant must have not less than 10 million equity shares in issue.
■At least 30% of the equity shares must be held by the public.
■The applicant must ensure that the number of public shareholders must be at
300 for equity shares, 25 for preference shares and 10 for debentures.
■ The initial price must not be less than 100cents per share.
■ The shares must be freely transferable
■Financial statements must be drawn up in accordance with the applicant’s
national law and must comply with GAAP.
■Details of loan capital, names of directors, auditors, secretaries must be given.

4.2.4 The listing process

The decision to seek a listing may follow years of gradual preparation by
acompany or can be undertaken very rapidly, for example, within a few weeks
of thecompany beginning to trade. Before a company can be listed, it must
producelistings particulars, a prospectus for prospective investors which must
be approvedby the Registrar of Companies and the ZSE. This will be developed
with thesponsor and the professional advisers appointed to assist with the issue.

A certain amount of ‘housekeeping’ may also be required, such as the

appointmentof non-executive directors or the adoption of new Articles of
Association.

Professional advisers
Every company wishing to have its securities listed must appoint a sponsor
tosubmit its application, lodge the supporting documents and act as a channel
fordiscussion between the company or its advisers and the ZSE. Their role
includes sponsoring capital issues and the sale of securities to the public
generally. Theywill advise on the form that the issue should take, timing, any
capital reorganisationthat may be required and the issue price. Together with
the directors, they will also be responsible for the accuracy of the information
provided in the listing [Link] sponsor will therefore need access to the
records of the company and willneed to have extensive discussions with the
company’s directors, companysecretary and senior managers.

The listings particulars must contain specific financial information so a firm

ofaccountants must also be appointed to report jointly to the sponsor and
thecompany. Lawyers specialising in new issues may also be involved. They will
cooperate with the company’s usual lawyer in preparing issue documents.

A company coming to market for the first time may also want to appoint a
numberof other advisers including public relations advisers, registrars and a
receivingagent, often the new issues arm of the company’s registrar. Their role
is to processapplications, report the results to the company and then act
accordingly regardingthe issue of allotment letters and share certificates.

Once the company has resolved to go ahead with a listing or a new issue, all
theprincipal financial and legal advisers will meet with the company’s
representatives (usually the chairman, chief executive, finance director and
company secretary).They will decide:
• the amount and nature of the capital to be issued;
• the approximate price (subject to final pricing immediately before
tradingbegins);
• the issue structure;
• fees and commissions to be paid;
• timing.

The listing particulars

The listing particulars contain the information which investors will use to judge
theissue. The lawyers or the sponsors will prepare the first draft for agreement
by thecompany. All parties involved in the issue should be satisfied that the
information iscomplete and that it gives an accurate report of the company, its
history and itsfuture plans. Listing particulars should follow a set format. The
followinginformation is required:
♦ the persons responsible for listing particulars, the auditors and otheradvisers;
♦ the types of shares;
♦ the issuer and its capital;
♦ the group’s activities;
♦ the issuer’s assets and liabilities, financial position including the
workingcapital and profits and losses;
♦ the management;
♦ the recent development of, and prospects for, the group.

It is essential that confidentiality is maintained in the preparation of the

listingparticulars and key details such as profit forecasts. The proposed issue
priceshould be left out of drafts for as long as is practicable, to avoid the
possibilityofprice sensitive information leaks as this may lead to market abuse
and insidertrading. If the application is for a new issue, an application form for
investors,attached to the draft prospectus, should be included.

Listings particulars
The items of information to be included in pre-listing statements and
circularsrelating to rights offers, capitalisation issues and certain categories of
transactions,contained in Section 7 of the listings requirements of the Zimbabwe
Stock Exchange

TEST YOUR KNOWLEDGE

What are the advantages and disadvantages of maintaining a listing on the ZSE?
Answer
Advantages include:
• _ access to a refined and regulated world-class stock market
• _ the prestige of having a full listing
• _ considerable ability to raise finance through debt and equity
Disadvantages include:
♦ _ the additional costs of maintaining a listing, such as listing fees
♦ _ additional employment resources required to meet continuingobligation
requirements
♦ _ increased management time and effort on satisfying corporategovernance
best practice.

The application
On the penultimate day before listing, a board meeting should be held to
approveall the documentation and to give the go-ahead for the application to
be made.
The issue price
One of the major considerations is the issue price of new securities and
themanner in which the price is to be fixed and paid. While companies and
theiradvisers will have a reasonable idea of what issue price they can expect
toachieve, it cannot be fixed until just before the issue because it has to
reflectprevailing market conditions.

If the price set is too low, the issue will be oversubscribed; if the price is too
high,there will be insufficient applications and a number of shares will be left in
thehands of the underwriters. To err on the side of too low a price is preferable,
solong as it is only a modest margin, as a low take-up could cause problems for
theunderwriter and also adversely affect the public’s appetite for the
company’ssecurities in the future.

In a public offer, the issue price is fixed. All successful applicants pay the
sameprice. If the issue or offer is oversubscribed, some or all allotments may be
reducedso that some or all applicants will be allotted fewer shares than paid for,
and someapplications may be rejected altogether. Application monies in excess
of theamount required are returned to the applicants.

The main underwriter (usually the company’s merchant bank) must agree in
writingto purchase any securities that are not subscribed for and to pay the fixed
issueprice for those shares. There will be an underwriting fee and the
underwriter mayalso offset his risk by sub-underwriting with a number of banks
and pension [Link] provides insurance for the issuer that the issue
of shares will be fullysubscribed; this is important especially where the issuer
has to raise a specificamount of capital for a particular purpose.

In the event of the offer not being fully subscribed, if there is no underwriter to
takeup the shortfall, the Companies Act provides that all funds received shall
bereturned. This would result in the issue costs being wasted. Underwriting
isaccordingly essential to all public offers.

Underwriting
An agreement usually made between the company and merchant banks or
brokersfor the bank or broker to take up shares in an issue if they are not fully
taken up bythe public. Underwriting removes the risk that the company will not
receive its fullsubscription monies and have to return the funds to all applicants.

TEST YOUR KNOWLEDGE

• What conditi ons does a company have to meet to be listed?
• Who are the main advisers on an issue?
• What is a sponsor?
• What are the listing particulars and what should they contain?

4.3 CONTINUING OBLIGATIONS

Continuing obligations is the term used for the regulations and obligations
withwhich a listed company must comply following the listing of its securities.
Thecontinuing obligations are set out in Section 3 of the ZSE Listings
Requirementsand are designed to ensure a fair market, with equal access to
information by allparties and easy entry to and exit from the market. The
continuing obligations also reinforce the importance of a properly regulated
market and help to increaseinvestor confidence.

Companies must publish press announcements giving details of circumstances

or events that may affect the financial results of the cash flows to enable holders
of securities and the public to avoid the creation of a false market in its listed
securities.

Continuing obligations require a company to notify the ZSE investors of the

following:
• any information on new developments which could lead to a
substantialmovement in the price of its listed securities. For example, if the
company hadbeen awarded a major or lucrative contract;
• any change in the company’s expected performance which is
materiallydifferent from the expectation of the market. This could include a
profit warningthat the company does not expect to achieve the level of profit it
had previouslyin a given financial period;
• alterations to capital;
• changes in class rights;
• any major acquisitions or disposals;
• the company’s annual results and half-year interim results. Listed
companiesare not currently obliged to produce quarterly results.
• the board’s decisions on dividends;
• any change in directors

All notices and circulars except those of a very routine nature, such as
theappointment of a director or a notification of a director’s dealing in the
company’sshares, should be submitted by the sponsor to the ZSE for prior
approval.
The continuing obligations provide that a listed company which has not
distributed annual financial statements within three months of its financial year-
end shall distribute to the holders of securities (and publish on SENS) provisional
annual financial results.

If the provisional financial results, in the case of the financial year-end, and
interim financial results, in the case of the half-year period, are not distributed
and published on within three months; 14 days after despatch of a notice by the
ZSE to the company, the listing will be marked ‘RE’ and thereafter, usually at the
end of the fourth month, the listing will be suspended.

4.3.1 Protection of shareholder interests

All the requirements listed above are intended to protect the interests of the
members of a listed company, but there are also other shareholder protection
safeguards:
♦ There is to be no restriction on the registration of transfers of fully paid shares.
This ensures the shareholder’s right to buy or sell shares.
♦ An open offer of securities to shareholders cannot be purchased by the
directors, unless the permission of shareholders is obtained, at a general
meeting convened as the consequence of a ZSE approved circular.
♦ The annual accounts must be issued within three months of the financial year-
end.
♦ Half-yearly results must be published within 90 days of the half year end and
the accounting policies and presentation must be consistent with the previous
financial statements.
♦ Any notice of general meeting of shareholders at which business is to be
transacted that is not routine must be accompanied by an explanatory
circular, approved by the ZSE, after presentation by the sponsor.
♦ If matters are to be raised at a general meeting at which members will
have a right to vote, the directors must include a recommendation as to
whether or not the proposal is in the best interests of the members as a
whole and whether or not the directors intend to support the proposal with
any shares they hold.
♦ A form of proxy must be issued with the notice of general meeting.

4.3.2 Delisting
It may be necessary or desirable for a company to delist; for example,
if it has been taken over by another company.
4.3 .3 The role of the company secretary
It is a requirement of the Listings requirements that all directors of listed
companies agree to abide by the Listings Requirements. A good company
secretary of a listed company will therefore:
• have detailed knowledge of the Listings Requirements and together with the
sponsors, advise the board appropriately;
• prepare a summary of any listings regime proposals and send it to the board;
• provide the board with updates as appropriate;
• clarify any queries raised by the board;
• advise the board of the practical implications of any changes in the listings
regime.

TEST YOUR KNOWLEDGE

• Give four examples of the type of information a listed company is required to
release. When should this information be released?
• Which listed company documents do not require approval before they are
issued?
• Can a private limited company be listed?

DID YOU KNOW?

A good company secretary will need think to laterally about what other actions
need to be taken following a major allocation of shares. For example:
■ if there were any existing major shareholders prior to the acquisition, it is likely
that their reportable percentage holding in the company will have decreased as
a result of the issue of additional shares. The company secretary should
investigate this to ensure that the major shareholder issues the company with a
new notification of its revised percentage shareholding.

4.5 TAKEOVERS AND MERGERS

Takeovers and mergers may be implemented through the Companies Act and
the Listing requirements of the Stock Exchange.

Detailed Requirements for Takeovers and Mergers

General Requirements
7.1 All parties involved in negotiations should aim at the ideal situation, viz,
that negotiations should be carried out in such secrecy that no suspension
would be necessary and the company would be able at conclusion of the
 negotiations to make any announcement giving full details of the
transaction.
7.2 if situation described in 7.1 above is not attainable the parties must
submit to the ZSE a draft press announcement for approval. Such
announcement, which must be published as soon as possible, should
contain all available details regarding negotiations and a warning to
shareholders that they should consult their professional advisors before
dealing in their shares until such time as the result of the negotiations is
known. In these circumstances no suspension will normally be necessary,
but where a brief suspension occurs because of factors such as price
fluctuations, the listing will usually be restored o publication of the
announcement.
7.3 Any other suspension of a listing, at the request of a company, will only
occur in very exceptional circumstances, and then for the briefest possible
period.
7.4 In all instances where preliminary announcement has been published the
parties concerned must publish a progress report every 28 days until
negotiations have been finalised whereupon announcement giving full
details must be published.
7.5 Companies should ensure that when negotiations commence, the
attention of all directors and members of staff involved should be drawn
to prohibiting insider trading.
7.6 The Committee of the ZSE will now normally require that the Merchant
Bankers or Auditors be requested to make a statement to the effect that
a transaction is considered to be fair and reasonable in circumstances
where:
7.6.1 the parties concerned in the transaction are not at arms length;
7.6.2 any special circumstances exists where the Stock Exchange feels
that the auditors opinion is required.

offeree
A company subject to a takeover bid.

offeror
The bidding company in a takeover.

Takeovers and mergers

Regulations governing takeovers and mergers and the rules under Section
193 and 194 of the Companies Act 1973.
Securities Regulation Code
Regulations governing takeovers and mergers and the rules under Section
193 and 194 of the Companies Act 1973.

CHECKLIST
PREPARING THE OFFER DOCUMENTS
 Appoint printers to produce the documents. If the documents contain
price sensitive material it is not uncommon to use specialist financial
printers. Such printers have established security procedures to ensure
that the information remains confidential until publication.
 Although the issuing house and the companies’ respective solicitors will
carry out most of the work in preparing the offer documents, the directors
of the two companies concerned in the takeover are legally responsible
for the accuracy of the documents.
 If either or both of the companies concerned are listed, the
documentation must comply with the Listings Requirements.
 The document issued to shareholders of the offeree company must
constitute a transfer of the securities to the offeror company.
 Any existing dividend mandate applicable to the shares in the offeree
company will be applied to the shares in the offeror company unless
otherwise instructed.
AGREEMENT WITH INDIVIDUAL SHAREHOLDERS
♦ The purchase and sale agreement is drawn up, with legal advice, ensuring
that the interests of both parties are adequately protected.
♦ The final agreement is executed and formally exchanged between the
parties and a date set for completion.
♦ On completion the share transfers with share certificates are exchanged
for payment.
♦ The Registrar of Companies should be notified of any changes, for
example to directors or secretary, or to the Registered Office. A return of
allotments should also be submitted on Form CR 2.
♦ The various statutory registers should be updated reflecting the registration
of the transfers.
If the company is listed, announcements should be made to the ZSE, the press,
if appropriate, and the company’s customers and employees.

4.5.2 Public offers

A public offer is a takeover offer made to all shareholders of a target company
to acquire all or a proportion of their holdings, in return for cash or shares or
other securities in the offeror company.

In this instance, the secretaries and directors of both companies would be

closely involved in the preparation of draft documentation for approval by their
respective boards.

The offer documents are usually sent direct to the shareholders of the target
company by a merchant bank or by a ZSE sponsor.

The Competition Act

The Competition Act prohibits market situations in which the merging of two or
more businesses could result in a restrictive market practice, which because of
the lack of adequate competition, could result in a controlled supply and/or a
higher price than would otherwise by the case.

As a consequence of the provisions of the Act it may be necessary for purchase

agreements to be subject to the approval of the Competition Commission.

A copy of the Competition Act may be obtained from the Government

Publications (Printflow (pvt) Ltd)

The Closing Date

Most shareholders will not accept the offer until just before the closing date, so
the offeror company or its receiving agent must be prepared for a last minute
rush of acceptances.

The basic procedure is:

• Cross-check with the register of members of the target company that the form
of acceptance and transfer has been completed correctly, and the correct share
certificate has been returned.
• Care should be taken to keep acceptance forms separate so that they may be
completed when the share certificate is finally received.
• Acceptances may also be allowed if, following a recent purchase, the share
certificates have not yet been prepared.

If a shareholder has lost his certificate(s), the usual replacement procedure will
apply. Similarly, if forms of acceptance have been signed by a personal
representative, or the holder of a power of attorney, the appropriate documents
must have been registered first.

During the period of the offer, the offeree company should notify the offeror of
any transfers received for registration so that offer documents can be sent to
these new shareholders. The copy of the register of members of the offeree
company should be updated.

After The Closing Date

♦ Calculate the total of the complete and incomplete acceptances so that the
board of the offeror company can decide whether the level of acceptances is
sufficient for the bid to be declared unconditional, or whether, if the number of
acceptances is small, it should be extended for a further period, possibly
improving the terms of the offer.
♦ Once the bid has been made unconditional, prepare share certificates for
shares or other securities in the offeror company to be issued to shareholders
in the offeree company.
♦ Draw cheques for those who accepted a cash alternative.
♦ The offeror company should establish a committee to make allotments of
securities.
♦ Send out the share certificates or cash consideration 21 days after the date
the valid acceptances are received.
♦ Arrange to obtain a listing of the securities issued if the company has increased
its share capital in order to implement the offer.
♦ If employees of the offeree company hold share options under any employee
share schemes, the terms of the acquisition would have stated how the options
would be treated upon a change of control of the offeree (for example, all
options may become exercisable). It is therefore necessary to ensure that option
holders of the offeree company are provided with the appropriate
documentation in accordance with the terms of the acquisition.

4.5.3 Agreement with individual shareholders

This is a simple way of transferring ownership, but, is only suitable where small
numbers of shareholders are involved. A formal agreement is entered into
between the parties, setting out the full details of the shares to be acquired, the
price, the date for completion and arrangements for paying for related expenses
such as legal costs.

4.5.4 Compulsory acquisition

Section 194 of the Companies Act deals with the compulsory acquisition of
securities in an affected transaction.

Compulsory acquisition is by means of a Court Order.

If, within four months of the offer being made, the bidding company has
acquired or contracted to acquire at least 90 per cent of the value of the shares
in the target company, Section 194 provides for the bidder to give notice to the
holder of any shares still outstanding and confirm that it wants to acquire those
shares on the terms of the offer. Shares which were already held in the offeror’s
name, or contracted to be acquired but not registered in the offeror’s name, or
held by a third party on behalf of the offeror, at the time the offer was made,
are excluded from the 90 per cent minimum. Shares held by a subsidiary in its
parent company, which is usually the consequence of a share buy-back, are also
excluded from voting.

A copy of the notice together with a statutory declaration – signed by a director,

if the offeror is a company – must be sent to the company within two months of
the date on which the 90 per cent acceptance is reached.

Unless the shareholder applies to the court to cancel or vary the order and the
court agrees, the bidding company must acquire the shares on the original terms
of the offer. This may include the terms of a related cash alternative even if this
has closed, under the terms for its underwriting, some time earlier.

TEST YOUR KNOWLEDGE

In view of the complexity takeover bids, it is usual for listed companies to have
ready-made plans on what to do if they are the subject of a takeover bid. What
might these include?

Answer:
• a list of advisors which will need to be appointed
• matters on which the board would need to consider
• an overview briefing for directors, company secretary and senior management
on the key points of the Code

The company secretary may well be asked to help facilitate the process as part
of the support provided to the board of a listed company.
4.5.5 Schemes of arrangement

Sections 193 of the Companies Act, deal with schemes of arrangement.

A scheme of arrangement requires approval of the court and resolutions of the

members and/or creditors of the company passed by a 75 per cent majority,
rather than the 90 per cent required for compulsory acquisition. Because the
shares acquired are not transferred, but cancelled by the court order, there is
no stamp duty liability.

Because of the involvement of the court, the documentation for such a scheme
must be settled by counsel, and the legal advisers of the companies concerned
will be closely involved in the various procedural steps.

Once the Court Order has been obtained, it must be lodged with the Registrar
as soon as it becomes available from the court. A copy of the order must be
annexed to every copy of the memorandum of the company issued after the
order has been made.

TEST YOUR KNOWLEDGE

♦ Name the key principles on Takeovers and Mergers in terms of the Listing
requirements and the Companies Act?
♦ What is the role of the Tariff and Competition Commission?
♦ Outline the procedure for compulsory acquisition of shares.
♦ Under what circumstances might a scheme of arrangement be appropriate.
4.6 INSIDER TRADING AND MARKET ABUSE

4.6.1 Insider Trading

Insider trading occurs where an individual with inside knowledge of

developments within a company uses this knowledge to his advantage, for
example, by dealing in shares.

The offence of insider trading may take the following form:

• knowingly dealing in securities on the basis of inside information;
• encouraging another to engage in such dealing;
• disclosing inside information otherwise than in the proper performance of
one’s employment, office or profession; or
• receiving insider knowledge (a “tip”) from a person who is known to be an
insider and then trading in the security concerned.
Inside information is specific information relating to particular issues of
securities or to a particular issuer or issuers of securities, which would be likely,
if made public, to have a significant effect on the price of the securities
concerned. To be guilty of the offence, the information which is price sensitive
and has not been published, must have been obtained from a director,
employee or officer of the company concerned, knowing that the information
was inside information.

Insider trading
Trading in shares of a company by an individual who has knowledge of price
sensitive, undisclosed ‘insider information’ that comes from an inside source.

Inside information
Specific information relating to particular issues of securities or to a particular
issuer or issuers of securities, which would be likely, if made public, to have a
significant effect on the price of the securities concerned.

4.6.2 Market abuse

Market abuse
Behaviour in relation to securities or investments traded which amounts to (i)
misuse of information, (ii) misleading/false impression (iii) market distortion. The
Securities Services Act specifies the legal reaction to market abuse.

4.6.3 The Zimbabwe Stock Exchange Act

The freedom of directors and certain employees of listed companies to deal in

their company’s securities is restricted in a number of ways by the requirement
of the listing requirements that listed companies require their directors and
officers to comply with a code of dealing. This requirement imposes restrictions
beyond those that are imposed by law.

The principal terms of the ZSE Listings Requirements

♦ A director of a company should not buy or sell any securities in the company
without first giving a written notification of the intention to the chairman of the
board, or other director designated for this purpose, and receiving clearance for
the deal.
♦ Directors should not be given clearance to buy or sell securities in the
company during a closed period, that is, the period between the end of the
financial year or half-year and the results being made public or while the
directors concerned possess price sensitive information.
♦ Within 24 hours of having dealt in securities the director concerned shall
notify the company secretary, in writing, of the dealing including details of the
number of securities traded and the price obtained.

NICE TO KNOW
The company secretary will need to be proactive in considering any matters
which may fall in a closed dealing period. For example, if a director is appointed
with a requirement to hold qualification shares, the secretary should make every
effort to ensure the director concerned is advised appropriately to avoid the
compulsory purchase of the qualification shares in a closed period.

TEST YOUR KNOWLEDGE

♦ What is insider dealing? What is market abuse?
♦ When are closed dealing periods?

CHAPTER SUMMARY
• The ZSE is an organised market for dealing in the listed securities of issures.
• Companies wishing to be listed should appoint professional advisers, and must
meet the criteria laid down in the Listings Requirements including publication of
the listing particulars, the formal prospectus which sets out the business, assets
and liabilities and financial position of the company, together with details of the
management and recent development and prospects.
• Once a company has been listed, it becomes subject to the continuing
obligations which regulate the disclosure of information to the market and the
public.
• The most common form of takeover, is a public issue where an offer is made
to all the shareholders of a company to acquire all, or a proportion of, their
holdings. Other forms of takeover are by stake building, or by agreement with
individual members.
• Where a takeover or merger might result in two leading companies in the same
field joining forces, an application should be submitted for consideration by the
Tariff and Competition Commission.
• If a bidding company acquires 90 per cent of the value of the shares in a target
company, it may compulsorily purchase the outstanding shares.
• Directors and senior employees of listed companies should be aware of the
impropriety of Insider Trading and market abuse.
• Directors and senior employees of listed companies must also avoid dealing in
securities when the director or employee is (or is deemed to be) in possession
of unpublished price-sensitive information.

CHAPTER 5
 ANNUAL REPORT,
ACCOUNTS AND
AUDITORS
CONTENTS

1. Introduction
2. Duty to keep accounting records and prepare accounts
3. Preparation, laying and delivery of accounts
4. Directors’ report
5. Interim reports
6. Auditors

LEARNING OUTCOMES

Every public company with limited liability is required to deliver accounts to the
Registrar of Companies. This chapter summarises the legal requirements
concerning the preparation and publishing of the annual accounts and
accompanying reports. Although the compilation of the annual report is not the
prime responsibility of the secretary, he is likely to act in a coordinating role in
consultation with the company’s internal and external advisers; the preparation
of material for inclusion in the directors’ report is an important part of this role.

Also covered in this chapter are preliminary announcements and interim

reports, and the duties and responsibilities of auditors.

After working through the chapter and attempting the practice questions at the
end, you should be able to:
 Understand the main components of the annual report and accounts.
 Know and understand the regulations affecting companies.
 Know and understand the disclosure requirements for listed companies.
 Understand the requirements and procedures for appointing and
reappointing auditors.
 Be familiar with the responsibilities and liabilities of auditors.
 Understand the typical roles and duties of the company secretary in relation
to preparing the accounts.

5.1 INTRODUCTION

Statutory accounts are the individual or group accounts, which must in the case
of a public company, be filed with the Registrar of Companies.

Section 140 to 155 of the Companies Act, contain detailed provisions with regard
to accounting and disclosure.

The provisions include:

♦ Section 140 : Duty to keep accounting records
♦ Section 141 : Duty to prepare annual financial statements and lay them before
the annual general meeting (AGM)
♦ Section 141(3) : Default: An offence
♦ Section 145 : Group Financial Statements
♦ Section 145 : Consolidations
♦ Section 146 : Accounts and auditors reports
♦ Section 147 : Ditectors report
♦ Section 294 : Auditors duty to report on directors’ decisions
♦ Section 177 : Prohibition of loans to directors.
♦ Section 149 : Right of members to receive balance sheet and auditors report
prior to AGM
♦ Section 150 : Appointment and remuneration of auditors
♦ Section 151 : Special notice required to appoint or remove auditor
♦ Section 152 : Disqualification for appointment as auditor
■ Section 153 : Auditors report
■ Section 154 : Auditors right of access to books and to attend general Meetings
■ Section 184 : Particulars of directors salaries and allowances
■ Section 185 : Disclosure of loans to officers

It is important to understand the difference in meaning of the following terms:

Laying accounts means circulating them to shareholders for consideration at a

general meeting
Lodging accounts means filing them with the Registrar of Companies.

Publishing accounts means publishing, issuing, circulating or otherwise making

them available for public inspection in a manner intended to invite the general
public, or any class of members of the public, to read them.

5.2 DUTY TO KEEP ACCOUNTING RECORDS AND PREPARE ACCOUNTS

The requirement on companies to keep and regularly publish proper accounts

showing their assets and liabilities and the results of carrying on their business
activities goes a long way to protect directors, shareholders and creditors alike.
The main benefits of proper accounting are:

• providing information to directors about a company’s financial position so that

they may then better plan its future activities, and may avoid committing
irregularities, such as the payment of dividends out of capital or borrowing
beyond the limits set for them by the Articles;

• enabling shareholders to judge whether the company’s affairs are being

competently managed, whether the company’s profits to its turnover and its net
assets is adequate, and whether the dividends recommended by the directors
are sufficient; and to ascertain whether the market value of their shares is higher
or lower than a valuation based on the company’s assets, earnings and
dividends;

• enabling creditors to judge whether the company will be able to pay its debts,
and whether they may safely extend further credit to it;
• enabling customers to ascertain whether the company is of sufficient financial
standing, prior to becoming a client of the company; and
• if a company is wound up, providing information from which the liquidator can
see what assets he may realise, and what claims against the company he has to
meet.
Accounting records must be kept at the registered office or at any other place
the directors may decide. They should be open to inspection by the officers of
the company at all times. A subsidiary has a duty to give information to the
holding company’s auditors and a holding company has a duty to require foreign
subsidiaries to provide its auditors with all necessary information.
The auditors have the right of access to the books, accounts and vouchers, but
there is no statutory right of access for members or the general public.

5.2.1 Accounting period

The period covered by the accounts is known as the accounting period. On
incorporation, a company’s first financial year begins on the day that it
commences business and ends with the last day of that accounting period.

Change of financial year end

The financial year end may be changed, so that the first accounting period is not
less than six months or longer than eighteen months. In terms of section 2 of
the Companies Act, a financial year simply means the period in respect of which
any profit and loss account of the body corporate laid before it in general
meeting is made up, whether the period is a year or not.

DID YOU KNOW?

When a company is being incorporated from new, it is important for the
company secretary to draw the financial year end to the attention of the
directors. They will need to consider what would be the most appropriate
accounting year for the business. This is particularly important given the
limitations on extending the accounting reference period.

TEST YOUR KNOWLEDGE

• Where should accounting records be kept?
• Why is it important for companies to prepare and publish annual financial
statements?
• How is the financial year end date set for a company upon incorporation?
What are the restrictions on a company changing its financial year end?

5.3 PREPARATION, LAYING AND DELIVERY OF ANNUAL FINANCIAL

STATEMENTS

5.3.1 Timing
Annual financial statements must be circulated to members, laid before the
Annual General Meeting and delivered to the Registrar of Companies. The
Annual General Meeting shall be held within the period specified in section 125
of the Companies act.

5.3.2 Preparation
The requirements for financial statements are set out in sections 142 and 145 as
read with the Companies (Financial Statements) Regulations to the Companies
Act and by accounting standards, which detail the information required in the
financial statements.

If a company is a holding company it must prepare group accounts.

DID YOU KNOW?

A good company secretary will have a diary system to act as a reminder as to
when the annual financial statements and the interim results need to be filed
with the Registrar and, in the case of a listed company, the Zimbabwe Stock
Exchange

5.3.3 Circulation
Copies of the financial statements must be sent to all members of the company,
all debenture holders and everyone entitled to receive notice of general
meetings at least 21 days prior to the Annual General Meeting at which they are
to be laid before the members. Copies may also be circulated electronically or
made available on the company’s website provided members are notified that
the financial statements are available to view online. Listed companies who
publish provisional results, are required, within six months of the financial year
end, to publish the annual financial statements and to provide sufficient copies
for the ZSE.

Financial statements, which are the directors’ record of the financial situation,
are received and discussed by shareholders at the annual general meeting.
While shareholders are entitled to refer the financial statements back to the
directors, shareholders are not permitted to amend the financial statements or
to increase the recommended dividends, which are controlled by the company
directors; who have a fiduciary duty.

As well as the statutory circulation list, the company secretary often maintains
a mailing list of other persons who may wish to receive the annual accounts, for
example, the bank or a major supplier. The company secretary should also retain
a small stock of spare annual reports throughout the year to deal with any
requests for additional copies from shareholders, debenture holders or
interested parties.

Public companies are required to lodge annual financial.

5.3.4 Private Companies and Close Corporations
Private companies and Close Corporations are not required to lodge financial
statements with the Registrar.

5.3.5 Minimum Contents Of The Annual Financial Statements Of Listed

Companies

Minimum contents of Annual Financial Statements

The Listings requirements of the Zimbabwe Stock Exchange provide the
following:

8.62 The annual financial statements must:

a) be drawn up in accordance with the national law applicable to a listed

company;

b) be prepared in accordance with:

i) Generally Accepted Accounting Practice; or
ii) International Accounting Standards

c) be audited in accordance with:

i) Statements of Zimbabwean Auditing Standards; or
ii) In the case of overseas companies, in accordance with national
auditing standards acceptable to the ZSE or International Auditing
Standards;
d) be in consolidated form if the listed company has subsidiaries, unless
the ZSE otherwise agrees, but the listed company’s own financial statements
must also be published if they contain significant additional information; and
e) fairly present the financial position, changes in equity, results of operations
and cash flows of the group.

8.63 In addition to complying with the Companies Act listed companies are
required to disclose the following information in the annual financial
statements:
a) Code of Corporate Practice and Conduct

Commenting on the extent of their compliance or non compliance with the code
contained in the Cadbury or King Reports on Corporate Governance. This
statement may be contained in a separate section of the annual report and need
not be audited;
b) borrowings;

i) full disclosure must be made of all borrowings. Where, during the

period under review, a listed company or any of its subsidiaries incurs
a material increase in its borrowings, it must disclose the nature of and
purpose for such borrowings; and
ii) as a note, disclosure must be made of the level of borrowings in
relation to those borrowings authorised by the articles of association
of the listed company and its subsidiaries;

c) Disclosure of unconsolidated investments in an unlisted company or group of

companies;

d) disclosure of directors’ interests:

i) the aggregate of the direct and indirect interests of the directors in,
and the direct and indirect interest of each director’s holding in the
share capital of the listed company distinguishing between beneficial
and non beneficial interests. The statement should include by way of
a note any change in those interests occurring between the end of the
financial year and a date not more than one month prior to the date
of the notice of the annual general meeting or, if there has been no
such change, disclosure of that fact; and
ii) comparative figures for the previous year must be presented;

e) shareholder spread:

i) the percentages of each class of listed security that is held by public

and non-public shareholders must be disclosed; and
ii) the disclosure for non-public shareholders must be analysed in
accordance with the categories set out in paragraph 4.22;

f) major shareholders:
i) the interest of any shareholder who, in so far as it is known, is directly or
indirectly beneficially interested in 5% or more of any class of the listed
company’s capital, together with the amount of each such shareholder’s
interest, or if there are no such shareholders, an appropriate negative
statement;
g) share incentive schemes:

the listed company must, in respect of its or its subsidiary companies’ share
incentive schemes, summarise the details and terms of options in issue at the
beginning of the financial period, cancelled or issued during the financial period
and in issue at the end of the financial period, the number of securities that may
be utilized for purposes of the scheme at the beginning of the financial period,
changes in such number during the financial period and the number of securities
available for utilization for purposes of the scheme at the end of the financial
period;

h) profit forecasts:
commentary on the performance of the company against any profit forecast
made by the company for the period under review;

i) unlisted securities:
if applicable, a statement in accordance with paragraph 4.29(b) must be made;

j) special resolutions:
full details must be given of all special resolutions passed by the issuer’s
subsidiaries since the date of the previous directors’ report relating to capital
structure, borrowing powers, the object clause contained in the memorandum
of association or any other material matter that affects the understanding of the
company and its subsidiaries;

k) Inter group contracts:

particulars of any significant contract between the company, or one of its
subsidiaries undertakings, and a controlling shareholder subsisting during the
period under review.

Issuer
The company which is listed on the Zimbabwe Stock Exchange (“ZSE”) which has
issued shares or any other securities.

Securities
Shares, debentures and any other instrument which is listed on the ZSE.

DID YOU KNOW?

Interim results contain a great deal of unpublished price-sensitive information.
As the company secretary is usually responsible for the release of results, great
care needs to be taken that the results are not improperly divulged until
confirmation has been received from the regulatory information service that the
results have been lodged. The company secretary should therefore ensure any
copies of the results are embargoed until he confirms they may be distributed.

5.3.6 Delivery of Financial Statements

The company secretary should arrange for the following signatures:
• The financial statements, which include the directors’ report, shall be signed
by the directors;
• Auditors’ report (if any) to be signed by the auditor;

5.4 DIRECTORS’ REPORT

5.4.1 Companies Act
The matters to be specified in the directors’ report, which includes, but is not
restricted to the following:
• Nature of business;
• Changes in share capital;
• Major changes in assets;
• Amount of dividends paid and proposed;
• Whether the company or any part of the group has been managed by a third
party;
• Names of company secretary and directors and the business and postal
address of the former;
• The name of the company’s holding and ultimate holding company.

5.4.2 Corporate Governance Requirements

Content of the Annual Report

 Mission: Detail shall be provided of the Mission, Policies and Objectives
for performance measurement within the company;
 Ethics: Detail shall be provided on the implementation of the Code of
Ethics of the company;
 Risk Management: Steps taken by the company in addressing operational
and financial risk.
 The Environment: Is the company taking every possible step to minimise
the effect of its business on the environment?
 Health and Safety: What is the state of health and safety matters within
the company?
 Internal Controls: Is the board satisfied as to the effectiveness of internal
controls?
 The Audit Committee: The report to state:
 The name of the Chairperson (preferably non-executive);
 The names of the members of this committee;
 Do non-executive directors constitute the majority of members?
 Are internal and external auditors given unrestricted access to the
Audit Committee?
 Does the Committee report to the Board?
 Does the internal audit function examine, evaluate and report on
operational and financial systems and adherence to procedures (if
these exist)? [The King Report requires the majority of the audit
committee to consist of non-executive directors.]
 ♦Disclosure of directors’ emoluments: Is a breakdown given (in total for
executive and non-executive directors) of basic remuneration, share
incentives, retirement and medical contributions and other benefits.
 ♦Accounting Standards/GAAP: Does the company comply with
GAAP/Accounting Standards and if not, why not?
 ♦Accounting Policies: Are accounting policies clearly set out?
 ♦The Remuneration Committee:
 ■ The name of the Chairperson (preferably non-executive);
 ■ The names of the members of this committee;
 ■ Do non-executive directors constitute the majority of members?
 ■ Does the Committee report to the Board?
 ♦Affirmative Action: Does an affirmative action strategy exist and how
does overall performance compare to goals?
 ♦Going Concern: All companies and close corporations should report that
there is no reason to believe that the business will not be a going concern
in the year ahead; and that an effective system of internal control exists
and is being maintained.
 ♦Directors: All changes in directors should be reported, as well as the
names of directors to be appointed or re-appointed, together with an
abbreviated curriculum vitae of all candidates for appointment as
directors.
Note: Usually one third of the directors, which includes any director who
the board has appointed to fill a casual vacancy, are elected each year, at
the Annual General Meeting. No director should remain in office for more
than 3 years.
 ♦Loans to directors: Any loans to directors (save for housing loans to
executive directors, if part of a scheme for executives) shall be disclosed,
regardless of whether or not such loan has been repaid. The declaration
 should provide details of the interest rate payable, the opening balance
and the closing balance of all loans.
 ♦Corporate Governance Compliant: A statement that the company has
complied with the principles of corporate governance as set out in the
King II Report, is necessary.
 ♦Issued Share Capital:
 ♦Removal of Company Secretary:

5.4.3 Notes on Annual Report trends elsewhere in the world

• The Nomination and Audit Committees in certain countries, report to
stakeholders, in the annual report.
• Details of directors’ emoluments, including retirement and medical benefits,
is broken down to reflect the emoluments and all benefits of each individual
director.
• Corporate shareholders and corporate investors have an obligation to exercise
their vote at general meetings of companies in which they have invested.
Compliance is often reported to the stakeholders of each corporate shareholder.
• There is an emphasis on independent (unconnected and impartial) directors
(i.e. directors who are not, amongst other matters, related to a director and who
are not the appointee or agent of a shareholder).
• Directors are given free and unrestricted access to the company secretary, to
provide advice, and the company secretary or chairperson, within defined
expenditure and authority levels, may make independent professional advice
available to a director in the performance of his or her duties as a director.
• In certain countries all directors of a listed company have to be re-elected at
each annual general meeting.
• An in-house code should exist for every company, which provides for the
control and monitoring of the share dealings of directors and officers.
[Note: This is ICSA recommended practice.] The code should require the
chairperson’s written permission before any director may deal in the company’s
securities. After having dealt (bought or sold) in the security, the director is
required to immediately notify the company secretary, who shall notify the ZSE,
detailing the price paid and the number of securities involved.

5.5 INTERIM REPORTS

5.1 Every listed company other than companies engaged primarily and
directly in the mining of minerals, and which report to shareholders on a
quarterly basis should, in addition to statutory requirements concerning
 half yearly interim reports and provisional annual financial statements
include in such reports the information as detailed hereunder.
5.2 Income statement
The income statement should include at least, material and applicable,
the following information:

a) Income before creding items in (b) and charging items in (c), (d), and (e).
b) Dividends received (including dividends from associated companies and
non-consolidated subsidiaries);
c) Depreciation;
d) Interest paid;
e) Net income before taxation and extraordinary items;
f) Net income;
g) Net income of the group;
h) Extraordinary items;
i) Outside shareholders’ interest, and
j) Dividends payable.

5.3 Balance sheet

The balance sheet should include at least, where material and applicable
the following information:
a) Fixed assets
b) Investments:
i) Listed
ii) Unlisted;
iii) Market value of listed investments;
iv) Director’s valuation of unlisted investments;
c) Other non-current assets;
d) Current assets;
e) Ordinary shareholders’ funds;
f) Preference of shareholders;
g) Outside shareholders;
h) Deferred taxation;
i) Current liabilities
j) Intangibles

5.4 Supplementary information

The following supplementary information should, where applicable and
material, be included:
k) Capital expenditure for the period
 l) Capital expenditure committed or authorised;
m) Finance and operating lease commitments;
n) Contingent liabilities;
o) Interest capitalised
p) Full disclosure of all borrowings and off balance sheet;
q) Any exceptional increase in borrowings during the period under
review, and where possible the effect of such increased borrowings on
the earnings per share the reasons must be stated; and effect of the
earnings per share. Should it not be possible to disclose this effect of
the earnings per share reasons must be stated; and
r) Details of any category 4 transactions as required by paragraph 9.18
which have not previously been disclosed to shareholders.

5.5 Change of financial year

If a change in the financial year is proposed, the Committee must be
notified in writing and consulted as to the period or periods to be covered
by the interim report.
5.6 Audited interim reports
Where the figures in the interim report have been audited, the report of
the auditors including any qualification must been reproduced in full.
5.7 Basis of presentation
Interim and preliminary report must be presented on a consolidated
basis.

TEST YOUR KNOWLEDGE

a) State three requirements in the Listings Requirements in connection with
the preparation of annual financial statements.
b) What must a directors’ report contain?
c) What should the directors’ remuneration report contain?

5.6 AUDITORS
An auditor is the independent professional, individual or firm who is referred to
in Sections 149 to 155 of the Companies Act. The auditor may not be an officer
of the company.

The first auditor of te company is appointed by directors within one month of

the issue of a certificate to commence business. Subsequent appointments are
made in the annual general meeting. The first auditor of a private company
which appoints an auditor shall be appointed within 30 days of the issue of a
certificate of incorporation. (See however section 150(7) for circumstances
where a private company need not appoint an auditor).

An auditor once appointed can only be removed through a resolution of which

a special notice has been given i.e. 28 clear days’ notice (see section 135).

If an auditor resigns, a casual vacancy is created which the directors can fill
without having to call for a general meeting (section 150(5)).

TEST YOUR KNOWLEDGE

a) What is the difference between the annual financial statements and the
provisional annual financial results?
b) What are the timing requirements in respect of the release of (i) the
provisional annual financial statements and (ii) the interim report?
c) What is the interim report?
d)
DID YOU KNOW?
The company secretary is responsible for keeping and maintaining of the
company’s minute books and statutory registers, so he will need to cooperate
with the auditor. Company secretaries should check that all minute books and
registers are fully up to date and complete in advance of any audit. It is
necessary, in terms of Section 138 of the Companies Act to ensure that proper
minutes of all general, board or managers’ meetings are kept.

TEST YOUR KNOWLEDGE

a) What is the procedure when an auditor resigns?
b) Who is responsible for the appointment and the re-appointment of
auditors?
c) What rights should be granted to an auditor?

DID YOU KNOW?

Company secretaries often play a part in setting out the timetable for the
publication and filing of annual report and accounts. Secretaries should ensure
that their annual report timetable allows sufficient time for the additional steps
which will need to be taken.

CHAPTER SUMMARY
 A company is required to publish annual financial statements. Auditors
have the right of access to the accounting records, but there is no
statutory right for the general public to have access. The directors are
liable to penalties for failure to keep financial records.
 Accounts should be laid before the Annual General Meeting and lodged
with the Registrar of Companies. Listed companies are also required to
issue half-year interim results under the Listings Requirements.
 The financial statements must include a directors’ report which should
include principal activities, review of the business, indication of likely
future developments, results and dividend, names of directors of the
company, the names of the chairman and members of the audit,
remuneration and nomination committees. The report should also cover
each individual director’s interests in securities.
 Listed companies have additional obligations arising from the Listings
Requirements, principally the requirement to publish a statement, of how
the company has applied the principles of good governance, together
with an explanation when the principles have not been applied and the
reason why.
 Auditors are appointed annually. Auditors should be suitably qualified and
registered.
 The auditor’s report must state that the balance sheet and profit and loss
account represent a true and fair view of the company’s affairs.

CHAPTER 9
 CORPORATE
GOVERNANCE
CONTENTS
1. Introduction
2. Key issues in corporate governance
3. Key concepts in corporate governance
4. The King II Report on Corporate Governance 2002
5. Internal Control Systems
6. The Company Secretary

LEARNING OUTCOMES

This chapter introduces the key concepts and issues in corporate governance,
looking at how they have emerged in recent times and how they impact on
company regulation. The coverage of corporate governance provides an
overview of the subject in the context of corporate secretaryship. It is covered
in significantly more detail in the Corporate Governance module, which is a
compulsory part of the professional qualifying scheme.

After reading and understanding the contents of this chapter, you should be able
to:
 Understand what is meant by corporate governance and why it is
important.
 Explain the key issues and concepts in corporate governance.
 Be aware of how codes of practice have developed.
 Understand the key principles of the Code to the King II Report 2002 and
its implications for company reporting.
 Understand in outline the company secretary’s role in respect of
corporate governance.

6.1 INTRODUCTION
The term corporate governance refers to the way in which companies are
governed. The British Cadbury Report (see below), published in 1992, defines
corporate governance as

‘the system by which companies are directed and controlled’.

In a World Bank report which contained a corporate governance overview,

published in 1999, Sir Adrian Cadbury said

‘Corporate governance is concerned with holding the balance between economic

and social goals and between individual and communal goals - - - - - - the aim is
to align as nearly as possible the interests of individuals, corporations and
society.’

British concerns about the way companies are organised and controlled grew
out of a number of high-profile cases of corporate failure involving financial
reporting irregularity – for example, the Bank of Credit and Commerce
International (BCCI), Mirror Group News International – and a serious lack of
internal controls – for ex ample, the collapse of Barings Bank. Over the last
decade, significant attempts have been made to respond to these failures and
put the appropriate regulation and control in place.

In the United States of America the ENRON collapse led to the Sarbanes-Oxley
Act and to several corporate reforms.

South Africa’s emphasis on the stakeholder and social issues in corporate

governance did not arise from any specific corporate collapse, but from a desire
to make the business enterprise more relevant to all stakeholders, including,
but not restricted to, international investors and previously disadvantaged
individuals and communities.

Stakeholders
Groups with an interest in the company, such as employees, the families of
employees, shareholders, customers, surrounding communities, investors,
suppliers and directors.

6.2 KEY ISSUES IN CORPORATE GOVERNANCE

Annexure 2 to this paper contains a summary of the Code to the King II report,
which you should study and regularly use.
A major concern in corporate governance is the potential conflict of interest
between the board of directors (and its individual directors) and other
stakeholder groups, particularly the shareholders and employees. The key
question is how to ensure that directors act in the best interests of the company
as a whole, rather than in their personal interests, and how to prevent any
malpractice. Shareholders and employees have to rely on the board of directors
to run the company honestly and competently.

For example, the directors, particularly executive directors, have more access
than anyone to the information systems of the company and are in a position to
control and potentially manipulate the information that is released.

In a listed company, where shareholder value is key, directors could resort to

making decisions which boost results in the short term, at the expense of long-
term company survival.

Directors and officers should also not receive performance bonuses when the
organisation has performed poorly.

6.2.1 Financial reporting and auditing

Accounting irregularities are at the heart of a number of financial scandals of the

last two decades and, d espite a tightening of accounting standards, have not
been eliminated. The collapse in 2001 of the US energy giant Enron, which filed
for bankruptcy after ‘adjusting’ its accounts, was followed by similar problems
in other US companies, including WorldCom (which admitted to fraud in its
accounting) and Rank Xerox.

The effectiveness and independence of external auditors have also been called
into question. It might be argued that auditors should be responsible for
checking that financial reporting and procedures are honestly and properly in
place, and in carrying out their audit they should be free from influence from
the company’s management. If they are not free from such influence they might
be persuaded to agree to a controversial method of accounting which presents
the company in a misleading light. Remember that auditors Arthur Andersen
collapsed in 2002 in the wake of the Enron scandal when it became clear that
their independence from Enron had been compromised.
Legislation has been introduced in the US following the high profile incidences
with the enactment of the Sarbanes-Oxley Act 2002. Listed companies which
also have a secondary listing on a US stock market must conduct much of their
corporate governance in accordance with this legislation.

6.2.2 Directors’ remuneration

Directors’ remuneration can be a contentious issue, with the main complaint

being that there is not an effective mechanism for linking directors’ rewards with
company performance. In other words, the perception is that directors are well
rewarded regardless of the company’s performance.

6.2.3 Company-shareholder relations

The main debate here is how far directors can be relied upon to act in the best
interests of a company and its stakeholders, and the extent to which the powers
of directors should be limited. The key elements here are:

 The structure of the board and the role of independent non-executive

directors.
Directors have a fiduciary duty, that is, they are in a position of trust, and
they must act in the interests of the company and not in their own interest
or in the interest of a shareholder or other party. Corporate governance
seeks to put structures in place to ensure this happens by appointing
independent nonexecutive directors to bring balance and objectivity to
board decision-making, so avoiding the dominance of a single dominant
individual or small group.
 The powers of shareholders under company law, and whether additional
legislation should be enacted to strengthen it.
 Whether shareholders genuinely take advantage of the powers they
already have, for example by voting not to re-elect directors.

There has been much debate recently on how to encourage shareholders to

make more use of their votes at general meetings and how to engage directors
more directly on matters of concern. The King II Report 2002 recommends that
institutional shareholders, who own most of the share capital of listed
companies, use their vote more often and in a constructive manner. There is
recent evidence that the exercise of shareholder power is becoming more
prominent.
CHECKLIST
REMOVAL OF DIRECTORS
 Special notice must be given to the company of the proposed resolutions
– see Section 175 of the Companies Act.
 Copies of the special notice must be sent immediately by the company to
the director proposed for removal.
 The director proposed to be removed or not reappointed may make
representations in writing to the company and may ask the company to
circulate the representation to the shareholders.
 The company should comply with the request, and attach the written
reply of the directors to the notice of meeting, provided the reply is not
defamatory. If it is too late to include the representations with the notice
of the meeting, it must still be sent out to all shareholders who received
the notice, or if it is still too late, the director may require the
representations to be read out at the meeting.
 A director who has been removed is also entitled to receive notice of and
attend and speak at the meeting at which the resolution for his removal
is to be considered.

6.2.4 Risk management

Although some corporate failures have been brought about by fraud or

dishonest management, a more common reason is the failure of an over-
optimistic and well intentioned board. For example, directors can expose the
company to undue risks in an attempt to increase profits. It is readily understood
that when investors buy shares in a company, they are weighing up the business
and financial risk in order to arrive at the likely returns. Risk management is not
about the elimination of business risk but rather about how risks are managed,
so that directors can generate business value with a reduced possibility of
compromising the company and its assets.

Internal audit is now required to be risk orientated and the board’s responsibility
for risk management is emphasised as one of the most important components
of their duty, without which it becomes difficult to diligently prepare a going
concern statement.

6.2.5 Ethics and corporate social responsibility

Good corporate governance expects a company to behave in an ethical way. For
example, it might maintain a code of conduct which all directors and employees
are expected to follow.
Focus on ethical behaviour has in recent years broadened into corporate social
responsibility. This includes not only ethics, but also:
♦ welfare for employees, such as on health and safety, training and
development, and anti-discrimination policies;
♦ impact assessments on the environment, such as pollution;
♦ impact assessments on customers, for example, a company which
manufacturers alcoholic drinks might wish to state what steps it takes to ensure
that minors are not encouraged to consume their products;
♦ contribution to the community through charitable acts and donations, etc;
♦ policies in relation to suppliers, for example, ‘fair trade’ with third world
countries.

Ethics, or “Ubuntu”, concentrates on the development of corporate ethics

amongst company employees and associates and results in the enrichment of
the individual and the corporate community.

TEST YOUR KNOWLEDGE

a) What brought about the pressure for reform in corporate governance?
b) Summarise the key issues in corporate governance.
c) What are the typical concerns of corporate social responsibility?

6.3 KEY CONCEPTS IN CORPORATE GOVERNANCE

To understand better the context of the reforms that have been introduced in
recent years, it is helpful to understand the core concepts that underlie
corporate governance. They are:

1. Transparency: Transparency refers to the ease with which an outsider is able

to understand the information available about a company. This includes both
financial and non-financial information, such as the strategic objectives of the
company.
2. Independence: Independence refers to the extent to which procedures and
structures are in place to minimise potential conflicts of interest. This is
particularly important in the case of non-executive directors.
3. Accountability: The principle that decision-makers within a company, or those
who take actions on behalf of a company, should be accountable for what they
do. It follows that shareholders should be able to assess the actions of their
board and query them if necessary. The difficulty arises in deciding exactly how
directors should be accountable and over what period of time. After all,
performance could be measured over the short term – a year for example – or
over a much longer term of five or even ten years. Key performance areas and
criteria should be identified. The performance of directors individually and the
board collectively should be evaluated annually.
A Board Charter should list matters for which board retains authority and
authority delegated should be separately identified.
4. Responsibility: Another issue in the corporate governance debate is whether
directors should be liable for their performance to stakeholders, and their
shareholders in particular. Should shareholders have the right to re-elect all
board directors each year? Each time that a director is to be elected, his or her
summarised curriculum vitae should be supplied to shareholders.
5. Fairness: The principle that all shareholders should receive equal
consideration regardless of the size of their holdings.
6. Social responsibility: A well-managed company should be aware of and
respond to issues of social concern and matters of health and welfare.
7. Environment: The company should take every possible step to ensure that
it does not damage the environment, in which its stakeholders live.

6.4 KING II REPORT ON CORPORATE GOVERNANCE 2002

A summary of the Code to the King II Report on Corporate Governance, which is
the part of the report that JSE listed companies are expected to observe or
explain, forms Annexure 2 to this book.

 The Code applies to:

 main board JSE listed companies
 large public entities
 banks, financial and insurance entities
 large unlisted public companies with shareholders’ funds of +R50
million
However, all companies are encouraged to adopt the Code.

 No board should have less than two non-executive directors of sufficient

calibre.
 The board must retain full and effective control over the company;
monitor the executive management; and ensure that the decision of
material matters is in the hands of the board.
 The board should have a definition of materiality on matters such as the
acquisition and disposal of assets, investments, capital projects, authority
levels, etc.
 The board must decide its own levels of materiality.
 The offices of Chairperson and Chief Executive Officer should be separate,
unless considered by the board not to be in the company’s interest. The
Chairperson preferably should be a non-executive director.
 The selection and evaluation of non-executive directors should be
addressed by the Chairperson or a board sub-committee.
 An executive director’s service contract should not exceed five years.
 Directors’ remuneration should be recommended to the board by a
remuneration committee consisting of a majority of non-executive
directors, one of whom should be the Chairperson of the committee.
 The remuneration of the directors should be disclosed. Remuneration
should be separated into the categories of salaries, fees, benefits, share
options and bonuses.
 The regularity of board meetings should be determined by the board
itself, it being stipulated that a board should meet at least once a quarter.
 All directors should have access to the advice and services of the company
secretary.
 All directors should also be entitled to seek independent professional
advice at the company’s expense, preferably only after obtaining
clearance from the Chairperson or the company secretary.
 Stakeholder communications: The company should ensure that it has
effective communication channels with all stakeholders.
 Annual Report: The company should report on its compliance with the
Code to the King II Report. Reasons should be given for non-compliance.
 In addition to the legally required auditors, the company should have an
effective internal audit function and an audit committee.
 Employees: Effective channels of communication should be built with
employees. The code of ethics should be communicated to, and
developed with, all levels of employees. Health and welfare should be a
matter of concern to the company.
 Affirmative Action Programmes: Companies are required to have
employment equity programmes as part of their business plan. This is
integral to the future operation of any business enterprise in South Africa
and should inherently constitute part of its corporate governance
structure.

 Code of Ethics: All companies should have a Code of Ethics, which sets the
corporate ethical standards and the consequences for management,
employees, directors and stakeholders.
 Environment: The company should strive to ensure that the environment
is not adversely affected by its operations.
 
DID YOU KNOW?
In your opinion, how well did the King II Report on Corporate Governance 2002,
address the issues of concern in corporate governance?

TEST YOUR KNOWLEDGE

a. In what ways did the King II Report break new ground?

6.4 INTERNAL CONTROL SYSTEMS

Risk Management, Going Concern statements and Internal Controls are all
interrelated.
 The King II Report recommends that the board should disclose that:
 it is responsible for internal control systems and risk management,
which are regularly reviewed;
 an ongoing process for identifying, evaluating and managing significant
risks is and has been in place;
 an adequate system of internal control provides reasonable, but not
absolute, assurance to manage risk and to achieve business objectives;
 a documented and tested disaster management and recovery plant
exists;
 material joint ventures have been:
 dealt with as part of the group risk management; or
 by other means: details of which should be provided;
 any additional appropriate information on the risk management
process should be provided.

Should the board not be able to make any of the aforementioned disclosures,
this should be explained.
 The review of processes may identify areas in which risk management can be
turned to competitive advantage.

DID YOU KNOW?

We have seen that all listed companies must produce a statement of compliance
in their annual report. To help you understand more clearly what is said in
practice make sure you read the corporate governance section of the annual
report of at least one listed company.

6.5 THE COMPANY SECRETARY

The importance of the company secretary was dealt with in Chapter 1 of this
book:
The King II Report 2002 emphasises the role of the company secretary as the
champion of corporate governance in the organisation, who is to train and
provide a central source of guidance and advice to directors.

Company secretary’s responsibilities mentioned in the King II Report include the

following:
 Providing guidance to directors collectively and individually on their duties
and making them aware of their legislative and regulatory duties;
 The induction of directors;
 Providing practical support to non-executive directors and the chairperson;
 To raise matters which may warrant the attention of the board.

CHECKLIST
THE COMPANY SECRETARY’S ROLE IN CORPORATE GOVERNANCE
♦ To keep all legal and regulatory developments affecting the company’s
operations under review, and make sure that the directors are properly briefed
about them.
♦ To ensure that the interests of stakeholders are borne in mind when
important business decisions are made, particularly those affecting employees.
♦ Keeping in touch with the debate on corporate social responsibility and
advising the board about its policies and practice.
♦ To prepare drafts of the statement on corporate governance and the
directors’ remuneration report for consideration and approval by the directors.
This will require in depth knowledge of the Listings Requirements of the ZSE, the
Securities Services Act (which deals with insider trading and market abuse), the
Companies Act and the Securities Regulation Code on Takeovers and Mergers,
as well as familiarity with the operations of the board.
♦ To draft updates to the schedule of matters reserved to the board and
committee terms of reference, taking into account current legislation and best
practice. These documents will be submitted to the board for consideration and
approval.
♦ To act as a ‘confidential sounding board’ to the chairman, NEDs and executive
directors on matters that concern them, and take a lead in dealing with difficult
interpersonal issues, such as when a director is removed from the board.
♦ To act as an effective channel of communication, ensuring good information
flows within the board. This includes working with the chief executive and the
chairman on practical matters, such as ensuring board papers and discussion
notes are of high quality and reach directors in a timely manner.
♦ To act as the ‘conscience of the company’, by providing an additional
enquiring voice in relation to board decisions.
♦ _ To ensure compliance with corporate governance regulations and guidelines
(e.g. the Listings Requirements of the Zimbabwe Stock Exchange (“ZSE”).
♦ To monitor the published practices of peer and other companies, so that
emerging trends in best practice can be detected and reported to the board in
good time.
♦ To manage relations with investors, particularly institutional investors, with
regard to corporate governance matters.
♦ To be responsible for the induction of new directors.
♦ Making sure that the company avoids committing offences under the Listings
Requirements of the ZSE and the Companies Act and does not put out
misleading information about its financial performance or trading condition.

CHAPTER SUMMARY
 Corporate governance refers to the internal structures and controls
within a company, and how power is exercised by different groups to
ensure that the objectives of the company are achieved lawfully and
ethically. It also refers to stakeholder, social, environmental and
economic matters.
 Concerns originally arose in the UK from the scandals of the 1980s and
1990s involving financial irregularity and lack of internal control. At the
heart of the concerns were financial reporting and auditing, dominance
of the board by a single individual or small group of individuals, whose
behaviour was unchallenged, poor appreciation of the risks involved in
decisions made, directors’ remuneration and ethics.
 Corporate governance seeks to address these issues by encouraging
independence and objectivity in decision-making to avoid conflicts of
interest, accountability, responsibility to other stakeholders, fairness and
social responsibility.
 The King II Report on Corporate Governance recommends that the role of
chairperson and chief executive be separated, with distinct
responsibilities for each, that non-executive directors should constitute a
majority of board members, and that executive directors service contracts
should be limited to three years.
 The company secretary is expected to provide help and advice to the
board on best practice in corporate governance.
CHAPTER 7
 THE CLOSE
CORPORATION ACT
CONTENTS
1. Insolvency, winding up and dissolution
2. Consequences of registering an incorporation statement
3. Formation of a Private business corporation
4. Contents of incorporation statement
5. Access to incorporation statement
6. Fiduciary duty of members
7. Members declaration of interests in contracts
8. Votes and interest in Private business corporation
9. Members right to convene a meeting
[Link] of Members
[Link]
[Link] to members
[Link] of members to contract
[Link] Financial Statements
[Link] of Accounting Officer
16. Taxation of a Private business corporation
[Link] Liability
[Link] of limited liability
[Link] of Company into Private business corporation
[Link] and Disadvantages: Private business corporation compared to a
Company.

LEARNING OUTCOMES

This chapter covers the legislative requirements to form and operate a Private
Business Corporation (PBC) which is the simplest form of maintaining an entity
with limited liability.
After reviewing this chapter you should:
 Know how to form a Private Business Corporation;
 Know how to comply with statutory requirements
 Know how to covert a Private Business Corporation to a Company or vice
versa.
 
You should refer to the Private Business Corporations Act as you consider this
chapter.

7.1 CONSEQUENCES OF REGISTERING AN INCORPORATION STATEMENT

The following flows from the registration of a founding statement:

 A Private Business Corporation (PBC) is a juristic person which has:
♦ perpetual succession;
♦ limited liability
♦ the capacity and powers of a natural person.
 The total membership is less than 20.
 Members are free to participate in the management and control of the
corporation.
 The interest of a deceased member may be disposed of by the Executor.
 Members have protection from unfair treatment.
 Only natural persons can be members of a Private Business Corporation.
 The acts of members will bind the PBC if they were done for the benefit
of the PBC.
 The name of the PBC must be included on all business letters
 A PBC may be wound up in a similar manner to a company.

TEST YOUR KNOWLEDGE

♦ May a Company be a member of a Private Business Corporation?

♦ May a Private Business Corporation be a shareholder in a Company?

7.2 FORMATION OF A CLOSE CORPORATION

Private Business Corporations in Zimbabwe are similar to Private Business

Corporations in South Africa. However the terms used in the Private Business
corporations Act tend to be different. Students utilising South African material
must be aware of these differences.
The name PBC should first be reserved. This is done by making an application to
the registrar of companies in a prescribed form. An incorporation statement
must be lodged for registration. The incorporation statement must be signed by
every member and accounting officer [section 6]

TEST YOUR KNOWLEDGE

How would you register a new Private Business Corporation?
7.3 CONTENTS OF INCORPORATION STATEMENT
The founding statement shall specify:
♦ Name of PBC
♦ Principal business
♦ Postal and physical address
♦ Registered office
♦ Members: full names, ID number, size of interest, expressed as a percentage
♦ Size of members’ interests
♦ Contribution of members
♦ Accounting officer: name and address and letter of consent
♦ Financial year end

The Incorporating statement shall be signed by all members.

7.4 ACCESS TO INCORPORATING STATEMENT

In terms of Section 11 members AND THE PUBLIC have access to the

incorporating statement.

7.5 FIDUCIARY DUTY OF MEMBERS

Each member has a fiduciary duty to the PBC (i.e. as for directors of companies).
This is different to a company where shareholders do not have a fiduciary duty.

7.6 MEMBERS DECLARATION OF INTEREST IN CONTRACTS

Disclosure of any material interest in contracts is required.

7.7 VOTES AND INTEREST IN CLOSE CORPORATION

The ratio of votes is also the ownership ratio. [SECTION 40(5)]

A company may not be a member of a Private Business Corporation but there is

no reason why a Private Business Corporation may not be a shareholder in a
Company.

 MEMBERS’ RIGHT TO CONVENE A MEETING

Any Meeting must be called on reasonable notice [Section 40(2)]. However no
meetings are necessary unless the by-laws provide differently.
  MEETINGS OF MEMBERS
All members meetings require a quorum of 50% [Section 40(30)]

 MINUTES
Minutes and resolutions are to be prepared in the same manner as for
companies.

 PAYMENTS TO MEMBERS
No payment to members is permitted, in terms of Section 42(1), if this would
result in:
• liabilities exceeding assets;
• an inability to pay PBC debts;
• cash flow problems in future.

 RIGHT OF MEMBERS TO CONTRACT

Any member may bind the PBC [Section 37]

ANNUAL FINANCIAL STATEMENTS

Annual financial statements are required within 9 months of year end [Section
46].
These should consist of the following:
♦ Balance sheet;
♦ Income statement;
♦ Report of Accounting Officer
■ The annual financial statements are to be signed by one or more member
holding at least 50% ownership and are not required to be lodged with the
Registrar.

TEST YOUR KNOWLEDGE

 Who may have access to a founding statement?
 Are the annual financial statements of a PBC required to be lodged with
the Registrar?

 REPLACEMENT OF ACCOUNTING OFFICER

The accounting officer shall be replaced if his appointment is terminated. The
accounting officer must advice the registrar of the termination of his
appointment together with an explanation if the termination is associated with
fraud by the PBC.
 TAXATION OF A PBC
A PBC is taxed the same as a Company.

 MEMBERS LIABILITY
Members of a PBC may become jointly and severally liable, with the company,
for debts incurred while:
 the name does not show PBC;
 a member does not make initial contributions;
 a member is not a natural person (i.e. is a body corporate);
 solvency, is a direct consequence of payment or granting assistance to a
member;
 a disqualified person is a manager;
 the PBC has no accounting officer for a period of 6 months;
 business is carried on:
♦ recklessly,
♦ with gross negligence
♦ with intent to defraud.

 ABUSE OF LIMITED LIABILITY

The Court may declare that Limited liability is suspended if there is abuse of
limited liability.

 CONVERSION OF COMPANY INTO PBC

Any private company may convert itself to a PBC by complying with the
provisions of section 20.

A notice must be published in the Gazette and newspaper circulating in the area
stating that:
 An application for conversion will be made to the registrar;
 The application must be inspected at the registrar’s office
 An objection may be lodged with the registrar within 10 working days
of the date of the application.
 Where there are no objections and the application is granted, the
registrar shall delete the company from the register of companies and
enter the register of PBC’s

 ADVANTAGES AND DISADVANTAGES: PRIVATE BUSINESS CORPORATION

COMPARED TO A COMPANY
7.1 Advantages
 Simplicity of management.
 Simplicity of decision making structure.
 A PBC may give assistance to a member to acquire interest.
 A PBC may acquire a member’s interest.
 Transfers of member’s interests are not subject to transfer duty.
 Fewer returns to the Registrar.
 A PBC can hold shares in a Company but a Company cannot hold shares in
a PBC.
 No director’s or auditor’s reports required.

DID YOU KNOW?

Compare the number of forms to regulate a Company and a PBC.

7.2 Disadvantages
 PBC’s accounting practice is uncertain.
 In a PBC: at least 50% of the members sign the annual financial
statements.
 Duties of Accounting Officer: not clear.
 Every member is an agent of a PBC.
 If a PBC is deregistered while having outstanding liabilities, the members
at the time of deregistration are jointly and severally liable for such
liabilities

7.3 Protection of Creditors

 Real protection of creditors is to be found:

♦ Payments by corporation to members places the onus of proof on
members
♦ Prohibition of loans and furnishing of security to members
♦ Joint member’s liability for the debts of a PBC
♦ Liability for reckless or fraudulent carrying on of business
♦ Powers of court in case of abuse of separate juristic personality of PBC.

DID YOU KNOW?

As PBCs may not have juristic persons as a member, it is not possible for a bank
to foreclose or grant an advance against a member’s shares in a PBC. This results
in banks being unable to accept cession of a member’s interest in a close
corporation. Security generally obtained is therefore a consequence of one or
more members providing personal guarantees. Generally a private company, in
which banks may become a member if the member defaults, is more suitable
when extensive bank loans are involved.

CHAPTER SUMMARY

 The Private Business Corporations Act provides for members to have a

fiduciary duty (unlike Companies where only directors have a fiduciary duty)
and for members to combine the roles which a director and a shareholder
have in a Company.
 The incorporating statement sets out the constitution of a PBC and should be
amended whenever there is a change in members or in participating ratios.
 A body corporate or company may not be a member in a PBC.
 A PBC may be a shareholder in a Company.
 A PBC requires an accounting officer who may prepare and certify the
financial statements.
 The financial statements of a PBC do not have to be lodged with the Registrar.
 A bank may not take cession of a PBC’s member’s interest, as it may of a
shareholders shares, as it may not become a member of a PBC.
 The members of a PBC may not be more than 20.
 PART THREE

Meetings and
Resolutions
LIST OF CHAPTERS

1. Meetings of members
2. Meetings of the board

OVERVIEW
This Part is concerned with the responsibilities of the company secretary at
company meetings.

The company secretary has a key role to play in the decision making processes
of the company and its members. It is one of the core duties for the company
secretary to ensure the correct procedure is followed at general and board
meetings so that decisions are made properly and lawfully. It is also a key
responsibility to make sure that they are recorded accurately, and that any
follow up paper work is prepared within the appropriate time scales.

Chapter 11 deals with the organisation and conduct of meetings of the

members, including the AGM and resolutions, which is particularly relevant for
listed companies. Chapter 12 goes on to cover board meetings.
 CHAPTER 11

Meetings of the
Members
CONTENTS

1. Introduction
2. Notice
3. Annual general meeting
4. General meetings
5. Class meetings
6. Quorum
7. Voting
8. Resolutions
9. The role of the chairman at general meetings
[Link] role of the secretary before, during and after general meetings
11. Minutes

This chapter covers the law and regulation governing the conduct of general
meetings, paying particular attention to the Companies Act and the JSE Listings
Requirements. This is essential knowledge for the company secretary in
ensuring the proper conduct of the meeting itself and advising the chairman
when necessary.

The chapter looks at the purpose of the different types of general meeting and
covers crucial areas of procedure such as notice, quorum and voting and
resolutions. We look in detail at the role of the company secretary before, during
and after the meeting in making sure that everything runs smoothly.
The procedures and regulations in respect of meetings of the members are very
different to that of meetings of directors (see Chapter 2. You should ensure that
you understand each set of procedures and regulations and know how to apply
them correctly.

LEARNING OUTCOMES

After working your way through the chapter you should:

 Know how to convene an AGM or a General Meeting.

 Understand the purpose of a class meeting.
 Know the regulations on quorums and voting.
 Understand the different types of resolution and when they are used.

1.1 INTRODUCTION

The requirement for companies to hold general meetings comes from the
Companies Act. It cannot be overruled by a company’s Articles. The term general
meeting includes both annual general meetings and general meetings. These are
sometimes referred to as company meetings or shareholders’ meetings.

General meetings and Annual General Meetings are usually called by the
directors. In exceptional circumstances, members may requisition a meeting.
The Court and the Registrar may order a general meeting to be called, held and
conducted in the manner in which it sees fit. It is likely that a meeting ordered
by the Court will be a general meeting, although legally the Court does have the
power to convene an AGM.

As a general rule, every company must hold an annual general meeting (AGM)
in each calendar year. Failure to hold an AGM is an offence.

Section 133 of the Companies Act provides that a quorum of 25 per cent of the
shares shall be represented when a special resolution is to be considered.

In the case of ordinary resolutions, Section 128 (1)(c) of the Companies Act
provides that, unless the Articles provide for a greater number, the quorum at a
general meeting of a company is two.

Section 127 of the Companies Act provides for all notices to be in writing.
To fully understand the content of this chapter you should refer to the following:
 The Companies Act;
 Annexure 3 to this book which deals with shareholder meetings

Annual general meeting (AGM)

A general meeting which, following the year of the company’s incorporation,

must be held in each calendar year to report on the profitability of the company
and to enable members to question the directors on the conduct of its affairs.

2. NOTICE

Authority to issue a notice convening a general meeting must come from the
board. The secretary has no authority to issue the notice unless instructed by
the board, although it is usually the duty of the secretary to prepare the notice.
If the notice has been sent by the secretary, it is usual to find the phrase ‘by
order of the board’ or a similar phrase followed by the secretary’s name and
position and this indicates that the secretary is acting with due authority.

If a notice is issued without proper authority, but every member attends, the
notice may still be considered valid. Any objections to the authority must be
made as soon as possible, or members will be deemed to have acquiesced.
Notice may be issued without authority if the meeting has been ordered by the
Registrar or the court, or has been validly requisitioned by members.

The following persons may call or requisition a meeting:

 The directors;
 The Court (Section 128(2))
 The Registrar: [Section 125(5)].
 The Shareholders [Section 126]: members who hold at least one twentieth of
the issued share capital

2.1. Period of notice

The number of days’ notice specified always means clear days, that is, the
number is exclusive of both the day on which the notice is served (i.e. the day
that notice is assumed to have arrived) and the day of the meeting.
All the following refer to “clear” days notice to shareholders and the auditor,
which excludes the day of notice and the day of the meeting. Two additional
days should accordingly be added, in each case.

 Annual general meetings: 21 days

 General meetings at which special resolutions are to be considered: 21 days
 General meetings at which ordinary resolutions are to be considered: 14 days
 Notice for a general meeting to consider the removal of a director or an
auditor (Sections 175 and 151): 28 days

Notice by requisition of shareholders to the company as follows:

 In terms of Section 128: 28 days

NB: The above is the notice to the company. The company has to respond by
giving the appropriate notice to members/shareholders.

2.2 Giving Notice

Notice is deemed to have been given if it was correctly addressed and sent by
post.

2.2. Proxies

 Requirement that the notice of meeting shall include a statement entitling

any member to appoint a proxy:

Section 129 of the Act obliges every company to include mention in the notice
of meeting that a member is entitled to appoint a proxy, who need not be a
member, to attend, speak and vote in his stead.

 Maximum period before meeting for lodging proxies:

Section 129(4) provides that the articles of a company may not provide for a
period of greater than 48 hours (excluding Saturdays, Sundays and public
holidays) before a meeting in which to lodge proxies.

 Voting by Proxy Holders

 Unless the Articles provide otherwise, a proxy holder shall only be
entitled to vote on a poll [subject to Section 198(2)].
  A member of a private company may not appoint more than one proxy
(i.e. appoint several proxy holders to represent portions of its
shareholding) but the member of a public company may appoint more
than one proxy.

2.3. Proxy
Any member who is entitled to vote at a general meeting can appoint another
person to attend and vote on a poll in his place. Unless the company’s Articles
provide otherwise, a proxy may not vote on a show of hands and need not be a
member of the company.

2.4. Responsibility if an Annual General Meeting is not held

 Section 125(7) provides that if a company fails to hold an Annual General

Meeting, all the directors and officers who are knowingly a party to that
failure commit an offence.

2.5. Inadequate Notice

 In terms of section 127(2), a meeting may be called by a shorter notice if in

the case of an annual general meeting, all the members entitled to attend
and vote agree and in the case of any other meeting if a majority in number
holding not less than 95% of the voting rights agree.

DID YOU KNOW?

The importance of proper notice and proper procedure cannot be over
emphasised. The dissatisfied shareholder, who disagrees with a decision
reached by the general meeting, will look to invalidate the meeting. As all
decisions at an invalid meeting become invalid, proper notice and correct
procedure are always essential. If you can invalidate the meeting you invalidate
the meeting’s decisions.

2.6. Quorum for General Meetings

 Section 128 of the Act provides that unless the Articles otherwise specify,
two members personally present at a meeting shall constitute a quorum.

Accordingly, it follows that:

Proxies may not be included in determining a quorum unless the articles
provide otherwise.
 When is a quorum required:
The common law principle is that a quorum is required to be present throughout
a meeting. Where there is no longer a quorum, the meeting must stand
adjourned. See however article 53 of Table A which merely requires a quorum
to be present when the meeting commences

2.7. Corporate shareholders: Appointment of representatives

Section 131 of the Act provides that a corporate shareholder may appoint a
representative to exercise the same vote as if he was the shareholder.

 Accordingly a representative:
♦ should be counted when the quorum is calculated;
♦ may vote on a show of hands as well as in voting if it is conducted by
means of a poll.
 Section 133 reads as follows:
A corporation whether a company within the meaning of this Act may-

If it is a member of another corporation, being a company within the meaning of

this Act, by resolution of its directors or other governing body authorize such
person as it thinks fit to act as its representative at any meeting of the company.

2.8. Compulsory adjournment of meeting of members

Section 130 of the Act provides that upon the demand of a member, or his
representative, a vote to adjourn shall be put to the meeting and decided by a
majority (more than 50 per cent) of members present personally or represented.

Where the prescribed articles are followed, Article 57 of Table A reinforce the
provisions of Section 130.

2.9. Defamation
Shareholder meetings are private meetings held in private places and
accordingly outsiders, which means anyone but a shareholder, may be asked to
leave the meeting at any time.

This is done so that “qualified privilege” may apply and accordingly avoiding the
pitfalls posed by the law of defamation, which would apply if a non-member was
present while a member’s contentions are discussed.
2.10. Eviction of a member from a General Meeting

As a member has a right to attend a general meeting of a company it is only

possible to evict a member upon the majority of members present at a meeting
voting to exclude him or her from the meeting. This is usually only resorted to
in the case of disorderly conduct (e.g. the member is drunk and keeps shouting
and disrupting the meeting) and after the Chairman has warned the member on
several occasions.

2.11. Voting rights of shareholders

Section 128 reads:

“every member shall have one vote in respect of each share or each twenty
dollars of stock held by him.’’

2.12. Voting rights of preference shareholders

Unlike ordinary shareholders who are deemed to hold equity, preference

shareholders do not normally, unless the articles specifically provide, carry any
voting rights in members’ general meetings. As a result they tend to be confined
to their preferential right to dividend payment of a fixed percentage and return
of capital upon liquidation.

CHECKLIST
• Does the notice state it is an annual general meeting and the date, time an
place?
• Does the notice contain resolutions that can be implemented (i.e. are your
resolutions clear)?
• Does the notice indicate the authority under which it is being given (usually by
you, as company secretary under the authority of the board)?
• Does the notice include a reference of the member’s right to appoint a proxy

TEST YOUR KNOWLEDGE

♦ What are the minimum notice periods for general meetings?
♦ What are the requisite authorities to consent to holding an annual general
meeting and a general meeting at short notice?
♦ What are the typical resolutions considered at an annual general meeting?
♦ Who other than shareholders is entitled to receive notice of general meetings?
3. ANNUAL GENERAL MEETING

3.1. Timing of Annual General Meetings

• Maximum period from incorporation to first Annual General Meeting:

Section 125(2) provides that the first Annual General Meeting shall be held
a. within 18 months of incorporation of the company.
b. Thereafter within not more than six months after the end of every ensuing
financial year of that company, and
within not more than 15 months after the date of the last preceding such
meeting of that company.
• Adjournment of Meeting
The meeting may be adjourned in the following circumstances:
♦ If a quorum is not present;
♦ “Compulsory” adjournment of the meeting of members [see Sections 130]

DID YOU KNOW?

The best way to understand AGM’s is to attend one. That way you will see
different styles and approaches, all of which can be acceptable. Choose five
leading companies, call the company secretary, state you are studying and ask
for an invitation to attend the AGM. Go, look, listen and learn.

3.2. Requisitioned meetings

Sections 126 makes provision for members to requisition meetings of
shareholders.

3.3. Circulation of members’ resolutions

In addition to the ability of a shareholder to requisition a general meeting,

shareholders also have the right to add their own items of business to the
agenda of a forthcoming AGM. Section 132 provides that:
• one or more shareholders representing not less than 1/20th of the total voting
rights of all the members having at the date of requisition a right to vote at the
meeting to which the requisition relates; or
• not less than 100 shareholders holding shares in the company on which there
has been paid up an average sum, per member of not less than 200 dollars.

The resolution may be accompanied by a statement of not more than 1,000

words. The requisition must be lodged not less than 6 weeks before the date set
for the meeting, but if the meeting is subsequently set for sooner, the requisition
is deemed to have been validly served. The procedure is to deposit the signed
requisition(s) (stating the object(s) or including any supporting statement) at the
registered office of the company. In most circumstances the board of the
company will not agree with the members’ resolution, and it is therefore usual
for the board to provide their view on the members’ resolution in a statement
together with a recommendation to vote for or against that particular
resolution. Directors are also at liberty, if they wish, to add a further resolution
in response to the requisitioned business.

Section 132(4)(b) provides that the cost of circulating the members’ resolution
is at the requisitionist’s expense. This does not, however, give the requisitionist
freedom to circulate a statement without due regard to its content. Section
132(5) states that a company is not obliged to circulate a members’ resolution
if, on application to court, the court is satisfied that the process is being abused
by the shareholder to secure needless publicity for defamatory matter.

CHECKLIST : AGM PLANNING

• Check that the date chosen complies with the statutory minimum 21 days’
clear notice. (i.e. excluding the day when notice was given and the day of the
meeting.)
• If it is the first AGM, check that the date chosen is not more than 18 months
since incorporation. If it is not the first AGM, check that the date is not more
than 15 months since the last AGM and that not more than 9 months has elapsed
since the end of the financial year.
• If the venue is a regular one, check that it has been booked. If it is a new one,
check that is convenient for members to attend at the location. Check that the
board has agreed to convene the meeting and approved the notice of meeting.
• Have the annual report and accounts and notice of AGM been posted to all
shareholders?
• Have you informed interested parties such as the auditors, institutional
investors and the financial and industry sector press of the date, time and venue
of the AGM? If the company is listed, will the documentation and arrangements
comply with the ZSE Listings requirements?

3.4. The business of an Annual General Meeting

Notes on the AGM:

♦ Any special resolution (the circumstances, which require a special resolution,
are set out in the special resolution section of this paper) may be considered,
subject to compliance with all the specified requirements (including, but not
restricted to, period and detail of notice and quorum, AS SET OUT IN Section
125(3) of the Companies Act).
♦ The meeting shall commence with a resolution to take the notice, the
Directors’ Report and the Auditors’ Report as read, failing unanimous (100 per
cent of those present) agreement, the Auditors’ Report shall be read.

♦ The Directors’ Report and Financial Statements shall then be adopted.

[Note: These documents cannot be changed, but could be referred back to the
Board of Directors.)
♦ Re-appointment or appointment of the auditors.
♦ Election / re-election of directors. Each director shall be voted separately,
unless the meeting first resolves to simultaneously elect more than one director.
Section 210 of the Companies Act refers. [Note: Subject to the provisions of the
Articles of Association, this means not less than one third of the directors (which
shall include directors which the board appointed to fill casual vacancies and
then the longest serving directors) shall be elected / re-elected each year.]
♦ Authority for the board to allot authorised but unissued share capital shall be
renewed by an ordinary resolution at each annual general meeting.
♦ In certain companies (now few and far between) the Articles require directors
and auditors fees to be set by the Annual General Meeting.
♦ Also uncommon, but sometimes required by the Articles, is the requirement
that the Annual General Meeting shall set the final dividend.

SAMPLE WORDING

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the Annual General Meeting of Members of

LMN Limited will be held at 1 Wierda Road West, Wierda Valley, Sandton, on
Tuesday, 24 May 2005 at 10h00 for the purposes of considering and, if deemed
fit, passing with or without modification, the resolutions set out below:

1. Ordinary Resolution number one (Auditors Report)

To resolve that the Auditors Report be taken as read.

2. Ordinary Resolution number two (Approval of Annual Financial Statements)

To receive the annual financial statements of the company and the group for the
financial year ended 30 September 2004, together with the reports of the
directors and auditors.
3. Ordinary Resolution number three (Simultaneous election of two directors)
To pass a procedural resolution to permit the election of directors by means of
a single resolution.

4. Ordinary Resolution number four (Re-election of directors)

To appoint Messrs D Duck and A Platapus who retire by rotation but, being
eligible, offer themselves for reappointment.

Summarised curriculum vitae of the directors who offer themselves for

reappointment:

Donald Duck
Holds the Estate Agency Board certificate. He completed the Stellenbosch
University Business School’s Business Management Programme. For 15 years he
was a manager of XYZ Limited.
Donald has served as a director of your company for three years.

Arnold Platapus
Arnold has been a director of ABC Limited for five years. He has consulted to
various Government departments and parastatals.
He is a businessman who is a director of several property owning companies.

5. Ordinary Resolution number five (Placing the un-issued shares under the
control of directors)

To resolve that the authorised but un-issued shares in the capital of the
company be placed under the control of the directors of the company to allot or
issue such shares at their discretion, subject to the provisions of the Companies
as amended, and the Listings Requirements of the Zimbabwe Stock Exchange.

No issue of shares is contemplated at the present time and no issue will be made
that could effectively transfer the control of the company without the prior
approval of members in general meeting.

6. Ordinary Resolution number six (Cash issue)

To resolve that the directors of the company be and they are hereby authorised,
by way of a general authority, to issue all or any of the authorised but un-issued
shares in the capital of the company for cash, as and when they in their
discretion deem fit.

This resolution is subject to the Listings Requirements of the ZSE and the
following:
♦ that this authority shall be valid until the next annual general meeting of the
company, provided it shall not extend beyond fifteen months from the date that
this authority is given;
♦ that a paid press announcement giving full details, including the impact on net
asset value and earnings per share, will be published at the time of any issue of
shares representing, on a cumulative basis within one year, 5% or more of the
number of the company’s shares in issue prior to any such issue;
♦ that issues in the aggregate in any one year shall not exceed 15% of the
number of shares in the company’s issued share capital;
♦ that, in determining the price at which an issue of shares may be made in terms
of this authority, the maximum discount permitted will be 10% of the weighted
average traded price determined over the 30 business days prior to the date
that the price of the issue is determined or agreed by the directors. Issues at a
discount greater than 10% may be undertaken subject to specific member
consent; and
♦ that any such issue will only be made to public members as defined by the ZSE.

NOTE: Resolution Number six requires the approval of a 75% majority of the
votes cast by members present or represented by proxy at the annual general
meeting.

A member entitled to attend and vote is entitled to appoint a proxy to attend,

speak and vote in his stead, and such proxy need not also be a member of the
company.

Forms of proxy must be lodged with the company at its registered office by
10h00 on Friday 20 May 2005.

By order of the board

[SIGNED BY COMPANY SECRETARY TO LMN LIMITED]

J BROWN

23 March 2005
 LMN LIMITED
(“LMN” or “the Company”)
FORM OF PROXY
FOR THE ANNUAL GENERAL MEETING TO BE HELD ON TUESDAY, 24
MAY 2005 AT 10H00.
I/We
………………………………………………………………………………………………………….………………
of ………………………………………………………………………………………………………………………
being a member/members of LMN and entitled to …..…….. votes do hereby
appoint .……………………………………………… ………………………………….. or failing
him/her
……………………………………………………………………………………………………… or failing
him/her

The Chairman of the meeting as my/our proxy to act for me/us on me/us at the
Annual General Meeting of the company to be held on Tuesday, 24 May 2005 at
10h00, and at any adjournment thereof, at 1 Wierda Road West, Wierda Valley,
Sandton, and to vote for me/us on my/our behalf in respect of the
undermentioned resolutions in accordance with the following instructions (see
note 2).

Number of votes
(one vote per shahre
For Against Abstain
1. Auditor’s Report
2. Approval of Annual Financial
Statements
[Link] election of two directors

4. Alternatives
4.1 Should the meeting have agreed
to simultaneously elect directors:

In favour of the appointment of

Messrs Duck and Platapus

4.2 Should the meeting have agreed not

to simultaneously elect the two
directors:
 D Duck
A Platapus
5. Placing the unissued shares under
the control of directors
6. Authority for board to allot: Cash
Issue

Signed at on 2005
Signature Assisted by me
(where applicable – see note 7)

A member qualified to attend and vote at the meeting is entitled to appoint a

person to attend, speak and vote in his stead. A proxy holder need not be a
member of the company.

FORM OF PROXY – NOTES

Members holding certificated shares or dematerialised shares registered in

their own name.

1. Each such ordinary member is entitled to appoint one or more proxy holders
(none of whom need to be a member of the company) to attend, speak and,
on a poll, vote in place of that member at the general meeting, by inserting
the name of a proxy or the names of two alternate proxies of the ordinary
member’s choice in the space provided, with or without deleting “the
chairman of the meeting”. The person whose name stands first on the form
of proxy and who is present at the meeting will be entitled to act as proxy to
the exclusion of those whose names follow.
2. A member’s instructions to the proxy holder must be indicated by the
insertion of the relevant number of votes exercisable by that member in the
appropriate box/es provided. Failure to comply with the above will be
deemed to authorise the chairman of the meeting, if he is the authorised
proxy holder, to vote in favour of the resolutions at the general meeting, or
any other proxy to vote or to abstain from voting at the general meeting, as
he deems fit, in respect of all the member’s votes.
3. A member or his or her proxy is not obliged to vote in respect of all the shares
held or represented by him, but the total number of votes for or against the
resolutions in respect of which any abstention is recorded may not exceed the
total number of votes to which the ordinary member or his proxy is entitled.
4. Any power of attorney and any instrument appointing a proxy or other
authority (if any) under which it is signed, or a notarially certified copy of such
power of attorney shall be deposited at the office of the transfer secretaries
not less than 48 (forty eight) hours (excluding Saturday, Sundays and public
holidays) before the time appointed for holding the meeting.
5. The completion and lodging of this form of proxy will not preclude the
relevant member from attending the meeting and speaking and voting in
person thereat to the exclusion of any proxyholder appointed.
6. Where there are joint holders of ordinary shares any one holder may sign the
proxy form. The vote of only one holder in order of seniority (determined by
sequence of names on the company register) will be accepted, whether in
person or by proxy, to the exclusion of the vote(s) of other joint holders.
7. Members should lodge, post or fax their completed proxy forms to
Computershare Investor Services Limited, 70 4th Street, Harare. (to be
received by not later than 10h00 on 20 May 2005. Proxies not deposited
timeously shall be treated as invalid.

TEST YOUR KNOWLEDGE

• When must an AGM take place?
• What is the statutory minimum period of notice for the AGM?
• What is the main purpose of the AGM?

4. GENERAL MEETINGS

General meetings may be convened by the directors at any time and there are
no specific requirements about the business to be conducted at such a meeting,
except that the business shall be specified in the notice of meeting.

4.1. The business of a General Meeting

The only business that may be transacted at a general meeting is that specified
in the notice convening the meeting. The ordinary or special resolutions to be
passed will be in accordance with the Companies Act and as stated in the
company’s Articles. Examples of resolutions to be passed at a general meeting
include:
• amendments to the Memorandum;
• new Articles;
• amendments to employees’ share schemes (necessitated by a change in
legislation);
• substantial proposed acquisitions or divestments.

4.2. Minutes of General Meetings

♦ The minutes of a General Meeting should be considered approved and signed

at the board meeting held soon after the General Meeting, or should a board
meeting ONLY be scheduled for some time after the General Meeting, be signed
by the Chairman (preferably with the support of directors, by a “round robin”
resolution of directors).
♦ Section 138 provides that any such minute, if purporting to be signed by the
chairman of the meeting at which the proceedings were had or by the chairman
of the next succeeding meeting shall be evidence of the proceedings.
♦ Section 138(1) creates a statutory duty to keep minutes.

5. CLASS MEETINGS

A company’s Articles usually provide that the capital can be divided into shares
of more than one class.

By definition, therefore, class meetings are meetings of the holders of a class of

a company’s shares. Meetings must be held whenever the rights of the holders
of the class are to be varied as a result of some action proposed to be taken by
the company.

As the rights are defined in the Articles, any variation must be effected by
resolution in general meeting. It is normal to hold a preliminary class meeting
and then a full general meeting of the company, at the same place one meeting
immediately after the other. Many Articles provide for preliminary consent to
the variation to be obtained from the class either in writing by the holders of at
least 75 per cent of the shares, or by extraordinary resolution passed at a
separate meeting of the holders. The latter is usually favoured since the majority
need not be 75 per cent of the whole number of shares, but only of votes cast
by those present.

It is common for public companies to discuss any proposed variation of class

rights with their institutional shareholders prior to dispatch of the notice of
meeting to ensure that the company has their support. It is also useful in
ensuring the presence of a quorum at the meeting.

Class meeting
A meeting of the holders of a class of a company’s shares. Class meetings are
held whenever the rights of the holder are to be varied, by some action proposed
by the company.

5.1. Convening a class meeting

Unless the Articles of Association provide otherwise, the procedure for

convening, holding and passing resolutions at class meetings are the same as for
general meetings, except that the right to vote at the meeting is usually
restricted to the holders of that particular class of shares. Whatever is in the
Articles will determine the operative procedure.

SAMPLE WORDING

NOTICE OF CLASS MEETING

................................ Ltd. NOTICE IS HEREBY GIVEN that a SEPARATE CLASS

MEETING of the holders of the ............ per cent second cumulative preference
shares in the capital of the company will be held at .............................. on ...........
day, .................... 2005 at ............. (or as soon thereafter as the separate class
meeting of the holders of the ......... per cent first cumulative preference shares
in the capital of the company which has been convened for the same day and
place shall have been concluded or adjourned) for the purpose of considering
the following resolution, which will be proposed as an extraordinary resolution:

RESOLUTION THAT this separate class meeting of the holders of the ........ per
cent second cumulative preference shares in the capital of the company hereby
sanctions the passing of the resolution set out in the notice dated
................................. 20xx, convening an extraordinary general meeting of the
company on ....................... 20xx (a copy of such notice having been produced to
this meeting and for the purpose of identification signed by the chairman
thereof) and hereby sanctions each and every variation, modification or
abrogation of the rights and privileges attached or belonging to the ....................
per cent second cumulative preference shares effected thereby or necessary to
give effect thereto. By order of the board, ...............................
Secretary (Address) (Date) Note:
1 A member entitled to attend and vote at the meeting is entitled to appoint
one or more proxies to attend and vote on his or her behalf. A proxy need not
also be a member.

TEST YOUR KNOWLEDGE

Define a class meeting.

6. QUORUM

If the company is a single-member private company the quorum will be adjusted

accordingly to allow the transaction of business by a sole member.

Where more than one person is entitled to attend, the court has the power to
authorise the holding of a meeting even though it is known in advance that only
one person will be present. This is to deal with a situation where, a minority
shareholder can refuse to attend a meeting at which he is to be dismissed by the
majority shareholder, the court will, in such circumstances, allow the majority
shareholder to conduct the business of the meeting alone.

TEST YOUR KNOWLEDGE

• In what circumstances may one person constitute a valid quorum?

• If a quorum is not present at a general meeting, what would you expect to
happen?

7. VOTING

It is an important duty of the chairman of a meeting to ascertain the true sense

of the meeting on any question being considered. It is usual in the first instance
for the chairman to take a vote on a show of hands, although a poll can be
demanded at any time.

When voting by a show of hands, the chairman calls on those present to vote by
raising their hands, first ‘For’ the motion and then ‘Against’. At this stage each
member has only one vote and proxies are not allowed to vote unless the
Articles permit them to do so. A visual count (or if there are many members
present a visual survey of the hands raised) is made and the chairman declares
the motion carried or lost. If many members are expected at the meeting, it may
be a good idea to issue voting cards to bona fide shareholders upon arrival. In
that way, only those who are entitled to vote on a show of hands (excluding
proxies, see below) will be able to do so and this will aid the visual count.

The chairman’s declaration of the motion is conclusive unless a poll is

demanded.

7.1. Counting the votes

Article 62 of Table A of the Act makes it clear that votes shall be counted as
follows:

• On a show of hands: Each personally member, shall have one vote.

• On a poll: Each shareholder except for preference shareholders, shall generally

have one vote for every one share.

• Article 62 reads as follows:

Subject to any rights or restrictions for the time being attached to any class of
shares, on a show of hands every member present in person shall have one
vote and on a poll every member shall have one vote for each shares of which
he is a holder.

Proxies therefore cannot unless allowed by the article, vote on a show of

hands.

7.2. The role of scrutineers in a meeting

• The scrutineers, who are usually the share registrars, shall take charge of all
proxy forms and check these against the member’s register, before each AGM
or General Meeting.
• It is normal practice to arrange for all shareholders, proxies and
representatives of corporate shareholders to notify the arrival desk of their
arrival, by signing the attendance register.
• The share registrars or the secretary who is responsible for the share register
should simultaneously record those present (it is usual to use a computer for
this purpose) together with the number of shares represented and before the
meeting commences to inform the company secretary whether or not a quorum
is present.
• The scrutineers should have pre-printed forms for voting by poll available.
• The scrutineers will verify, before the representatives enter the venue, that all
persons who represent corporate shareholders are authorised in terms of valid
Letters of Authority, or in accordance with resolutions of directors and that
proxies were received before the set deadline, which deadline may not be more
than 48 hours before the meeting.
• On voting by a show of hands, the scrutineers should count the hands and
inform the company secretary of the outcome.
• In the event of a poll being called for in terms of Section 129 of the Act, the
scrutineers shall be responsible for handing out the voting forms, collecting the
completed voting forms, and calculating the outcome of the voting and notifying
the company secretary of the results.

TEST YOUR KNOWLEDGE

Whose duty is it to ascertain the sense of the meeting when votes are cast?

DID YOU KNOW?

Compare the advantages and disadvantages of voting on a show of hands
compared to a poll vote. Some of the key comparisons are:

♦ a show of hands is quicker, cheaper and involves less administration;

♦ on a show of hands, the democracy of a ‘one man one vote’ principle as

compared to the right to vote in proportion to ownership, has been the subject
of considerable debate;

♦ voting by a poll allows those shareholders with a greater financial interest in

the company (i.e. through a major shareholding) to have more influence that
those with a minor interest.

Are there any other comparisons you can think of?

TEST YOUR KNOWLEDGE

What is a proxy and when does the proxy have a right to speak at a meeting?

8. RESOLUTIONS
8.1. Introduction

A resolution is the formal way in which a decision is proposed and passed at

general meetings.

8.2. Types of resolution

Three types of resolution may be passed at a general meeting:

• Ordinary resolutions;
• Special resolutions;
• Ordinary resolutions which require special notice.

8.3. Ordinary resolutions

An ordinary resolution is the normal method of securing the members’ approval

for routine business transacted at general meeting, such as approval of the
annual accounts. The Companies Act does not contain a definition for an
ordinary resolution and is therefore any resolution which is not a special
resolution as described in Section 133 of the Companies Act.

The Companies Act also allows the following to be passed by an ordinary

resolution:

 the authorisation of directors to allot shares

 the re-appointment of auditors

An ordinary resolution is passed by a simple majority of votes cast, and requires

21 days’ notice at an AGM, or fourteen days’ notice at a General Meeting.

8.4. Special Resolutions

• Special Resolutions passed in terms of Section 133, only become effective

upon registration by the Registrar of Companies.
• The content of the special resolution should not be implemented before the
Special Resolution becomes effective.
• The quorum consists of two members personally present unless otherwise
specified by the articles (section 128(1)(c).

It should be noted that the quorum in respect of special resolutions [Section

133(a)] includes a proxy in the quorum.
• The full body of the Special Resolution, together with reasons for and the
effect of passing the special Resolution, shall, inter alia, together with the
“Requirement that the notice of meeting, include a statement entitling any
member to appoint a proxy” is required to be set out in the notice of meeting.
• The notice required is 21 clear days’ notice (which excludes the day of giving
notice and the day of the meeting), which for all practical purposes should be
calculated as 23 days.
• Any of the following matters require a Special Resolution. [Refer: Page 104/5
of the second edition of “Corporate Law” by H S Cilliers, M L Benade et al
(Butterworths)].
♦ Converting one type or form of company into another [Section 33 of the Act]
♦ Change of name [Section 25]
♦ Alteration of objects and powers [Section 15 and 16]
♦ Alteration, removal or incorporation of conditions in the Memorandum
[Section 16]
♦ Alteration of share capital, other than reduction [Section 87]
♦ Authorising payment of interest on shares out of capital [Section 90]
♦ Authorising issue of shares of par value at a discount [Section 75]
♦ Acquisition by the company of its own shares [Section 78 and 79]
♦ Conversion of shares into stock and vice versa [Section 87]
♦ Making a loan to a director [Section 177]
♦ Approval of payments to directors for loss of office or in connection with
schemes of arrangement or of take-over [Section 180]
♦ Requesting the appointment of an inspector by the Minister to investigate
the affairs of a company [Section 158].
♦ Winding up by the Court [Section 206]
♦ Voluntary winding up [Section 242]
♦ Sanctioning arrangement between insolvent company and creditors
[Section 260]
♦ Disposal of records of a company which is the subject of a voluntary windup
operation by members [Section 293]

Section 133 of the Act reads:

(1) A resolution by a company shall be a special resolution when it has been
passed by the majority of not less than three fourths of such members
entitled to vote as are present in person or by proxy at a general meeting
of which not less than twenty one days notice has been given, specifying
the intention to propose the resolution as a special resolution and the
terms of the resolution and at which members holding in the aggregate
 not less than one fourth of the total votes of the company are present in
person or by proxy.

(2) If members at the meeting hold less than one fourth of the total votes of
all members entitled to vote, the meeting shall stand adjourned to the
same day in the following week or, if that is a public holiday, to the next
succeeding day other than a public holiday. At the adjourned meeting the
members present in person or by proxy may deal with the business for
which the original meeting was convened and a resolution passed by not
less than three-fourths of such members shall be deemed to be a special
resolution, notwithstanding that less than one-fourth of the total votes of
the company are represented at such adjourned meeting.

(3) If it is so agreed by a majority in number of the members having the right

to attend and vote at such meeting and holding in the aggregate not less
than ninety-five per centum in nominal value of the shares giving that
right, a resolution may be proposed and passed as a special resolution at
a meeting of which less than twenty one days’ notice has been given, and
subsection (7) shall not apply for the purposes of this subsection.

(4) Notwithstanding the provisions of subsection (1), a resolution may, with

the written consent, on the prescribed form, of all the members of the
company, be proposed and passed as a special resolution at a meeting of
which notice as contemplated in subsection (1) has not been given. A copy
of such consent, on the prescribed form, shall be lodged with the Registrar
together with a copy of the special resolution.

(5) All other resolutions at a general meeting shall be called ordinary

resolutions.

(6) At any meeting at which a special resolution is submitted to be passed, a

declaration by the chairman that the resolution is carried shall, unless a
poll is demanded, be conclusive evidence of that fact without proof of the
number or proportion of the votes recorded in favour of or against the
resolution.

(7) When a poll is demanded regard shall be had, in computing the majority
on the poll, to the number of votes cast for and against the resolution.
 (8) For the purposes of this section notice of a meeting shall, subject to the
provisions of this Act, be deemed to have been duly given and the meeting
shall be deemed to be duly held when the notice is given and the meeting
is held in the manner provided by the articles of the company concerned.

8.5. Ordinary resolutions requiring special notice

Special notice is required for an ordinary resolution to remove a director, before

the expiration of his period of office [Section 175].

Section 135 defines special notice as notice given to the company of 28 days.

TEST YOUR KNOWLEDGE

• What are the main types of resolution and when are they used?
• What is special notice and when is it required?
• What are the requisite majorities for passing an ordinary and special
resolution?

9. THE ROLE OF THE CHAIRMAN AT GENERAL MEETINGS

The role of the chairman at a shareholders’ meeting is to ensure that the

meeting is properly managed in an orderly manner.

The chairman may:

♦ demand that a poll be taken;
♦ declare the result of a vote taken by a show of hands;
♦ direct the manner, time and place when a poll will be taken.

Part of the duty of the company secretary is to provide guidance for the
chairman of the meeting to ensure compliance with the law and the company’s
Articles of Association. For example, when preparing the detailed chairman’s
agenda for a general meeting, it is vital that an opportunity is given for
shareholders to raise any questions before a resolution is put to the vote and
declared.

The chairman of the board should be nominated to preside as the chairman at

general meetings. If the chairman is not present, then another director (e.g.
deputy chairman or vice-chairman) should be nominated by the board to take
the chair. If neither the chairman nor another director is able or willing to take
the chair within fifteen minutes after the appointed start time of the meeting,
then those shareholders present and entitled to vote may choose one of their
number to act as chairman.

The election of the chairman confers on him all the powers necessary for him to
fulfill his role. The Articles of a listed company often give the chairman more
extensive powers, for example to adjourn without the consent of the meeting.

One area in which the chairman’s power is of great importance is the manner in
which he deals with unruly shareholders. The chairman is in charge of the
meeting and can, subject to the Articles, enforce his decisions on points of order,
motions, amendments and questions. The duty of the chairman at a general
meeting of a listed company to ensure that the sense of the meeting is properly
ascertained is expanded to include reporting on the proxy votes which have
been lodged prior to the meeting. This is encouraged by both the Combined
Code and by the ICSA. The chairman should report on the proxy votes lodged for
each resolution once the result has been declared. The ICSA also strongly
encourages that a short report stating the proxy votes lodged for each resolution
is available following the meeting to shareholders who attended the meeting
and also to other interested parties, for example, by placing the report on the
company’s website. It is also good practice for the chairman to report on proxy
votes lodged so as to ensure that, if the resolution is carried on a show of hands,
the result is not at odds with the proxy votes.

10. THE ROLE OF THE SECRETARY BEFORE, DURING AND AFTER GENERAL
MEETINGS

10.1. The role of the secretary at AGMs

The first job of the secretary is to estimate the attendance at the meeting, so
that a room can be booked that will be suitable in terms of size, availability, cost
and quality. Members will require a venue that is fairly comfortable, but not so
extravagant that they feel their money is being wasted. The secretary is usually
responsible for finding, evaluating and hiring an appropriate venue.

Before the meeting

1. Following approval of the audited accounts, three proof copies of the report
and accounts and the notice of the meeting should be signed off. Two
 directors must sign the balance sheet and the directors’ report. The signature
of the auditor is needed on the auditor’s report. The secretary usually signs
the notice of the meeting.
2. If the company has a large share register, it is likely that the annual report
will be printed externally by professional printers. Another copy of the report
and accounts with the names of the signatories should be sent to the
company’s printers for a final proof prior to the bulk supply being printed for
the shareholders.
3. Advise the share registrar (if one is used) of the recommended dividend so
that they can prepare the dividend warrants for dispatch to shareholders
following approval at the AGM.
4. Arrange with the bankers for a dividend account to be opened so that the
money required to pay the dividend can be deposited.
5. Prepare the proxy forms for dispatch with the report and accounts and the
notice of general meeting. Proxy forms are often provided as either separate
cards or a tear-out page in the notice of meeting.
6. Instruct the printers as to the date the report and accounts, notice of general
meeting and proxy form should be published in the press and sent to
shareholders.
7. Place one of the three signed copies of the report and accounts in the
company files and send one to the Registrar of Companies.
8. Invite the company’s attorneys and other appropriate advisors to attend the
meeting. Remember that the auditors are entitled to attend anyway. Instruct
the company’s share registrars (if applicable) to attend, in the case of listed
companies.
9. Check returned proxy forms against the register of members and report the
result of the proxy count to the chairman after the expiry of the deadline for
receipt (usually 48 hours before the meeting).
[Link] ballot papers in anticipation that a poll may be demanded.
[Link] an agenda for use by the board. In some circumstances it may be
useful to prepare a more detailed agenda for the chairman, together with
prepared answers to awkward questions.
[Link] attendance sheets to register attending shareholders, the press,
proxies and representatives.
[Link] the register of members available, in case it is necessary to identify the
people attending the meeting, to ensure that only those entitled to be there
are present.
[Link] practical details, for example, catering, room layout, security, access
and facilities for the disabled, health and safety arrangements, and audio-
 visual arrangements. These practical details are usually dealt with during a
pre-meeting with those responsible for managing the meeting venue.
[Link] proposers, seconders and scrutineers and finalise the chairman’s
agenda.

At the meeting

At the AGM itself, the secretary should:

1. Check that each director is sitting behind his own name card.
2. Assist/manage the registration process of shareholders or their proxies as
they arrive at the meeting – it is necessary to verify the identity of the
shareholder or proxy to ensure they are entitled to attend. Similarly, it is
necessary to review any letters of appointment or board minutes in respect
of a corporate representative, as these do not need to provide any advance
warning of their attendance. This is often managed for the company
secretary by the share registrars who are the scrutineers.
3. Check that a quorum is present at all times.
4. Ensure that the number of members’ proxies has not exceeded the room’s
capacity, to enable everyone to participate in the meeting.
5. Be ready at the chairman’s request to read the auditors’ report to the
meeting. With the consent of the meeting it may be taken as read.
6. Make sure that the identity of any member who speaks from the floor is
known.
7. Be prepared to advise the chairman on any point of procedure. It is
customary that the secretary sits next to the chairman of the meeting in
order to provide advice. The secretary should have a copy of the company’s
Memorandum and Articles of Association, the latest annual report and the
notice of meeting to hand, in order to assist in handling queries.
8. Assist the chairman and any tellers in counting the votes on a show of hands.
9. Assist with the setting up of a poll, if one is demanded, and advise the
chairman on whether it can be taken immediately (i.e. if the secretary has
anticipated the poll and has prepared the necessary documentation and
scrutineers) or whether it should be taken at a later date – usually not more
than two days after the meeting.

After the meeting

After the meeting the secretary should:

1. Send copies of any special resolutions, signed by the chairman, to the
Registrar of Companies on a form CR 11.
2. Make the necessary arrangements for the dividend to be paid if the payment
date is some time after the meeting. If it is necessary to close the share
registers, follow the requirements of Section 117.
3. Promptly prepare the minutes of the meeting. Section 138
4. If the company is listed, the results of any non-routine matters may need to
be announced to the ZSE and members.

10.2. The role of the secretary at General Meetings

The role of the secretary before, during and after a General Meeting is similar to
that at the AGM. However, as it is unlikely that the Annual Report will be
received or a dividend approved, these elements of the secretary’s role can be
ignored.

TEST YOUR KNOWLEDGE

a) It is good secretarial practice to have available the registers and spare

copies of the agenda at the AGM. What other documents and forms
should be ready for use at the AGM?
b) List the duties to be performed by the secretary during the AGM.
c) List the duties to be performed by the secretary after the conclusion of
the AGM.

TEST YOUR KNOWLEDGE

Your chairman is worried about demonstrators and activists at the forthcoming

AGM. What would you advise?

Answer

• Consider employing a professional events management firm with their own

security personnel.
• Think about the layout of the room: for example, directors should be seated
centre stage to make unauthorised access more difficult.
Introduce airport-type screening of attendees.

11. MINUTES
It is a statutory requirement [Section 138] that all companies are to record
minutes of the proceedings at:

 all general meetings;

 all meetings of directors;
 all meetings of managers.

The minutes must be signed by the chairman; that signature is prima facie
evidence that the meeting has been properly constituted and conducted. Failure
to comply with keeping minute books will make the company and every officer
liable to a daily default fine.

Minutes are the written record of business transacted at a meeting and of the
decisions reached. They are the permanent record of the proceedings. Although
there is no statutory format for minute writing, they should be clear, concise
and free from ambiguity. All relevant dates and figures should be stated (e.g. by
stating monetary or other limits) and should not be left ill defined. Minutes must
be absolutely impartial.

No alterations should be made to minutes except to correct obvious errors. This

should be done before signature, the alterations being initialled by the
chairman. Once signed, minutes may not be altered and any subsequent
revisions should be dealt with by an amending minute at a subsequent meeting.

AGM and general meeting minutes are to be signed within one month of the
meeting. The Chairman may sign the minutes without reference to directors but,
the minutes are normally discussed by the Board if it meets in the month after
the AGM/General Meeting.

CHECKLIST

Minutes must be:

a) objective
b) clear
c) concise
d) complete

Minutes should be written:

a) impersonally
b) in the past tense, and Minutes should contain:
i. the name of the company (company number)
ii. the type of meeting
iii. the day and place of meeting
iv. those present or in attendance and apologies received
v. details of relevant discussion
vi. the full terms of resolutions adopted

11.1. Location and inspection of minutes

A company is required to keep the minutes of its general meetings at its

registered office and make them available for inspection by the members.

Members have a right to inspect the minutes of general meetings and to be

supplied with a copy of any minutes within seven days of making the request.

The rights of members to inspect minutes are confined solely to minutes of

general meetings and AGM’s. Members have no right to inspect the minutes of
board meetings.

CHAPTER SUMMARY

 All companies are required to hold AGMs, except that private companies may
be exempted from this requirement if the meeting is by resolution of
members.

 Generally, the AGM must be held with not more than fifteen months elapsing
between the date of one AGM and the next AGM. The AGM must be held
within 9 months of the end of the financial year.

 A general meeting (GM) is any general meeting which is not the AGM. GM’s
can be called at any time, for a specific purpose, although there are certain
circumstances where directors are required to convene a General Meeting.

 Notice periods for general meetings are strictly regulated and it is essential
that proper procedures are followed.
 The agenda acts as a driving force on the meeting. The content and the
presentation for the agenda should be decided between the chairman and
the secretary.

 For a meeting to be valid, there must be a quorum, which is usually specified

in the Articles.

 Proxies may be appointed to represent a member and vote on his behalf. See
Section 129 of the Companies Act.

 There are two types of resolution for decision-making – ordinary and special.

 Special resolutions must be described as such in the notice and require 21

days’ notice. They are passed on three-quarters of votes cast, if a quorum of
25% of the issued share capital is represented.

 The secretary organises the practical arrangements as well as preparing and

issuing the documents for the meeting. After the meeting, he/she is
responsible for ensuring that special resolutions are filed with the Registrar
of Companies on a Form CR 11.
 CHAPTER 2

Meetings of the
Board
CONTENTS

1. Introduction
2. Chairman
3. Notice
4. Agenda
5. Quorum and Attendance Register
6. Resolution and Voting
7. Resolution in writing
8. Minutes
9. The role of the Company Secretary before, during and after Board Meetings
[Link]

LEARNING OUTCOMES

This chapter looks at the key tasks in planning, organising and conducting board
meetings. After working through the chapter, and trying the Practice Questions,
you should know:

 The regulations which govern board meetings.

 The role of the chairman.
 The notice required for board meetings.
 What should be covered at the first board meeting of a newly registered
company.
 Voting procedure.
 What is required in preparing and keeping the minutes.
 The main tasks of the company secretary before, during and after the board
meeting.

1. INTRODUCTION

Directors collectively form a board, with each director having an equal say in
matters of company business and policy and with one vote each at meetings.
The Articles of the company contain provisions relating to board meetings. For
example, Table A, article 99, which is set out in schedule 1 to the Companies Act,
provides that, the directors may regulate their meetings as they think fit. Many
companies adopt a board procedures manual on how board meetings are
conducted. It is important to note that there are many differences between the
procedures used at board meetings those used at general meetings.

Board meetings do not have to be held at fixed intervals, but, in practice, it

makes sense to set a regular timetable for regular events, such as, the approval
of annual and interim financial results. Larger companies should have regularly
scheduled meetings so that the board can consider the financial and trading
position of the company at appropriate intervals.

The chairman will normally instruct the company secretary to convene a

meeting, but any director, acting independently or by instructing the company
secretary, can call a board meeting.

There is no automatic right for a director who cannot attend to appoint an

alternate. However, most Articles provide for the appointment of alternate
directors. [See article 79 of Table A, for public companies, contained in schedule
1 to the Companies Act.] Companies may, of course, choose to adopt Articles
which are not similar to Table A.

2. CHAIRMAN

The duties of the chairman are largely the same whether at general meetings or
at meetings of directors. Less formal meetings of directors are not as likely to
call upon the chairman to exercise control over the proceedings.

The Articles should cover the appointment of the chairman and in some cases,
deputy or vice-chairman. Table A, article 102 provides that the directors may
elect a chairman of their meetings and determine the period for which the
chairman is to hold office. Usually, the person appointed chairman of the board
will also take the chair at general meetings of the company (this is provided for
in Table A article 55) and will be regarded as chairman of the company.

It is important to keep a clear record of who the chairman is and the terms of
appointment. Disputes can arise if there is not a regular chairman, particularly if
the Articles give the chairman a casting vote, as provided for in article 60 of Table
A.

Minutes of each board meeting, which are required by Section 138 of the
Companies Act, should clearly state who is chairman of the meeting. If the
appointed company chairman is unable to attend the meeting (e.g. due to
illness) or is unwilling to chair the meeting within five minutes of the time set
for the meeting, article 102 of Table A allows the other directors to appoint a
fellow director to assume the chair for that meeting.

The duty of the chairman is to manage the board meeting. He should seek the
views of the other directors and facilitate the discussion of each agenda item.
Following discussion, the chairman should ascertain, whether or not the board
approves the agenda item concerned.

3. NOTICE

While the Companies Act is very explicit on the notice required for AGMs, there
is no provision in the Act regarding notice for directors’ meetings. Under
common law directors must be given reasonable notice. For some companies,
reasonable notice would be a week; in others it might be much shorter. Even if
there is a fixed timetable for regular meetings it is still sensible to issue
reminders, sending a copy of the agenda at the same time.

SAMPLE WORDING: NOTICE OF BOARD MEETINGS

....................... LIMITED
(Address) ............................
(Date ) ............................
To: ....................

Dear Sir,
I have to inform you that a meeting of the directors of the company will be held
at ...............................................................................
on ................ day, .................... 20xx at 09h00
Yours faithfully,

................................
Secretary

TEST YOUR KNOWLEDGE

a) When should board meetings be held?

b) How much notice is required?
c) What are the rules regarding the chairman of a board meeting?

4. AGENDA

Items are placed on the agenda in the order in which they will be discussed at
the meeting. Supporting papers should be referred to by page numbers or some
other referencing system, in order to keep the agenda as concise as possible.

The agenda and supporting papers should ideally be issued to the directors
about one week before the meeting to provide adequate opportunity for the
directors to study them before the meeting.

Agendas vary according to the type of meeting and the type of business to be
discussed, etc. However, a typical agenda will include the following:

 apologies for absence;

 minutes of the last meeting – read out or previously circulated;
 matters arising from the minutes;
 business of the present meeting – presentations, reports, resolutions, etc. as
appropriate;
 any other business;
 date of the next meeting.

“Any other business” is usually the last item on the agenda, but can be
contentious if the business raised does not give the directors adequate time to
consider the merits of the proposal. Because of this, some chairmen refuse to
put matters under this heading to the vote until the next meeting.
4.1. Agenda for the first board meeting

The first board meeting of a newly formed company must deal with several non-
recurrent items before the company can carry on its business. The company’s
first directors and shareholders/members are subscribers to the Memorandum
of Association which was submitted for the company’s registration. The first
meeting of subscribers to the memorandum, who are the first shareholders of
the company, see Section 169 of the Companies Act, also constitutes the first
board meeting and should be held as soon as possible after incorporation.

The following items form part of the agenda for the meeting:

 Certificate of Incorporation – this should be produced by the company

secretary and its receipt recorded.
 Appointment of first directors – this is a formality to be recorded in the
minutes.
 Appointment of the chairman of the board.
 Appointment of the secretary.
 Appointment of company’s bankers.
 Appointment of company’s auditors.
 Consideration for the raising of capital – decide on the method used. This
entails the preparation of subsequent documents, such as draft underwriting
contracts and a prospectus.

There may be other matters which may be appropriate to consider at the first
board meeting, including:
 Change of accounting year-end.
 Allotment or transfer of shares – further shares may be allotted or
transferred,
 Change of registered office.

DID YOU KNOW?

The procedures adopted to issue agendas and board papers vary from company
to company. For example, many companies send papers by e-mail as this
reduces circulation costs and the directors receive their papers quickly. What is
important is that a reliable and efficient system is adopted, which is tailored to
the needs to the directors. The secretary should therefore be pro-active in
facilitating this process.
The secretary should also ensure that procedures take into account the security
of agendas and board papers, particularly where the papers deal with
confidential matters (or price sensitive matters for listed companies).

SAMPLE
WORDING

AGENDA FOR BOARD MEETING FOR A LISTED COMPANY

................................. LTD.
Agenda for Board Meeting
to be held at ...................................... on ................ day, ..................................
20xx at 09h00

1. WELCOME

2. APOLOGIES

3. MEETING DULY CONSTITUTED

A quorum being present, the Chairman to declare the meeting duly
constituted.

4. DIRECTORS INTERESTS IN CONTRACTS

To declare

5. MINUTES OF MEETING HELD ON 24 MARCH 20XX

To verify and sign, as a true record of proceedings.

6. MATTERS ARISING
To discuss any matters arising from the previous meeting.

7. TRADING REPORT
To review the company’s trading performance since the last Board meeting,
including:
(a) major contracts awarded or lost; and
(b) market overview and update.

8. FINANCIAL REPORT
To review the company’s financial position and performance.
9. ACQUISITIONS AND DISPOSALS
To consider for approval proposals to:
a) acquire XYZ Limited for $1.5m in cash;
b) dispose of the ABC Limited (a wholly-owned subsidiary) for $4m in cash.

[Link] DISCUSSION
To receive a strategy presentation on emerging market opportunities in the
Far East and to discuss what strategic action, if any, the company should take.

[Link] AND VENUE OF NEXT MEETING

To confirm that the next scheduled meeting of the Board will be held at 10h30
on Tuesday, 7 July 20xx in the Board Room of the company’s registered offices.

12. ANY OTHER BUSINESS

To consider any other business and to declare the meeting closed.

AGENDA FOR FIRST BOARD MEETING

........................ LTD
Agenda for Board Meeting

to be held at ...................................... on ................ day, ..................................

20xx at 09h00

1. Produce the certificate of incorporation and a print of the Memorandum and

Articles of Association as registered.

2. Produce the Articles of Association signed by the subscribers to the

Memorandum of Association, determining the number of the directors as not
less than two or more than five.

3. Note that the first directors of the company named by the subscribers in the
statement delivered to the Registrar of Companies with the Memorandum
are ....................... and .............

4. Resolve:
THAT ................................................... be appointed chairman of the board.

5. Resolve:
THAT ................................. was appointed secretary.
6. Resolve:
THAT the situation of the registered office of the company,
namely................................... , shown in the statement delivered with the
Memorandum to the Registrar of Companies, be confirmed.

7. [optional] Resolve:
THAT the seal, of which an impression is affixed in the margin hereof, be
adopted as the common seal of the company.

8. Consider opening a bank account with .................... Bank Ltd., and, if thought
fit, resolve:
[Resolutions in accordance with bank’s printed form for opening an account.]

9. Consider the appointment of auditors and resolve:

THAT .................... be appointed auditors of the company to hold office until
the conclusion of the first general meeting at which accounts are laid before
the company.

[Link] a form of application dated .................... 20xx from .................... for

98 shares of R1 each in the capital of the company at a price of $1 per share,
together with cheques for a total of $100, being payment in full for the said
98 shares and for the 2 shares taken by the subscribers to the Memorandum
of Association.

Resolve:
a) THAT 98 shares of R1 each, fully paid and numbered from 3 to 100
inclusive, be allotted to ..........................

b) THAT the under-mentioned share certificates drawn in respect of

subscribers’ shares and the allotment made by resolution (a) hereof be
approved:
No. 1 .................... 1 share numbered 1
o. 2 .................... 1 share numbered 2
o. 3 .................... 98 shares numbered from 3 to 100 inclusive

[Link]:
THAT all the shares of the company in issue shall not bear distinguishing
numbers.
[Link] other business.

[Link] for future board meetings.

5. QUORUM AND ATTENDANCE REGISTER

The quorum required for board meetings is generally fixed by the Articles.

Article 100 of Table A, which applies to public companies, provides that the
quorum may be fixed by the directors or, if not fixed by the directors:
 if the directors do not fix the quorum it shall be two;
A quorum must be present for each item of business.

Where the number of directors falls below the number fixed as the quorum, for
example if a public company had only two directors, and one were to resign or
die, Table A, article 101, allows the continuing directors or the sole remaining
director to continue only for the purpose of filling vacancies or calling a general
meeting.

Generally speaking, it is preferable to fix a low quorum because doing so eases

the conduct of the board’s business. If the quorum is high, directors can obstruct
the board by deliberately absenting themselves from meetings, or the board
could find itself unable to take decisions because directors are too busy.

The quorum for board meetings may also affect the quorum for committees of
the board where the Articles provide that the regulations governing proceedings
at board meetings shall also apply to committees of the board.

The company secretary should assess the quorum of the meeting at the
beginning of the meeting and then again as necessary if any directors leave the
meeting or if the directors are considering a matter in which a director is
interested. It is the secretary’s responsibility to advise the chairman of the
meeting if there is a problem with the quorum. If, at any time, the meeting does
not have a quorum, the secretary should advise the chairman to adjourn the
meeting until the correct quorum is once again available.

When directors find difficulty in meeting, it may be necessary to appoint

alternate directors, or to arrange telephone or video conferences, before
consideration is given to passing a special resolution to amend the Articles.
TEST YOUR KNOWLEDGE

a. What procedures should a director follow if the number of directors falls

below the required quorum?
b. What are the provisions in respect of voting in board meetings?
c. Is a simple majority sufficient to pass a resolution in writing?

5.1. Video conference and telephone meetings

The use of video conference and telephone conference meeting facilities has
made it possible for directors in different cities and countries to participate in
board decisions, without always having to travel long distances. This enables
directors to perform their duties as a director, without inhibiting their ability to
perform other duties, in other cities and countries.

TEST YOUR KNOWLEDGE

What should be the main items on the agenda for the first board meeting of a
newly registered company?

DID YOU KNOW?

Think about the benefits of using video and telephone meetings. For example, a
global business may need to convene a board meeting at short notice, when
directors are in different locations throughout the world. Participation via video
or telephone would be better than being unable to attend due to other
commitments. The cost savings on travel and accommodation for such a
meeting should also be taken into account.

6. RESOLUTIONS AND VOTING

The rules on voting at meetings of the board are based on common law, but are
subject to modification by the company’s Articles. Board meetings are usually
less formal than general meetings and decisions are normally reached by
consensus rather than being put to an actual vote. When a resolution is put to
the vote, each director will have one vote. Questions are decided on a majority
of votes cast for or against the resolution, although the chairman is sometimes
given a second or casting vote in the event of a deadlock. Certain Articles require
a special majority for certain types of business and most restrict the right to vote
if a director has a personal interest in the matter under consideration.
Voting is normally conducted on a show of hands.

For the chairman to have a casting vote, this must be provided for in the Articles
and must be used only when there is a deadlock. The chairman does not have to
use his casting vote and if he does, he is not bound to use the casting vote in the
same way as his original vote. There are two guiding principles:

 The first is that the casting vote should be used to preserve the status quo.
 The second is that the casting vote should be used in the best interests of
the company, following a deadlock.

Directors have a right to call for their opposition to a resolution to be recorded

in the minutes.

It is good practice at meetings, when consensus has been reached, for the
chairman to summarise what has been agreed. This prevents directors from
having varied opinions as to what exactly was agreed and also assists the
secretary when preparing the minutes. If the chairman tries to move on to the
next item without summarising the last decision, the secretary should ask him
to provide this summary so that it can be properly recorded.

DID YOU KNOW?

Not every item of business which is considered by a board requires a formal

resolution and voting. Sometimes an item of business may be presented as an
update to the board and the board will simply note the progress made. This is a
good example of how the agenda and business of a board meeting varies from
the agenda and business of a general meeting.

7. RESOLUTIONS IN WRITING

Section 134 of the Companies Act provides for a written resolution, which is
often referred to as a “round robin resolution”, to allow directors to act without
holding a meeting, if they are unanimous.

If it is convenient, such a resolution could be a single document, which is signed

by each director in turn. Otherwise a separate copy of the resolution could be
sent to each director for signature. The company secretary, upon receipt of a
signed copy from each director, will then certify the resolution as a true copy.
The document, if signed by all the directors, or the resolution, when certified by
the Company Secretary, should be inserted in the minute book.

As unanimous consent is required, the resolution becomes effective from the

date of the last signature. Written resolutions of the board therefore override
the usual requirement that a simple majority is required to approve a board
resolution.

CASE STUDY

Hood Sailmakers v Axford 1997

The company’s Articles stated that the quorum for a board meeting was two.
There were two directors, one of whom was abroad and this made it impossible
to hold a board meeting. The Articles included provisions for written resolutions,
i.e. that such a resolution was valid if signed by all those entitled to notice. It
also included the provision that directors abroad were not entitled to notice.
The director in the UK passed written resolutions signed by him alone. The
question before the court was the relationship between the quorum
requirement and the written resolution. The court held that the written
resolutions were invalid. The written resolution procedure was for commercial
convenience not fundamental constitutional change.

SAMPLE WORDING

RESOLUTION IN WRITING

........................ LIMITED.

Pursuant to the authority given by article ..... of the company’s Articles of

Association, we, the undersigned, all the directors for the time being of
.................... Limited. [entitled to receive notice of a meeting of directors],
hereby resolve:
THAT ...........................................................................................................
Dated this .................... day of .................... 20xx.
(Signatures)

TEST YOUR KNOWLEDGE

• When does a written resolution become effective?
• Where should signed written resolutions be kept?
• When is it not possible to use a written resolution?

7.1. Alternate directors

The position of alternate directors also needs to be considered when preparing

board resolutions in writing.

Article 80 of Table A, for public companies, makes it evident that alternate

directors are to exercise and discharge all the powers, duties and functions of
the director that they represent.

8. MINUTES

Section 138 of the Companies Act requires directors to cause minutes to be kept.

Minutes should be prepared by the secretary. They should be included in the

papers for the next meeting and, if approved, signed by the chairman. Any
amendments or alterations to the minutes should be summarised at the
beginning of the next set of minutes, for example:

‘subject to minute no. ….. being amended to read …………. the minutes of
the last meeting were approved and signed’.

Once signed, minutes are evidence of the proceedings of the relevant meeting.

Section 138 of the Companies Act requires minutes to be kept for all meetings
of the board.

The names of the directors present should be included in the minutes of that
meeting. If a director leaves the meeting at any point, or rejoins it, this should
be reflected in the minutes. It should be clear from the minutes who chaired the
meeting and also that a quorum was present.

Directors and auditors have a right to inspect all minutes at any time, but
members, creditors and the public cannot inspect, or take copies of, minutes of
directors’ meetings. There are no statutory requirements as to where the
minutes of board meetings must be kept, but it is usual to find them at either
the registered office or at the principal place of business.

Section 138 requires the minutes to be entered into minute books.

8.1. Writing minutes

Preparing minutes is a skill. The minutes must reflect accurately what was
decided, giving sufficient detail while remaining concise. The preferences of the
chairman will be paramount in the way the minutes are presented, but all
minutes must include the following basic elements:

 name of the company;

 place where the meeting was held;
 day and date of the meeting;
 names of those present and in attendance;
 record of the proceedings;
 chairman’s signature.

The record of proceedings should include the text of any resolutions put to the
meeting and the result of any vote. All papers presented to the meeting must
be clearly identified in the minutes and retained for as long as the minutes
themselves.

Records of any written resolutions should be entered in the minute book and be
noted at the next meeting of directors, in terms of Section 138 of the Companies
Act. This is particularly important if there is only one director of a private
company, who is the sole member making written resolutions regarding the
company.

SAMPLE WORDING

MINUTES OF BOARD MEETING FOR A LISTED COMPANY

.............................. LTD.

BOARD MEETING
held at ........................................... on .............. day, .................... 20xx at …..h……
Present: ...............................
...............................
...............................
...............................
............................... (in the chair) } Directors
…………………… Secretary
1. The chairman signed the minutes of the board meeting held on
............................. 20xx and of the committee meeting held on ....................
20xx, copies having been circulated to the directors.

2. Transfer audit reports dated .......................... 20xx from the company’s

registrars were produced and it was resolved:
a) THAT share transfers Nos. ............, to ..........., inclusive and loan stock
transfers Nos. ..........., to ............., inclusive be approved.
b) THAT the issue of share certificates Nos. ............, to ............., inclusive
and loan stock certificates Nos. ............., to ............., inclusive be
confirmed.

3. There were produced and considered:

a) list of bank balances at ................... 20xx and forward cash statement for
the six months to .................... 20xx;
b) financial statements at .................... 20xx.

4. ......................... joined the meeting.

5. A proof print of the report of the directors and the financial statements for the
year ended ............................... 20xx, were considered.

It was resolved:
a) THAT the sum of $ ................. be transferred from profit and loss account
to general reserve account.
b) THAT notice be given to shareholders that the seventh annual general
meeting is to be held on ............................. 20xx AT …h ..
c) THAT the report of directors, and the audited financial statements for the
year ended ............................... 20xx be approved and that, subject to
approval by the company in general meeting, a dividend of two cents per
share be paid on ................................. 20xx, to shareholders registered at
the close of business on ................................ 20xx.
d) THAT signature of the balance sheet by two directors on behalf of the
board be authorised.
e) THAT the eighth annual general meeting of the company be convened and
held on .................... day, .................... 20xx at .......................... at .......h
…., to transact the ordinary business of the company and that the
secretary be authorised to issue Notice accordingly, together with a form
of proxy in accordance with the proof print submitted to and approved by
this meeting.
 f) THAT the company’s bankers, ......................... Bank Ltd, be requested to
open dividend account No. ............. in the name of the company and be
authorised to honour cheques drawn on the said account bearing the
facsimile or autographic signature of the secretary without any other
signature.
g) ............................ , the chief accountant, attended the meeting by
invitation during the discussion on the accounts.

It was resolved:

THAT the secretary be authorised to release to ZSE and to the press an

announcement of the resultsfor the year ended ....................... 20xx.

6. The question of office hours was discussed and it was decided that with effect
from ........................... 20xx the office should close each day at ......... p.m.
instead of at ......... p.m.
................................. dissented from this decision and asked that his dissent be
recorded in the minutes.
CONFIRMED

………………………………………..
CHAIRMAN

8.2. Keeping the minutes

When outside shareholders are involved it is a good idea to keep minutes of

board meetings and minutes of general meetings separate because
shareholders do not have the right to inspect minutes of board meetings. All the
pages, of the minutes, should be consecutively numbered so that it is easy to
see at a glance if any pages have been removed.

Security is important. The minute books should be stored in a fireproof, lockable

cabinet or safe to prevent any physical damage or unauthorised alterations. As
documents are usually prepared on a word processor it is also necessary to
password-protect computer files containing minutes and supporting
documents. Care should be taken when sending such documents via e-mail, to
prevent unauthorised access.
TEST YOUR KNOWLEDGE

a) What are the provisions in relation to minutes of meetings?

b) Are there any statutory requirements as to the location of board minutes?
What would be good practice in respect of the keeping of minutes?
c) What are the key tasks for the company secretary before, during and after
the board meeting?
d) Apart from the specific papers relating to the meeting what should the
company secretary take to the meeting?

9. THE ROLE OF THE COMPANY SECRETARY BEFORE, DURING AND AFTER

BOARD MEETINGS

The company secretary plays a central role in the preparations for and
management of board meetings. He is also responsible for any administration
arising from the meeting.

9.1. Before the meeting

 Prepare the notice of the board meeting when instructed by the directors.
This should include date, time, venue and agenda and draft proposed
resolutions.
 Send out the notice to directors and any company managers or
professional advisors who are invited. Advise branches, departments or
other parts of the company responsible for producing statements or
information for board meetings.
 Prepare the agenda for the meeting, setting out the full text of any formal
resolutions to be passed. The company secretary should review a draft
agenda with the chairman prior to its despatch.
 Circulate the agenda, formal resolutions, reports, financial statements and
any other documents that are to be considered at the meeting. It is wise
to keep a few spare copies of the agenda for the meeting.
 Check that the boardroom is prepared, for example:
♦ there are sufficient chairs for attendees;
♦ the room is at a comfortable temperature, well lit and ventilated;
♦ audio/visual equipment is working properly;
♦ refreshments are available as appropriate;
♦ name plates have been set out, if appropriate, to assist in the positioning
of directors and attendees around the board table. It is customary that
the secretary sits next to the chairman of the meeting.
 Check that a quorum will be present. If any director is unable to attend,
advise the chairman accordingly.
 Take to the meeting:
♦ a copy of the Memorandum and Articles of Association;
♦ the directors’ attendance book;
♦ the minute book;
♦ a copy of the Companies Act;
♦ the agenda and other necessary documents (plus spare copies); and
♦ in the case of a public company, the register of directors’ interests.

9.2. At the meeting

 Record the names of directors and others present and report apologies for
absence.
 If the company uses directors’ attendance books (i.e. a non-statutory
register used to confirm director attendance at meetings), arrange for this
to be signed by each attending director.
 Check that a quorum is present and ensure it is maintained throughout the
meeting, particularly if there are any items to be considered in which any
director has an interest.
 Take accurate notes, minute the decisions and note any further actions.
 Record late arrivals or early departures of any directors.
 Give advice on request about procedure, or rules and regulations
governing the meeting.
 Keep track of progress against the agenda. Advise the chairman if any
agenda items have been overlooked.
 Arrange to have people brought into the meeting who are present by
invitation.
 At the end of the meeting, make sure that directors take away any papers
which form part of the company’s records, and in particular ensure that
any confidential reports or letters are removed before the room is cleared.

9.3. After the meeting

 If the company is listed, announce to the market via ZSE any decision to
declare or recommend a dividend, to make an issue of shares or debentures
or any decision relating to issues such as payment of a fixed dividend or
interest payment.
 Notify departments, branches and relevant personnel of decisions that
affect them.
  Comply with the lodging of special resolutions with the office of the
Registrar of Companies.
 Prepare the minutes in draft form from the notes taken.
 The precise procedure for the circulation of minutes will vary from company
to company. However it is usual to send a copy of the draft minutes to every
director present asking for comments by a given date, followed by
distribution of the minutes in their final form to all directors. If a director
makes a comment about the wording of a particular minute, the alteration
should be agreed by the chairman, who should mention the amendment at
the next board meeting.
 Produce final minutes for approval and signature by the chairman at the
next meeting.
 File a copy of the meeting agenda and supporting papers.
 Enter any minutes approved and signed in the company’s minute book.

[Link]

It is common for public companies to establish committees for specific purposes,

either on a temporary or a permanent basis. For example, a permanent
committee may be set up to fill a staff vacancy. The committee would be
disbanded once the vacancy was filled.

Committees of directors may be appointed only by a resolution of the board,

which should specify its membership and terms of reference, together with any
conditions on the exercise of their powers and limitation on duration.

10.1. Audit and Remuneration Committees

The listings requirements of the Zimbabwe Stock Exchange require listed

companies to follow the recommendations contained in the King II Report on
Corporate Governance 2002, on the basis of “comply or explain” in reports to
shareholders. These recommendations specify that an Audit Committee and a
Remuneration Committee should be operational.

The audit committee:

 Should consist of a majority of independent non-executive directors.
 The majority of the members should be financially literate.
 Written terms of reference should be agreed by the board.
 The Chairperson is to be an independent non-executive director.
 The Chairperson of the board should not be a member of the Audit
Committee.
 The annual report should list the names of members of the Audit Committee
and specify whether or not the Committee has complied with its terms of
reference.

The remuneration committee:

 Should consist only of non-executive directors who are considered to be

independent.
 Is responsible for reviewing the remuneration packages for executive
directors, including their salary, share options, and pensions.

10.2. Committee powers and duties

The powers delegated to a committee must be stated in written terms of

reference. Where committees are established to deal with specific contracts it
is necessary to state explicitly that it has the authority to appoint the relevant
professional advisors, and incur any necessary costs in carrying out its duties.
Committees established solely to make recommendations to the board do not
need such powers.

Standing committees need more formal rules to include matters such as the
quorum necessary to meet, because they are established permanently to
perform certain duties on a regular basis. The formal rules are usually contained
in terms of reference which are approved by the board. The company secretary
is usually responsible for drafting the terms of reference and should be pro-
active in ensuring the board reviews and amends them as necessary, for
example, if the composition of the board changes.

Terms of reference of the Audit and Remuneration Committees should be in line

with the recommendations of the King II Report on Corporate Governance 2002.
If the company is listed, the JSE listings requirements specify that the provisions
of the King II Report on Corporate Governance 2002 shall be followed, or the
directors shall disclose the reasons for non-compliance, in the annual report.

10.3. Appointing a committee chairman, voting, quorum

The provisions for boards in Table A, articles 103 to 106 are extended to
committees and will usually include procedures for appointing the committee
chairman, voting, quorum and so on. It is usual for the board to specify a quorum
and to nominate the chairman (which need not be the company chairman),
especially for standing committees – if this is not done the committee may, if
the company’s Articles follow Table A, elect a chairman. It is important that the
extent of any delegated powers is specified in the committee’s terms of
reference.

SAMPLE WORDING

SPECIMEN BOARD RESOLUTIONS TO APPOINT COMMITTEES

‘THAT, pursuant to article no. … of the company’s Articles of Association, Messrs.

A, B and C (any two of whom shall be a quorum) be appointed a committee with
the power to ……………….’.

‘THAT, pursuant to article no. … of the company’s Articles of Association, any

two directors be appointed a committee to take such action and to complete all
documents necessary for the purpose of …………….’.

CHAPTER SUMMARY

 Board meetings are an essential part of the management of a company. They

do not have to be held at fixed intervals, but it is good practice to have a
regular timetable.
 There are many differences in the procedures of board meetings compared
to general meetings, for example, there is usually no fixed notice period to
convene a board meeting.
 The person who is chairman of the board is generally regarded as chairman
of the company.
 The secretary should draft the agenda and review it with the chairman prior
to dispatch. Board papers should be issued to allow the directors sufficient
time to review them ahead of the meeting. The agenda and supporting
papers should be organised in the order in which they will be discussed.
 The first board meeting of a new company is an important milestone at which
specific matters must be covered.
 The quorum for a board meeting is usually specified in the Articles. Making
use of technology such as video-conferencing allows directors to be counted
as ‘present’ even if they are at a different location.
 Resolutions of the board are usually carried on a simple majority; however,
board resolutions in writing require unanimous consent. [article 107 of Table
A]
 The company secretary is responsible for the safekeeping of minute books.
 The company secretary plays a central role in the preparations for and
management of a board meeting.
 Committees can only operate under express authority of the board. In order
to comply with the requirements of the ZSE, listed companies must appoint
a remuneration committee, audit committee and a nomination committee
as standing committees.

PRACTICAL QUESTIONS

Section A (4 marks each)

1. How often must a company hold an annual general meeting?

2. To what extent does the Companies Act allow a written resolution to
substitute for a resolution of a general meeting of shareholders and what are
the main requirements to be met before a written resolution is effective?
3. Under the Companies Act, which persons are entitled to receive notice of
general meetings?
4. What is a class meeting of shareholders and why in general terms would such
a meeting be held?
5. In a general meeting, briefly explain the differences in counting between a
poll vote and a vote on the show of hands.
6. Explain the Table A provisions with regard to the convening of board
meetings.

Section B (20 marks each)

7. You are the company secretary of Bad Luck Limited, a large company, who is
to hold its AGM today at 10h00 in the Grand Hall. A number of complications
arise at the meeting:
a) Due to traffic delays only one shareholder, Mr Hurry, managed to arrive
on time. He notes that he was the only shareholder present for 10
minutes after the meeting was due to start, before other shareholders
arrived. Mr Hurry also notes that the chairman has still not arrived,
despite the fact that the meeting should have started 10 minutes ago. Mr
Hurry queries whether the meeting can actually still proceed, given the
 delay, and asks for an explanation of the provisions in the company’s
Articles and the Companies Act, regarding these situations.

b) The meeting eventually starts following the arrival of the chairman of the
meeting. Mr Fusspot, who is a joint shareholder with his wife, claims that
the meeting is invalid as he did not receive his copy of the AGM notice.
Mr Fusspot states that the only reason he knew of the meeting is because
a friend of his mentioned it to him on the preceding day. The chairman
has given Mr Fusspot assurances that the notice was in fact posted to all
shareholders over a month ago and that the meeting is valid. Mr Fusspot
asks what are the circumstances under which the company can claim that
the meeting is indeed invalid given his apparent non-receipt of notice?

c) Due to recent flooding, half of the hall is now unavailable for use. The
chairman realises that the remaining space will now be clearly
inadequate as several shareholders are unable to enter the hall. The
chairman asks you if he has the power to adjourn the meeting, and if so,
whether he could adjourn the meeting to 15h00 the same day to the
Royal Hotel. Provide the advice as requested in (a) to (c) above.

8. You are the secretarial assistant of ABC Ltd, a listed company. The company
secretary has left you a number of tasks in connection with the production
of the annual report and preparations for the forthcoming AGM, both
matters will be discussed at the board meeting in two weeks’ time. The
company secretary has asked you to prepare the following:

i) a note detailing which sections of the annual report and financial

statements will require to be signed, and by whom, together with the
appropriate requirements for lodging with the Registrar of
Companies. The note should also describe the Companies Act
requirements with regard to the entitlement to receive copies of the
annual report and accounts;
ii) a short note on the purpose and requirements of producing the
directors’ report within the annual report and financial statements, in
terms of Part III of Schedule 4 to the Companies Act. The secretary
also requires a checklist of the typical subject headings found in the
directors’ report section of a listed company’s annual report and
accounts;
iii) an advice note on whom is entitled to attend (or not as the case may
be), to vote and to speak at the AGM.
Prepare the matters requested in items (i) to (iii) above.

9. You are a shareholder in Rose Communications Ltd, a company whose shares

are listed. You have received notice of the company’s forthcoming annual
general meeting. On reading the notice you find that in a number of places it
contravenes the Companies Act and the Listings requirements of the
Zimbabwe Stock Exchange. Write a letter to the company secretary of Rose
Communications drawing her attention to the errors.
 PART FOUR

Shares
LIST OF CHAPTERS

13. Shares and share capital

14. Share registration
15. Dividends
16. Employee share schemes

OVERVIEW
This final part of the text covers the detailed work of the secretary as registrar.

Chapter 13 looks at shares and share capital, including allotment of shares,

andcapital events such as alteration of share capital and redemption and
purchase ofown shares.

We have already seen that the register of members is a statutory document

whichmust be kept up to date, reflecting the changes brought about by transfer
andtransmission of shares, corporate capital events or changes in
personalcircumstances of the shareholders. Chapter 2 reviews the procedures
and bestpractice involved in implementing changes to the register, emphasising
theimportance of checking the accuracy of documents being presented.

Chapter 15 summarises the statutory position on dividends and the

proceduresassociated with paying dividends.

Finally, Chapter 16 reviews the main types of employee share schemes and the
roleof the secretary in establishing and administering such schemes.
 CHAPTER 1

Share and Share

Capital
CONTENTS

1. Introduction to shares and capital

2. Allotment of shares
3. Rights issues
4. Alteration of capital

LEARNING OUTCOMES

This chapter outlines the financial structure of a company in relation to

sharecapital, and the secretary’s responsibility for ensuring the correct
proceduresarefollowed for the issue and allotment of shares. The regulations
here are particularlyimportant for listed companies. We also look at the
alteration of share capital, including the purchase by a company of its own
shares, as specified in Section 78 of the Companies Act.

After working through the material in the chapter, you should be able to:

 Understand the different classes of shares.

 Understand the procedure and regulation on allotment and issue of shares.
 Understand the procedure and regulation for altering capital and
thecircumstances in which it might take place.

1. INTRODUCTION TO SHARES AND CAPITAL

Every company must state the amount of its share capital and the number
ofshares. This is the company’s authorised, or nominal, share capital. It is left to
thecompany to decide what rights will attach to its shares.

The actual number of shares issued is usually referred to as the issued

sharecapital.

1.1. Classes of share and share rights

A share is defined in Section 2 of the Act as:

‘a share in the share capital of that company and includes stock, except where a
distinction between stock and shares is expressed or implied.

It is good practice to set out the different classes of shares with their
respectiverights in the Articles of Association.

The various classes of shares are as follows:

1. Preference shares- typically these shares carry a preferential right to a fixed

dividend and usually rankhigher in priority than other classes of shares in a
winding-up. If a company has adistributable profit, a dividend may be paid
on preference shares. The fixed rate ofdividend is often expressed as a
percentage and is deemed to be cumulative,unless stated otherwise. This
means that, should a company fail to pay thedividend due, it will accrue to
the shareholder and become payable, together withthe next dividend due,
at the next payment date.

If cumulative preference shares are issued and the dividend, of say 5%,
cannot be paid in year one, because the company has not operated at a
profit, the entitlementis rolled forward to year 2, with owners being entitled
to a 10% dividend.

2. Ordinary shares- rank after preference shares for the purposes of dividends
and return of capital, but carry voting rights not given to holders of
preference shares. These are thecompany’s risk capital and the directors
must decide whether or not to declare adividend to be paid out of the
distributable profits. Ordinary shareholders stand togain or lose the most on
a winding-up, depending on the surplus assets [Link] is not uncommon
for companies to divide their ordinary shares into ‘A’ ordinaryshares and ‘B’
ordinary shares with different rights being attached to each. Thispractice is
 however considered to be doubtful from a corporate governance point
ofview. If a company has only one class of share, they are, de facto,
ordinaryshares.

3. Redeemable Preference Shares - A company may issue preference shares

which can be redeemed by the companyat their nominal or par value at some
stated date in the future. Redeemablepreference shares offer a certain
amount of protection for the investor andcompanies welcome them because
the investor will not stay with the companyforever. Once the redemption
period has been reached and sufficient distributableprofits exist, the
redeemable preference shares will be redeemed.

4. Convertible Preference Shares - These preference shares provide the

company with the right, at a future date, of converting the preference shares
into ordinary shares.

5. Debentures and loan stocks - Debentures are effectively loans to the

company by investors who receive interest, usually at a fixed rate. These are
not strictly a class of share but are frequently referred to when looking at a
company’s financial structure. Debentures are secured loans on the assets of
the company, and rank ahead of the payment of dividends on either
preference shares or ordinary shares. Interest on debentures must be paid,
even if the company does not have sufficient distributable reserves, and
failure to pay may lead to an event of default. Debentures also rank ahead of
shares in repayment of capital in a liquidation. Debentures do not carry
voting rights.

6. Deferred shares – deferred shares commonly carry very few rights. As their
rights are deferred to the ordinary shares, they usually participate in profits
after the ordinary shareholders have been paid a predetermined dividend of,
say, 8 cents a share.

Section 128(1) of the Companies Act provides that every member of a company
with a share capital shall have a right to vote in respect of each share held by
him or her. Consequently every member who is present in person, or any
corporation that is represented at a general meeting is entitled to one vote on
a show of hands, and one vote for every share held in the case of a poll.

Cumulative dividend
If any dividend due is not paid, it accrues to the shareholder and is payable with
the next dividend due at the next payment date.

Distributable profits
Profits within the company which may be used to pay dividends.

Redeemable preference shares

Shares that will be redeemed by the company at their nominal or par value at
some stated date in the future, but which in the interim will enjoy a preferential
right, as compared with ordinary shares, against profits. Preference shares do
not have a vote except when dividends are in arrear.

Deferred shares
These commonly carry very few rights; i.e. their rights are deferred to the
ordinary shares, therefore they usually carry no right to vote or participate in a
distribution.

1.2. Capital

The share capital of a company is variously referred to as the authorised share

capital, nominal share capital, issued share capital or paid-up share capital.

Authorised capital

The authorised or nominal share capital refers to the maximum number of

shares available for issue and the nominal value of each share. Once a company
has begun trading, although the actual value of the shares will vary according to
the company’s performance and demand for the shares, the nominal value does
not change. Authorised share capital can be increased only with the approval of
the existing shareholders by special resolution.

Issued capital

Issued capital is the part of the company’s total authorised or nominal capital
which has been issued and taken up the members and is expressed in terms of
its nominal rather than actual value. For example, a company with an authorised
capital of 1,000 shares of $1 each ($1,000) which issues 250 shares, has an issued
share capital of $250 (i.e. 250 shares @ $1).

Share premium
A share premium is the difference between the issue price of a share and its
nominal value. For example, if the nominal value of a share is $1 and it issued
for $1.50, the premium is 50 cents. When a company states its share capital,
only the nominal amount of the shares is included. The amount of any share
premium is credited to a share premium account.

Share premium

The difference between the issue price of a share and its nominal value.

TEST YOUR KNOWLEDGE

a. What are the main classes of shares?

b. What is authorised capital and how does it differ from issued share capital?

2. ALLOTMENT OF SHARES

The right to allot shares belongs to members in general meeting. A general

meeting of shareholders may however delegate the authority to the board of
directors.

In the case of listed companies, the shareholders’ resolution, which delegates

the power to issue shares to the directors is subject to the Listings Requirements
of the ZSE , and the following provisions may:
• that this authority shall be valid until the next annual general meeting of the
company, provided it shall not extend beyond fifteen months from the date that
this authority is given;
• that a paid press announcement giving full details, including the impact on net
asset value and earnings per share, will be published at the time of any issue of
shares representing, on a cumulative basis within one financial year, 5% or more
of the number of the company’s shares in issue prior to any such issue;
• that issues in the aggregate in any one financial year shall not exceed 15% of
the number of shares in the company/s issued share capital;
• that, in determining the price at which an issue of shares may be made in terms
of this authority, the maximum discount permitted will be 10% of the weighted
average traded price determined over the 30 business days prior to the date
that the price of the issue is determined or agreed by the directors. Issues at a
discount greater than 10% may be undertaken subject to specific member
consent; and
• that any such issue will only be made to public members as defined by the ZSE.
Allotment takes place formally when authority to enter the name of the allottee
in the register of members is given. This follows the formal resolution to allot
shares. The term ‘issue’ is not defined by statute, but is used to cover the process
where new shares pass to a shareholder. In practice, the two words are often
used interchangeably, with no real distinction being made.

Allotments are to be reported to the Registrar of Companies on a Form CR 2

2.1. Procedure prior to allotment

The allotment of shares has to be carefully planned and managed. The company
secretary should follow these main points of procedure:
Authority to allot shares
Check that the directors are authorised to allot shares and if not, pass the
appropriate resolution(s) at a general meeting.
The authority may be given by ordinary resolution.
Sufficient capital
Check that the company has sufficient authorised but unissued share capital for
the proposed allotments and, if not, additional capital will need to be created.
Expected consideration
Take into account the consideration (payment) the company expects to receive
for the allotment, especially any special arrangements for non-cash
consideration (see 2.3 below).

Application form
Once the factors described above have been dealt with, a standard application
form should be prepared for distribution.

Public companies: Offers of securities to the public

Sections 53 to 64 of the Companies Act permit public companies to offer shares
to the public by means of a prospectus. The prospectus requires the approval of
the Registrar of Companies.

Private Companies: No public offer

As will be apparent from the articles of private companies, a private company
may not issue an offer to the public to subscribe for shares or debentures.

Companies listed on the Zimbabwe Stock Exchange

Share/securities issues by listed companies, other than rights offers, require a
circular to members, a general meeting and a prospectus. The prospectus is to
be approved by the Registrar of Companies. The circular and pre-listing
statement requires the approval of the Zimbabwe Stock Exchange.

2.2. Allotment procedure

1. On receipt of the completed application form, which is contained in the

prospectus, or, a letter of offer in the case of rights issues, and remittance,
which must be deposited in a bank account opened solely for the purpose of
the public offer, a share certificate should be prepared.
2. The board of directors, if duly authorised, should pass a resolution to allot
the shares and to authorise the issue of the shares. The resolution should be
passed as soon as possible since, until the application is accepted by
notification of allotment to the applicant, he is free to withdraw the
application unless the offer is specified as irrevocable.
3. All letters of allotment must be posted simultaneously, and for listed
companies, letters of allotment should be serially numbered and initialled by
a responsible official.
4. The necessary entries should be made in the register of members.
5. A return of allotments [on form CR 2] should be submitted to the Registrar.

2.3. Minimum Subscription

Section 65 of the Companies Act provides that no allotment may be made unless
the minimum subscription is received. If the minimum number of shares, stated
at the time of the issue of the shares/securities, is not received within 60 days
after the issue of the prospectus, the funds received shall be returned to the
offeror without interest. Failure to comply with this provision constitutes a
punishable offence.

2.4. Underwriting

In order to avoid the risk of having to return funds received to subscribers

[Section 65(5)], companies usually enter into a contract with an underwriter,
who contracts, for a fee, to purchase any shares for which offers have not been
received [Section 60 of the Companies Act refers].

Letters of renunciation
In the case of rights offers the existing shareholders are often permitted to
renounce the right to acquire shares offered to them in favour of another person
by completing a letter of renunciation, which is usually attached to the letter of
offer.

DID YOU KNOW?

For some small companies, especially where the shareholders and the directors
are the same people, it is possible to arrange the allotment of shares quickly, for
example on a single day. This may be appropriate when the
directors/shareholders have already informally agreed to the transaction or
when the allotment of shares is required urgently (for example, to provide
additional capital to the business). If there is sufficient share capital which has
been authorised but not issued, the process will involve:

 convening a board meeting where the board will consider a form of

application of shares already prepared by the shareholders;
 if necessary, convening a general meeting at short notice to approve an
increase in the authorised share capital or to give the directors authority to
allot shares;
 in terms of Section 127(2) of the Companies Act, the receipt by the board
from all the shareholders, of a consent to short notice by the shareholders;
 adjourning the board meeting to hold the general meeting;
 holding the GM to pass the necessary resolution.

2.5. Shares allotted for non-cash consideration

A copy of the contract should be sent to the Registrar of Companies when the
return of allotments form CR 2 is registered.

The directors are clearly bound to ensure the adequacy of the consideration,
which should be reported to members.

In the case of listed companies the Zimbabwe Stock Exchange will review a
valuer’s report and ensure that reference is made to the valuer’s report in
circulars sent to shareholders.

Procedure
A formal contract is drawn up for the transfer of the non-cash consideration to
the company and for the allotment of the shares in consideration of the assets.
This contract should be approved by the board of directors. The contract should
be sent to the Registrar of Companies, with the return of allotments [CR 2].

If there is no written contract, particulars of the agreement must be set out on

form CR 2, and sent to the Registrar of Companies with the return of allotments.

Private limited companies do not need to have non-cash consideration

independently valued. Directors can apply their own valuation, provided of
course this is acceptable to the allottee.

SAMPLE WORDING: RENOUNCEABLE LETTER OF ALLOTMENT (PRIVATE

COMPANY)
...................................... LIMITED

A. FULLY PAID LETTER OF ALLOTMENT

Dated .........

Dear Sir/Madam,

I am writing to inform you that you have been allotted ...........................

Ordinary Shares of $....... each in the capital of the company. Pursuant to an
Ordinary Resolution passed on the ....... day of ........................... 20xx, these
shares are credited as fully paid and will rank pari passu with the other existing
Ordinary Shares in the capital of the company.

If you wish to retain all the shares you need do nothing with this Letter of
Allotment. If you wish to dispose of all the shares comprised in this letter, you
should complete the Letter of Renunciation attached hereto and hand this letter
to the renouncee before the .......... day of ............................20xx.
The registration application form, also attached hereto, must be completed and
signed by the renouncee (if any) and returned with this letter to the registered
office not later than ............................... to be exchanged for a share certificate.

Unless this letter is returned, duly renounced, on the .................... day of

.......................... 20xx, the certificate for the shares will be automatically issued
in your name.
Yours faithfully

.......................
Secretary

B. LETTER OF RENUNCIATION

To the Directors of .................................... LIMITED

I/We hereby renounce my/our right to all the shares specified in the Letter of
Allotment in favour of the person(s) signing the Registration Application Form.

Dated this ......... day of ......... 20xx

Signed ..............................
DIRECTORS: A BLACK, C SMITH, J MATABANE, G JONES
COMPANY SECRETARY: CORPORATE GOVERNANCE CC

CHECKLIST

FORMAL APPLICATION FOR ALLOTMENT OF SHARES

 Complete an application for admission to list the securities;

 Pass a board resolution confirming the allotment of shares is required;
 Prepare a letter to the JSE Securities Exchange South Africa confirming that
the securities due for allotment have not been offered to the public

2.6. Pre-listing Statements

Pre-listing statements require the formal approval of the Zimbabwe Stock
Exchange.

The information required to be included in pre-listing statements varies for

companies in certain sectors, such as Property, Mineral, Investment Entities and
Dual Listings by external companies.

Section 6 of the listings requirements specifies the information to be set out in

all pre-listing statements. These include, but are not restricted to the following:
 Name, address and place of incorporation;
 Share capital details;
 Borrowings;
 Options or preferential rights in respect of securities;
 Controlling shareholder;
 Major shareholder;
 Directors, managers and advisors;
 Interests of directors and promoter;
 Director responsibility statement: on accuracy of information given;
 Detail of/purpose of listing securities;
 Confirmation that the Registrar of Companies has registered the prospectus;
 Market value of securities;
 Group activities;
 Financial information (including accountants reports and working capital
details);
 General information.

Pre-listing statements must be published in newspapers, and circulated to

shareholders, usually when the shareholders consider the issue in question (e.g.
major purchase of assets) or the circular issued, when the question of listing is
considered by the general meeting.

2.7. Listed Companies: Exemptions: Pre-listing Statements

Companies with a full listing on the ZSE must have newly-issued securities listed
before they can be traded. This process is required to be complete before the
new issued securities are offered for sale. Listing particulars are required to
support the issue of new shares.

Pre-listing statements are required by Section 6 of the listings requirements of

the Zimbabwe Stock Exchange
.
An exemption exists in so far as pre-listing statements are not required for
securities which are already issued and fall into the following categories:

Listing requirement 6.18: Deals with issues which do not require prelisting
statements

These are as follows:

 securities issued as a result of the conversion of convertible securities;

 securities issued as a result of the exercise of rights under options;
 securities issued in place of securities already listed;
 securities issued/allotted to employees, if securities of the same class are
already listed;
 securities issued relating to the extension of a business contemplated by and
previously described in a pre-listing statement;
 securities issued as a result of a capitalisation/bonus issue; or
 an issue of securities, including a rights issue, that, together with any
securities of the same class issued in the previous three months, would
increase the securities issued by less than 30% (for this purpose a series of
issues in connection with a single transaction, or series of transactions that
is regarded by the ZSE as a single transaction, will be aggregated and deemed
to be a single issue for purposes of measurement against the 30% level).

TEST YOUR KNOWLEDGE

a) What is a letter of renunciation?

b) Which form is used to notify return of allotments to the Registrar of
Companies?

3. RIGHTS ISSUES

A rights issue is an issue of shares to the existing shareholders pro rata to their
existing holdings. Companies use rights offers to obtain additional funding from
the company’s shareholders, rather than obtain working capital by borrowing
from banks or other financial institutions.

The following key issues may affect the timetable:

1. If the company does not have sufficient authorised but unissued share capital
to cover the proposed rights issue, it will have to pass a special resolution in
terms of Section 133 of the Companies Act and this will add several weeks to
the process. [This is a consequence of 21 clear days notice being required and
the need for the Registrar to register the special resolution before it may be
implemented.]

2. A quorum of 25 per cent of the voting rights must be represented at the

general meeting and 75 per cent of the voters represented must vote in
favour of the resolution. Any failure to achieve these could necessitate a
timetable adjustment.
A rights offer, dependant on the terms of the offer, may or may not include the
right of the shareholder to renounce the offer, in favour of a third party who will
then be entitled to exercise the right.

If a shareholder does not take up his right and does not renounce it, the shares
that would have been allotted to him may be sold in the market at the end of
the rights issue process. Any surplus funds in excess of the rights price, less share
brokerage expenses, are returned to the shareholder. A shareholder who takes
no action during a rights issue is often referred to as a lazy shareholder.

Underwriters may underwrite a rights issue.

TEST YOUR KNOWLEDGE

a) What is a rights issue?

b) Why do companies launch rights issues?

Rights issue
The issue of shares to existing shareholders in proportion to their existing
holdings.

CHECKLIST: RIGHTS ISSUE

 Check the Articles of Association and share register to ensure that the
company has sufficient unissued authorised share capital.
 Check that the directors have been authorised allot additional shares. If this
is not the case then separate authority must be sought via an ordinary
resolution of the members.
 The company must increase its authorised share capital if it is insufficient
(special resolution at general meeting). This requires 21 days notice, in the
form set out in Section 133, and approval by 75 per cent of a meeting with a
quorum of 25 per cent of shares represented.
 If it is necessary to increase the authorised share capital no further action
may be taken until the Registrar of Companies has registered the special
resolution, which shall be submitted on a form CR 11 together with form CR
5 in respect of the increase of capital.
 The directors must resolve to increase the company’s issued share capital by
a rights issue and to issue the provisional allotment letters to the
shareholders.
 Letters of renunciation must also be sent if it is the intention that existing
shareholders can renounce their entitlement in favour of third parties. If
renunciations rights are not offered, the shareholder would still have the
ability to refuse to take up the rights issue.
 The number and value of options outstanding under an employee share
scheme may need to be adjusted to reflect the impact of the rights issue.
 Once the closing date for acceptance is reached, the directors resolve to allot
those shares taken up.
 Update the register of members.
 Prepare appropriate share certificates and issue to shareholders
 File form CR 2 with the Registrar of Companies, to reflect the shares allotted.

4. ALTERATION OF CAPITAL

Most company secretaries will be involved at some time in a change to the share
capital of a company. This might be an increase in authorised share capital,
either by creating new shares of an existing class, by creating a new class of
shares or a share buy-back.

4.1. Increase of authorised capital

The authorised capital may be increased using the following procedure:

 At a board meeting the directors resolve to recommend the increase of

capital, convene a general meeting to pass the necessary ordinary
resolution and approve a circular to members, giving reasons for the
recommendation and including the notice of the meeting together with a
form of proxy. In the case of listed companies this will require a circular
which has been formally approved by the Zimbabwe Stock Exchange.
 When the final documents are posted, copies of the notice and any related
circular and the proxy form should be sent to the Zimbabwe Stock Exchange
and members.
 Copies of the special resolution suitable for submission to the Registrar
should be prepared and signed by the chairman of the meeting. A form CR
11 and CR 5 with the necessary duty should be submitted.
 The notice for the general meeting should, by ordinary resolution authorise
the directors to issue shares that are authorised but unissued.
 The special resolution has to be registered by the Registrar before it
becomes effective.
 The procedure for offering the shares has then to be followed. After
payment is received, the shares should be allotted. A form CR 2 is then
submitted to the Registrar. NOTE: If the company is listed, the ZSE should
list the new shares before they are offered.

At the same time as increasing the company’s share capital, it is important to

give the directors authority to allot the shares and consider whether pre-
emption rights should be waived. It is therefore common practice for a
resolution authorising the directors to issue the newly created shares to be
proposed at the same meeting.

DID YOU KNOW?

Review the need to explain the reason for, and the consequences of, a proposed
special resolution, which Section 133 of the Companies Act requires to be set
out in the notice of meeting.

4.2. Consolidation and subdivision of shares

Consolidation

Consolidation means that the shares of a low nominal value are aggregated into
a smaller number of shares of an increased nominal value. For example, five
shares of 10cents each would be consolidated into one share of 50cents.
Consolidation does not often arise, but it can be convenient to consolidate if a
company has issued a large number of ordinary shares which have a low nominal
value or as part of a complex re-organisation of the company’s share capital.
The procedure is similar to increasing the share capital, but that the register of
members should be rewritten to show the holdings of each member in the new
denomination. Existing share certificates should be cancelled and new ones
issued with a notice stating that the consolidation has taken place.

Some holdings may not consolidate into an exact number of new shares, causing
those members to ‘lose’ that fraction of their holding. If the company is listed,
the fractional shares should be aggregated, sold on the market, and the
proceeds distributed to the appropriate members, subject to a minimum
amount. In unlisted companies, arrangements would have to be made for the
fractions to be sold to some person, at an agreed price.

consolidation of shares
Where shares are consolidated to increase the nominal value of each share.

Subdivision of shares

Subdivision of shares is where shares of a high nominal value are divided into a
larger number of shares of lower nominal value. For example, one share of $1
each would be divided into four shares of 25cents. Subdivision is therefore the
opposite of consolidation and is usually effected to make the shares more easily
marketable. This is also known as splitting shares.

The procedure is the same as that for consolidation, except that fractions of
shares do not arise. Following receipt of the form CM36, marked as duly
registered by the Registrar, the register of members needs to be rewritten to
show the shares held in the new denominations, and existing share certificates
should be cancelled and replaced.

4.3. Share buy-backs

Sections 78 to 79 of the Companies Act permit a company to purchase its own

shares. Authority for the buy-back needs to be included in the Articles of
Association, or a special resolution may be necessary. In addition, the general
meeting should authorise a specified buy-back or a general power to buy-back.

The special resolutions should be obtained, passed and registered by procedures

which are set out in Section 133 of the Companies Act.

Once a buy-back is completed, the voting powers of the shares are lost and the
shares could be held by a subsidiary or by the holding company.

The need for cancellation does not often arise, but could occur following a
scheme of arrangement following the re-purchase of its own shares by the
company, or where the company has a class of shares, none of which has been
issued. A special resolution must be passed at a general meeting and the
procedure is similar to that for the consolidation of shares.

TEST YOUR KNOWLEDGE

a) What is the procedure for increasing authorised share capital?

b) What is meant by
i. Consolidation of shares?
 ii. Subdivision of shares?
c) Why are the share buy-back provisions significant?
d) When do preference shareholders have voting rights?

4.4. Effect of alterations of capital on voting rights

Section 128 of the Companies Act provides that as a general rule, one vote exists
for each share held. This clearly applies to voting by means of a poll, as voting
by a show of hands results in one vote per owner or representative.

TEST YOUR KNOWLEDGE

a) Why may a company want to purchase its own shares, in terms of Section
78 of the Companies Act.
b) What is the period during which an approval for directors to buy-back
shares is valid?
c) Are shares acquired under Section 85 of the Companies Act required to
be cancelled?
d) Is a company required to offer to acquire the shares of all shareholders,
in terms of Section 87?
e) Is a subsidiary which holds shares in its holding company precluded from
voting these shares at a general meeting or annual general meeting of the
holding company?

CHAPTER 2

Share
Registration
 CONTENTS
1. Transfer of shares
2. Share certificates
3. Registration of documents
4. Share Transfer Duty

LEARNING OUTCOMES

We saw in Chapter 1 that the secretary is responsible for the registrar function
within the company, either directly or through an outside agency and in Chapter
6 we covered the requirements for maintaining the statutory registers, including
the register of members. This chapter describes a further duty of the registrar:
share registration. We look at the procedures required for registering
shareholders, the issue of share certificates and how to manage common
situations, such as the death of a member, which require the registration of legal
documents and notices.

After working through the material in the chapter, you should be able to:
• Apply the procedure and regulation on transfer and transmission of shares,
and maintenance of the register of members.
• Understand the procedures for registering documents relating to shares and
members, for companies which are not listed and for certificated securities.

1. TRANSFER OF SHARES

Sections 53 to 105 of the Companies Act deal with shares. You should acquaint
yourself with these sections.

It should be noted that share transfer duty for listed companies is usually
handled:
 For certificated shares: by a share registrar company.
Share transfers for companies which are not listed are often effected by the
company secretary.

A shareholder has a right to transfer shares to whomever he pleases, although

the right to transfer may be restricted by the Articles of Association.

1.1. Transfer procedure

If a transaction which is not for the transfer of dematerialised shares dealt with
on the ZSE takes place in shares of both a private company or a public company,
the member wishing to dispose of his holding (the transferor) completes a
securities transfer form and passes it, with the relevant share certificates, to the
purchaser (the transferee) in exchange for the agreed price.

The transfer duty is paid in one of three ways, namely:

 In the case of securities listed and traded on the ZSE Securities, by the
payment of duty, by the broker concerned;
 When a high volume of duty is involved for sales which are not effected on
the ZSE Securities Exchange, by a direct payment to ZIMRA, which will issue
a receipt;
 When a smaller value of duty is involved in a transfer not effected on the
ZSE, by purchasing revenue stamps, which are to be pasted on the form.

The stamped securities transfer and the share certificates are then forwarded to
the company for registration. The transferee does not have to sign the securities
transfer form.

Once the securities transfer form has been received the following procedure
applies:
 Check that the details of the transferor and of the shareholding transferred
agree with the share certificate and the register of members. In particular,
pay special attention to whether the whole or only part of the shareholding
is being transferred.
 If the company has several classes of shares in issue, check that the shares
transferred are fully and correctly described. A separate transfer form should
be completed for each class of shares being transferred.
 The share certificate accompanying the transfer should be the original issued
by the company. If a replacement share certificate has been issued, this must
also be surrendered to the company prior to registration.
 Check that the transfer has been duly executed by the transferor or by his
attorney. If the transferor’s agent (e.g. broker, accountant or bank) is
handling the share transfer process, the agent’s stamp usually appears on the
stock transfer form in the space provided. The presence of the agent’s stamp
should give additional comfort to the secretary/registrar that the signature
of the transferor is genuine and this would help reduce the incidence of
forged transfer fraud.
 The company’s registration records should be checked to ensure that the
holding is free from any lien or restraint on transfer.
 Check that the transfer duty is appropriate for the value of the transfer.
 Assuming these points are in order, the transfer should be entered in the
register of members, debiting the number of shares transferred in the
transferor’s account and crediting the account (new or existing) in the name
of the transferee.
 The old share certificate should be cancelled and a new certificate issued in
the name of the transferee. If only part of the holding covered by the share
certificate lodged is being transferred, prepare a share certificate for the
balance in the name of the transferor. The cancelled certificate should be
endorsed with details of how the shares have been transferred.
 Private Companies will, in their Articles of Association, require the board to
approve the transfer of shares and may have clauses giving pre-emption
rights in connection with transfers. Check that the transfer does not
contravene any such provisions.
 The transfer and cancelled share certificate should be filed.
 The new certificate should, after signature, be sent to the transferee if he
lodged the transfer personally or to any agent who may have lodged it on his
behalf. Where the company is listed, certificates should be issued within
three business days of the lodgement of the transfer for registration.

A core duty exists for the company secretary to monitor share movements and
transactions on the register of members to identify any likelihood of ‘stake-
building’ in the company’s shares by a potential takeover bidder.

Blank transfers
When the shareholder completes a securities transfer form but leaves the name
of the transferee blank, this is called a blank transfer. This happens when the
shares are used as a form of security for a bank loan. The completed form and
share certificate are then deposited with the creditor, usually a banker. If the
shareholder fails to repay the loan, the creditor completes the form and has the
shares transferred.

Blank transfer
When a shareholder completes a Securities Transfer Form leaving the name of
the transferee blank.

Forged transfers
A forgery is an illegal attempt to transfer shares and is void; therefore no rights
can be created. If it becomes apparent that shares have been transferred under
a forged transfer:
 The true owner must be restored to the register of members and
compensated for any lost dividends.
 The name of the transferee must be removed from the register.
 The company may claim compensation from the person who lodged the
transfer.
 The transferee can claim compensation from the forger.

In some circumstances it may not be possible to make a successful recovery of

losses from the forger. Companies and share registrars can insure against losses.

Refusal to register
Section 101 of the Companies Act provides that a company shall give its reasons
for refusing to register the transfer of shares within 30 days of lodging.

Checks should also be made as to whether there is any reason why the transfer
should not be registered, for example if the transferee is known to be an infant
(particularly in the case of partly paid shares), a person of unsound mind, a
bankrupt or an entity that is not a body corporate. Transfers which are
unacceptable for any of these reasons should be refused registration under the
powers generally given to directors by the general law or by the Articles of
Association.

A company will refuse to register the transfer of a share:

 on which the company has a lien;
 unless the transfer is in respect of only one class of shares;
 if the share certificate has been reported as lost or stolen.

Remember, however, that shares in listed companies must be freely

transferable, so, in practice, directors are not in a position to restrict or refuse
to register a transfer.

Refusal to register must be exercised in the interests of the company and must
be positively effected by a resolution of the directors. It is not sufficient merely
to take no action on a transfer.

2. SHARE CERTIFICATES
In terms of Section 96 of the Companies Act, companies are required to issue
share certificates to shareholders within two months after an issue of shares of
the date that the transfer documents were received by the company.
Section 103 of the Companies Act requires a company to issue a share certificate
within two months of the transfer being lodged with the company.

A share certificate should contain at least the following basic information, but
as will be seen from 2.1 (below), the requirements for listed companies are more
extensive.
 a certificate serial number;
 the name and number of the company;
 the name of the registered holder exactly as it appears in the register of
members;
 the number and description of the shares to which the certificate relates,
including a statement as to the extent to which the shares are paid up;
 the date of the certificate.

DID YOU KNOW?

Company secretaries should regularly review the amount of cover provided

under any forged transfer insurance. The appropriate level of cover should
reflect the capitalisation of the company.

TEST YOUR KNOWLEDGE

(a) What is a securities transfer form?

(b) What checks need to be made when registering a transfer?
(c) When might a transfer be refused?

Section 104(2) of the Companies Act provides for the placing of automated
signatures on share certificates.

2.1. Listed company requirements

Schedule 11 to the listings requirements of the Zimbabwe Stock Exchange

provides that certificates of title, for securities, which includes debentures,
shares and other securities, shall include various matters. The provisions
include, but are not restricted to the following:
• Size of certificate
• Name of the issuer company
• Former name of the company, for a period of one year
• Country of registration
• Translation of name
• Certificate number
• Number of securities
• ZSE code
• Type and class of security
• Address of registered office
• Address of transfer office
• Signatures

2.2. Lost certificates

Once the company secretary has been informed by a member, or his

representative, that a share certificate may be lost, the procedure is as follows:

 Note in the register that a particular certificate is reported missing.

 Once it has been confirmed that the certificate is definitely lost, ask
the member to execute an indemnity guaranteed by the bank or
insurance company to protect the company against the fraudulent
misuse of the lost certificate. The bank or insurance company will
usually charge the shareholder a fee for guaranteeing the
indemnity. It is also usual for the company to require a statement,
signed before a commissioner of oaths, regarding the circumstances
of the certificate’s loss to be executed by the shareholder.

 On receipt of the indemnity, issue a duplicate share certificate,

marked ‘Duplicate’.
 Enter the details of the original certificate on the ‘stop list’.

 Ask the member to return the lost certificate if it is subsequently

found.

2.3. Request for certification

Certification occurs when a member wishes to split the shares represented on

one certificate to sell shares to more than one person or to only sell part of the
shareholding. This is necessary because it is not possible to provide a share
certificate to accompany the stock transfer form for more than one transferee
at the same time. The procedure is as follows:
 The member lodges the share certificate and the transfer form with the
company.
  The company endorses the securities transfer form with words indicating
that the securities transfer form is “certified” and a balance certificate or
share certificate, for the shares retained by the shareholder. The certified
securities transfer form and the balance certificate/new share certificate
is then handed to the lodging party.
 On return of the certified transfer form, the company issues the
appropriate share certificate.
 The company secretary usually retains a store of blank certificates for
issue at a later date. These should be kept locked a fire-proof cabinet to
prevent unauthorised access.

TEST YOUR KNOWLEDGE

a) What information should be shown on a share certificate?
b) What is the procedure when a member loses his share certificate?

3. REGISTRATION OF DOCUMENTS

The share registrars should establish reliable systems for checking and recording
the documents received. For example, all documents received for registration
must indicate clearly the particular shareholding concerned, and the full name
and address of the shareholder as registered. Where joint shareholders are
concerned, the names in the document should be in the same order as they
appear in the register of members. If there is any discrepancy between name(s)
in the register and names in the document, a declaration of identity should be
obtained before the document is registered.

Documents lodged for registration should be photocopied and given a serial

number. This should also be included in any entry in the register of members to
enable cross referencing in future.

3.1. Transmission of shares

Transmission of shares occurs when ownership changes otherwise than by

ordinary transfer, such as on the death, insolvency or insanity of the member. A
securities transfer form does not need to be completed and there is no stamp
duty to be paid as no payment is made. However, the trustee, executor or
liquidator should provide the company with a copy of the documents issued by
the Master of the High Court.

Member’s death
Once the necessary authority has been issued by the Master of the High Court
the trustee, liquidator or executor may address a letter of request to the
company to enter their names in the register of members as holders of the
shares or to register the shares in the name of a third party (e.g. the person
named in any valid will).

Once a letter of administration, trusteeship or liquidation has been registered

by a company, it may not accept any instructions or cession from a third party.

Member’s insolvency

An individual becomes bankrupt when the court makes an order against him. A
liquidator is then appointed to administer the estate of the bankrupt person.
The shareholding remains in the name of the bankrupt shareholder until a letter
of request is received from the liquidator in bankruptcy. The shares which are
held by the bankrupt are usually sold to raise money for the creditors but may
also be registered into the name of a third party (i.e. a creditor).

If the bankrupt is a joint holder, his interest passes to the trustee and not the
remaining holders.

Member: Mental disorder or declared to be a prodigal

The Court of Protection may declare a person mentally unfit or to be a prodigal.

A court order is issued giving specified powers to a receiver. The receiver is
entitled to deal with the shares according to the powers granted under the court
order and the secretary/registrar should ensure that the court order is inspected
carefully to ensure the receiver does not act outside of those powers.

Death of a member

Upon the death of a member, letters of executorship will be issued by the

Master of the High Court. A copy of the letters of executorship should be
retained by the secretary/registrar and a record that the presentation of the
letters has occurred, endorsed on the register of members. Upon the issue by
the Master, of letters of authority to wind-up the deceased estate, the
secretary/registrar shall execute the written instructions of the executor, with
regard to securities.
3.2. Power of attorney

A power of attorney may be signed by any person authorising another to act on

his behalf.

A special power of attorney is specific, for a particular purpose.

A general power of attorney is used when the principal, called the ‘donor’, is ill,
going abroad or where a trustee delegates his power. The power should be
executed as a deed. The individual should sign the document, making it clear
that the document is executed as a deed (e.g. by using the words ‘Signed by
............. as a deed’). The signature should be witnessed by an independent
witness.

The secretary should check for any limitations on the power, for example, no
power to sell shares or no power to vote at general meetings and any specified
time period after which the power will lapse.

A power of attorney may be ended in the following ways:

 the power may have been created for a fixed time period;
 the power may be revoked at any time by the donor.
When a power is revoked or lapses, the copy of the power should be suitably
marked and moved to a lapsed file.

CHECKLIST

POWER OF ATTORNEY

 Check that it is in the correct form and has been executed properly.
 Check that there is a complete match between the donor of the power and
either a registered shareholder or a person in the process of acquiring
shares, evidenced by, for example, a securities transfer form or a
renounceable allotment letter.
 Check that the power of attorney is an original or a copy certified as genuine
by a lawyer, stockbroker or commissioner of oaths.
 Photocopy the power of attorney for the company’s records.
 Check whether the appointment is joint, in which case establish whether
the parties must act together (‘joint’) or may act individually (‘joint and
severally’).
 Check also whether the registered address of the shareholder has changed.
3.3 Court orders

The company secretary/share registrar will have to deal with a number of court
orders.

A court may order that dividends from the shares be paid for the benefit of the
shareholder’s creditors.

All court orders should be acted on quickly as soon as they are received.

3.3. Other matters relating to ownership

Other situations that can occur are listed briefly below:

 Joint holders: All notices, dividends and other communications should be
sent to the first name on the register and notice so given shall be sufficient
notice to all the joint holders.
 Change of name: The member must submit the share certificate, together
with evidence of change of name, for example, marriage certificate. The
documents provided must be originals, or the office copy or a photocopy
certified by a commissioner of oaths. If the shareholder is a corporate
shareholder, it should provide the certificate of change of name to evidence
the change of name. The secretary/registrar should take a copy of the
appropriate evidence and return originals to the member. The register of
members should then be amended.
 The share certificate can be recalled and amended to show the change of
name and sent back to the member. Alternatively, it may be recalled and
retained by the company and a replacement certificate issued in the new
name.
 Change of address: Changes should be signed by the member. A notification
of a change purported to be given by a member of the member’s family
should never be accepted. Ideally, notifications should give details of the
old and new addresses to facilitate identification.

TEST YOUR KNOWLEDGE

 What is the procedure for registering the death of a member?
 What checks should be made when a power of attorney is received for
registration?

4. SHARE TRANSFER DUTY

4.1. Share Transfer Duty

Sales of marketable securities attract duty (i.e. according to the value of the
transaction).

4.2. Exemptions

When the beneficial owner of shares is unchanged, notwithstanding the transfer

between nominees (e.g. between the nominee branches of two banks) the
transfer is exempt from transfer duty and the share certificate should be marked
“No change in beneficial owner: Exempt from transfer duty”.

CHAPTER 3

Dividends
CONTENTS

1. Introductions and definitions

2. Declaring and paying dividends
3. Script dividends

LEARNING OUTCOMES
The company secretary or the share registrar is responsible for making the
arrangements for a dividend. This chapter concentrates on the procedures
necessary to ensure that the process goes smoothly.

After working through the chapter you should:

 Know the arrangements for paying dividends.
 Understand the procedures required to pay a dividend and the format and
content of the dividend warrant.
 Understand the supporting arrangements.
 Know what is required if the board resolves to offer scrip dividends.
 Understand the role of the external share registrar.

1. INTRODUCTION AND DEFINITIONS

Articles 114 to 127 of Table A refer to dividends.

Companies, except for Section 26 companies, have the power to distribute

profits to members, subject to any limitations contained in the Memorandum or
Articles of Association. A company may not make a distribution except out of
distributable profits available for the purpose. These are defined as a company’s
accumulated realised profits less its accumulated realised losses. Dividend
payments may not be made out of capital, which must be maintained so that
the company can meet its liabilities due to creditors.

Listings requirements 3.11 to 3.18 of the Zimbabwe Stock Exchange, emphasise

the price sensitive nature of dividend declarations or of decisions not to pay
dividends. This emphasises the need for immediate publication of any decision
with regard to dividends in the press.

A company’s Articles of Association set out the rights of different classes of

shareholder to receive dividends. Cash dividends are either paid as:
 a final dividend, after the end of the financial year, based on the final audited
accounts for the year; or
 an interim dividend, before the end of the financial year.

Public companies must ensure that the proposed distribution does not reduce
the net assets of the company to less than the aggregate of the company’s
called-up share capital and its undistributable reserves.
A dividend is declared and paid at the directors’ discretion. The decision whether
a distribution can be made is determined in conjunction with the company’s
relevant financial results and the last audited annual financial statements.

If the financial statements show that there are insufficient distributable profits
to make a distribution, the directors must refer to interim results. These must
be prepared to such a standard that they would enable a reasonable judgement
to be made. The interim results prepared by a public company do not need to
be audited, but are usually voluntarily subjected to review by the auditors and
they must be filed with the Registrar of Companies.

There are no rules concerning the format of interim accounts for a private
company, nor is there any requirement to lodge with the Registrar of
Companies. Thus private companies can use suitable management accounts to
support a dividend payment in such circumstances.

At a board meeting where a dividend payment is proposed, the secretary should

offer guidance to the directors, to ensure the discussion includes a review of the
relevant financial statements. When preparing board minutes of the discussion,
it should be stated that the directors have reviewed the relevant financial
results/financial statements prior to approving or proposing the dividend
payment.

1.1. Who declares a dividend

The Articles of a company may provide either for:

 directors to declare the dividend; or
 directors to recommend to the members in general meeting (usually the
annual general meeting) which then declares the dividend.

Articles contain various provisions, but these are usually variances of Table A.
Table A, article 114 provides “The company in general meeting may declare
dividends but no dividend shall exceed the amount recommended by the
directors.”

Once the dividend is declared it becomes a debt due by the company.

Accordingly a shareholder may take legal action to recover a dividend, if the
company does not pay the dividend.
The interim dividend is declared by directors and does not require shareholder
approval.

2. DECLARING AND PAYING DIVIDENDS

2.1. Procedure for declaring the dividend

It is helpful to set out a plan and timetable of events and use it as a checklist to
ensure that everything necessary is done in a timely fashion.

2.2. Paying the dividend

The company secretary is responsible for making dividend payments, either

directly through an in-house department or through the company’s share
registrar. Again, the importance of forward planning must be emphasised.

Record date

Because the register of members changes constantly, it is necessary to select a

date at which the register is fully updated. At the close of business on the record
date the register is printed and this copy provides the basis for compiling a
dividend list to show the amounts to be paid to each shareholder. The record
date should be agreed in the resolution to declare a dividend. The chosen record
date is included in the announcement of a forthcoming dividend and after the
record date dealings are done on an ex div (the seller keeps the dividend) basis.
Otherwise the purchaser would have to claim the dividend from the seller.

2.3. Banking: Opening special account, reconciliation and closing

 A special bank account should be opened for each dividend payment; the
detail of the bank account number needs to be printed on sufficient blank
cheques and similar documents, such as bank drafts, in order to be able to
make the payment.
 The total amount of the dividend to be paid should be transferred from the
general bank account.
 Six months after the cheques have been issued they become stale. At that
stage it is necessary to reconcile the special bank account and transfer any
excess funds to the general bank account. A ledger account entitled
“Creditors: Dividend Account number 2” is opened.
  The unclaimed dividends will be held on behalf of the shareholder for a
period of 12 years, after which, in terms of the articles, be forfeited to the
company until such time as the shareholder claims it, which practice is in
accordance with a longstanding arrangement with Government.

2.4. Paying the dividend: Mandates, automated signatories

Dividend mandates are the instructions, which the member gives the company,
with regard to how, and where to pay the dividend.

Automated signatories are the mechanized signatures, which are affixed to

dividend and other cheques as well as to share certificates.

2.5. Closing the Share Register

The register of members, which is required to be kept in terms of Section 115 of

the Act, may be closed for a period not exceeding 60 days per year (Section 117
of the Act). The closure of registers is to enable the persons who maintain it, the
secretary in a small company or share registrars in the case of large companies,
to finalise the share register at a specific date. In the case of dividends the day
before the register closes is the last day to register, which is contained in the
notice of dividend declaration.

To close the register of members it is necessary to give notice in a newspaper

circulated in the district in which the registered office is situated.

Should the company be listed, it is necessary to send the ZSE copies of the notice
to circulate to each member and to place advertisements in the press.

2.6. Unclaimed dividends

The active life of a dividend cheque is six months, after which it becomes stale.
Significant numbers of shareholders fail to clear their dividend warrants and
companies have adopted various strategies to cope with this situation. If lines
of enquiry produce no results, and the board has so resolved, the company
ceases to be liable to pay the dividend after twelve years, even if the relevant
warrant is then presented.

Sometimes warrants are returned to the company because the shareholder has
moved and left no forwarding address. The company could try to trace the
shareholder, for example, through the bank where the shareholder previously
collected his dividend. In other cases, warrants can be lost in the post or just
disposed of by the present occupier of the shareholder’s previous premises or
post box, in which case they are neither returned, nor presented for payment.
In this instance, the share registrar may write to the shareholder at the last
known address to try and ascertain whether the warrant just did not reach the
correct address or has been mislaid. If the warrant has been lost, the company
should issue a duplicate warrant, after stopping payment, at the bank.

It is a good idea to maintain an outstanding dividend register for those warrants

not cashed.

2.7. Dividend mandates

In order to minimise the risk of dividend warrants going astray a member can
issue standing instructions (sometimes referred to as an ‘evergreen’ instruction)
or a dividend mandate to the company so that payment goes straight into a
designated bank account.

3. SCRIP DIVIDENDS
Companies often give shareholders the option of taking up shares in place of
much or all of a declared dividend.

Should a company, however, have substantial accumulated profits, it may

distribute additional shares to existing shareholders, on a pro-rata basis, free of
charge.

Companies which wish to conserve cash resources may declare a dividend

payable in shares. Notwithstanding the right of shareholders to sell these shares,
which is a relatively simple matter in listed companies, this is not popular with
shareholders.
 CHAPTER 4

Employee Share
Schemes
CONTENTS
1. Introduction
2. Common terms used in employee share schemes
3. Share incentive plans (SIPs)
4. Savings-related schemes (Share Schemes) and Investment Unit Schemes
5. Profits sharing share schemes
6. Introducing and administering an employee share scheme
7. Additional issues for listed companies

LEARNING OUTCOMES

Many companies have introduced employee share schemes in an attempt to

boost individual performance and increase staff loyalty by providing an
opportunity for employees to participate in the financial future of the company.
This chapter outlines the most common types of employee share schemes, and
how they operate. We also look briefly at some additional matters for listed
companies.

When you have worked through the chapter and answered the Practice
Questions at the end, you should:
 Understand the types of employee share schemes available and the tax
implications.
 Understand the basics of establishing and administering employee share
schemes.
 Understand the role undertaken by many secretaries in the management and
administration of employee share schemes.
 Understand the advantages and disadvantages for employers of running an
employee share scheme.
 Be familiar with the additional requirements for employee share schemes in
listed companies.

1. INTRODUCTION

 In Zimbabwe, employee share option schemes are regulated by the Listing

requirements of the ZSE in respect of listed companies. This is unlike in South
Africa where both the Companies Act and JSE rules make specific provisions
for these schemes. In South Africa for instance, section 144A of the
Companies Act requires every company with a share incentive scheme for
employees to appoint a compliance officer. The compliance officer is
required to:
• Administer the scheme;
• Furnish specified information to employees who receive an offer of
shares, or share options;
• Lodge copies of the information to the Registrar, within 30 days;
 • Lodge, within 60 days of the financial year end, a certificate to the
Registrar, to the effect that he or she has complied with their
obligations and attaching particulars of any material change.

• The listings requirements of the Zimbabwe Stock Exchange refer (in schedule
14) to share incentive schemes. Schedule 14, which makes the more detailed
provisions provides as follows:
The following provisions apply, with appropriate modifications, to all schemes
involving the purchase of securities, and/or the issue of shares or other securities
(including options) by issuers (or trusts formed for this purpose in terms of the
Act) to, or for the benefit of, employees. They apply also to schemes of all
subsidiaries of listed companies.
The ZSE must be consulted on the application of these provisions to schemes
intended to apply to employees of associates.
14.1. The scheme, which must be approved by shareholders of the issuer or
company applying for listing in general meeting prior to its
implementation, must contain provisions relating to:

a) the category of persons to whom or for the benefit of who securities

may be purchased or issued under the scheme (“participants”).
Notwithstanding the above requirements, the Committee restricts the
definition of participants to persons involved in the business of the
group including non-executive directors;
b) the aggregate number of securities that may be utilised for purposes of
the scheme must be stated together with the percentage of the issued
share capital that it represents at that time;
c) a fixed maximum percentage for any one participant;
d) the amount, if any, payable on application or acceptance; the basis for
determining the purchase, subscription or option price, which must be
a fixed mechanism for all participants; the period in which payments,
or loans to provide the same, may be paid or after which payments or
loans to provide the same, must be paid; the terms of any loan; the
procedure to be adopted on termination of employment or retirement
of a participant; and
e) the voting, dividend, transfer and other rights, including those arising
on a liquidation of the company, attaching to the securities and to any
options (if appropriate).
14.2. A scheme may provide, in the event of a capitalization issue, a rights issue,
sub-division, consolidation of securities or reduction of capital, for
adjustment of the purchase, subscription or option price or the number or
amount of securities subject to options already granted to participants
and to the scheme. Such adjustments should give a participant entitlement
to the same proportion of the equity capital as that to which he was
previously entitled:

a) the issue of securities as consideration for an acquisition or a waiver of

pre-emptive rights will not be regarded as a circumstance requiring
adjustment; and
b) adjustments, where necessary must be confirmed to the directors in
writing by the company’s auditors that these are calculated on a
reasonable basis.

14.3. The scheme must provide, or the circular must state, that the provisions
relating to the matters contained in 14.1 above cannot be altered
without the prior approval of shareholders in general meeting.
14.4. Executive directors may not be appointed as trustees of schemes.

14.5. Shares shall, upon release to participants, rank paripassu in all respects
with the existing issued shares of the company.
14.6. Application must be made for a listing of those securities of a class
already listed at the time of their issue.
14.7. The scheme document, if not circulated to the shareholders, must be
available for inspection for at least 14 days at the company’s registered
office or such other places as the ZSE may agree.
14.8. The terms of the resolution must approve a specific scheme and refer
either to the scheme itself (if circulated to the shareholders) or to a
summary of its principal terms included in the circular, which must
contain all the provisions set out in paragraph 14.1 above.
14.9. The listed company must, in respect of its or its subsidiary companies
schemes, summarise in its annual financial statements the number of
securities that may be utilized for purposes of the scheme at the
beginning of the accounting period, changes in such number during the
accounting period and the balance of securities available for utilization
for purposes of the scheme at the end of the accounting period.
An employee share scheme is defined as being a scheme for encouraging or
facilitating the holding of shares or debentures in the company by or for the
benefit of:
 Bona fide employees or former employees of the company or group of
companies; or
 the wives, husbands, widows, widowers or children or step-children under
the age of 18 of such employees or former employees.

It is good to encourage the public to invest in shares generally, and particularly

for employees to invest in shares in the company for which they work. The
schemes available are designed to give employees the opportunity to acquire
shares in the company, sometimes on favourable terms, either in profit-sharing
schemes, savings-related share option schemes, company share option plans or
long term incentive plans. Their aim is to create a performance incentive by
offering employees the chance to benefit from the future growth of the
company, and in doing so to encourage employee loyalty and retention.

Listed companies are required to obtain the approval of their members in

general meeting before introducing a new employee share scheme or making a
substantial amendment to an existing employee share scheme.
TEST YOUR KNOWLEDGE

 Briefly outline the procedure for increasing the authorised share capital of a
company.
 Briefly, what typical information is found on a share certificate?
 What are the main differences between an issue of bonus shares and a rights
issue?
 Define the term ‘share premium’ and briefly outline the accounting
treatment under the Companies Act for share premium which arises upon
the issuance of shares.

2. COMMON TERMS USED IN EMPLOYEE SHARE SCHEMES

There are many specialised terms used in the management and administration
of share schemes. Before looking at the most popular types of employee share
schemes this section explains the more common terms:

• All-employee schemes and discretionary schemes: A scheme in which the

company intends that all, or substantially all, of its employees shall participate.
For example, the savings-related scheme or the share incentive plan are all-
employee schemes. The opposite of an all-employee scheme is a discretionary
scheme. This is where the company intends that only a selected group of
employees, usually defined by their seniority, business function, or duration of
service to the company, will participate. An example of such a scheme is a
company share option scheme.
• Bad or voluntary leaver: If an employee ceases to work for a company, their
right to any benefit under an employee share scheme usually depends on the
circumstances under which they leave. Most schemes contain provisions which
control the amount of benefit available for employees who leave the scheme. It
is common practice for schemes to stop or limit any benefit to employees who
resign voluntarily or are dismissed for misconduct. These are known as bad or
voluntary leavers. Good or involuntary leavers are those who retire, or are made
redundant. Most schemes contain provisions which allow all or some benefits
under the scheme to be made available to these participants. These benefits are
also usually available to the personal representatives of any participant who
died while in employment.
• The shares used to satisfy employee share schemes are either new shares
issued from the company’s unissued but authorised share capital or are existing
shares purchased by the company for the purposes of the scheme.
Where new shares are used, the number of shares is sometimes expressed as a
percentage of the issued share capital. For example, if a company has an issued
share capital of 10 million shares and it wishes to grant share options over
100,000 shares from its unissued but authorised share capital as part of an
employee share scheme, this would equate to a dilution of the issued share
capital of 1%.
• Exercise: This is the process by which the participant takes up their right under
certain schemes to convert an option (see below) into a share in the company.
• The ‘window of opportunity’ or ‘exercise period’ is the period in which the
participant may exercise their option or claim their incentive. For example, in a
company share option plan, options may generally be taken up in the seven-year
period between the third and tenth anniversaries of the date of grant. This is the
exercise period.
• Exercise price or option price: This is the price at which a share option may be
exercised. The price is usually set at the time of grant, in relation to the
prevailing market price of the share or by using a formula which takes the
market price of the share into account. For example, if a company awards an
employee with a share option under a company share option plan when the
price of a share is $1.00, this will also be the exercise price. If, when the
employee decides to exercise the share option, the share price has risen to
$1.50, they will still be able to purchase the share at the exercise price of $1.00.
The profit of 50 cents per share will be taxable.
• Grant: The process by which the company awards the participant with an
option, share or other incentive.
• Option: When the market value of a share at the point of exercise is greater
than the exercise price, this is informally referred to as an ‘in the money’ option
to reflect the worth of the option. The opposite of ‘in the money’ is underwater
which is when the market value of the share is less than the exercise price. For
example, an employee, who has a share option with an exercise price of R1.00
per share, is unlikely to exercise the option if the market price is only 75 cents
per share, as the option is more expensive than purchasing shares at market
price.
 Lapse: Most options or incentives granted have a finite period under which
benefits may be available. Once the benefit is no longer available under any
circumstances it is considered to have lapsed.
 Maturity: See ‘vest’ below.
 Option: This is the right granted by the company giving the participant in the
scheme an opportunity, but not an obligation, to acquire shares in the
company at a price or a formula which is fixed at the outset. The process of
converting the option into a share is called ‘exercising an option’. Participants
are not shareholders until they exercise an option and receive a share, and
so are not entitled to dividends or to vote at general meetings. The scheme
rules may provide that the participant can receive a copy of each annual
report and accounts for their information whilst they remain an option
holder. Options are not usually transferable.
 Performance condition: Some employee share schemes require that certain
conditions must be met before the option, share or other incentive can be
exercised or received. These conditions usually relate to achieving minimum
corporate performance levels, for example, a certain level of earnings per
share of the company, or a certain level of total shareholder return – the
amount of increase in the company’s share price plus dividends or other
distributions.
 Some performance conditions are an absolute measure, for example that the
earnings per share must increase by a certain percentage each year, or they
can also be made on a relative measure, for example comparing the
performance of the company between a group of comparative companies or
to a widely-recognised index.
 Scheme rules or Plan rules: Each employee share scheme should be governed
by a comprehensive set of definitive rules which are generic and govern the
key features of the scheme. If any queries arise under an employee share
 scheme, the scheme rules must first be reviewed in order to provide the
solution. In some circumstances the grant of an option, share or other
incentive may be accompanied by an agreement which provides additional
detail as outlined in general terms in the scheme rules.
 Vest: Most employee share schemes provide for a minimum waiting period
before the option, share or other incentive is available to the participant, in
whole or in part. The point at which the benefit becomes available is referred
to as the point of vesting.
 Vesting period: This is the minimum waiting period until which the option,
share or other incentive is available to the participant, in whole or in part.

Underwater option
When the market value of a share at the point of exercise is lower than the
exercise price.

In the money option

When the market value of a share at the point of exercise is greater than the
exercise price.

Exercise period
The ‘window of opportunity’ in which the participant may exercise their option
or claim their incentive The ‘window of opportunity’ in which the participant may
exercise their option or claim their incentive.

3. SHARE INCENTIVE PLANS (SIPS)

The terms of share incentive plans are set by the company, but common
features are as follows:

 Share options are allocated by the company free of charge to employees.

 There are variations in the method that free share options may be distributed
amongst the workforce, but the distribution is usually based on individual,
divisional or corporate criteria.
 Share incentive plans require shareholder approval.
 Shares, to the total value of the options, are usually allotted to a trust fund,
to be held on behalf of the beneficiaries.
 Share options often apply for 5 to 10 years.
 If the employee voluntarily leaves the company within three years of the
award of free options, these may fall away, in terms of the rules of the share
option scheme, in part or entirely. Special forfeiture exemptions apply where
 involuntary leavers depart the company prior to three years, because of
retrenchment, pension or death.

3.1. Tax implications

 Employees are generally taxed on all benefits received from their employer.
The profit made on exercising options is also taxable.
 Dependant on the structure, special tax benefits may be obtained when the
scheme is part of a Black Economic Empowerment scheme.

4. SAVINGS-RELATED SCHEMES (SHARESAVE SCHEMES) AND INVESTMENT

UNIT SCHEMES

Certain large employees operate investment unit schemes, for share purchase
schemes, in which the only investment is the company’s shares. This enables the
employer to allocate share units (which are for fractions of the share price) to
employees, as the employee saves. These schemes, which operate on market
value, also pay out individual employees, without the scheme having to trade
shares.
Savings-related schemes, which are an effort to move the risk of decreasing
prices from the employee, are often referred to as Save As You Earn (SAYE) or
Sharesave schemes. Sharesave schemes are open on an all-employee basis to
employees. It was common practice to extend schemes only to employees who
had worked for the company for at least one year, but the trend in recent years
has been to reduce the qualifying period so that all employees on a qualifying
date shortly before the invitation of applications are eligible. Whatever the
qualification requirements, a Sharesave scheme is offered to all qualifying
participants on similar terms.

Under the scheme, employees are given an option to buy a fixed number of
shares in the company. The option price is set by reference to the market value
of the shares at the time of grant.

In order to pay the option price, employees enter into a contract to save with a
financial institution. At the end of the savings period, the employee will receive
a special bonus from the employer which will be added to the accumulated
savings.

Employees who take out a five-year option also have the opportunity to decide
whether to take the proceeds after the fifth anniversary, and exercise their
option to buy, or to leave the savings for another two years (during which they
will not be required to make any further contributions) to earn an additional
profit, without any cash flow.

In addition to managing the administration of the register of participants, the

company secretary should maintain a close relationship with the financial
institution to ensure the record of participant’s savings is accurate, complete
and up to date.

At the end of the savings period, participants usually have six months to exercise
their options, after which their options lapse. Participants who have left
involuntarily before the end of the savings period may use the savings
accumulated until the time they leave the company to purchase the shares at
the option price. They usually have six months in which to exercise the options.
In the case of the participant’s death, the personal representative may have up
to 12 months to exercise from the date of death.

Employees do not have to exercise their option. For example, if, when they
exercise their option the prevailing share price has fallen below the option price
(i.e. it is underwater), they can simply take the savings from the SAYE contract
plus their bonus and use the money as they see fit.

NOTE: It should be emphasised that the employee is at immediate risk in a one-

share investment unit scheme, whereas in a sharesave scheme the employee is
only at risk after they have exercised the option.

4.3. Tax implications

The usual rules of capital gains tax apply when shares are sold under a share
incentive scheme, in which the difference between the option price and the
market value at the time that the option is exercised will be taxable.
In savings related schemes any bonus paid by an employer will be taxable.

4.4. Sharesave and SIP: a comparison

There is nothing to prevent an employer from offering both a Sharesave and a

SIP to their workforce. Company Secretaries should be prepared to advise
employers on the relative merits of each type of scheme, taking into account
factors such as:
• SIPs offer more flexibility in scheme design than Sharesave schemes.
• Sharesave schemes offer a lower risk to employees. If the options become
underwater, employees can simply continue saving through the SAYE contract,
receive a bonus at maturity and allow the Sharesave option to lapse.
• Sharesave schemes are simpler to understand than SIP schemes.

5. PROFIT-SHARING SHARE SCHEMES

The purpose of a profit-sharing share scheme is to give all employees a common

target of achieving at least a certain level of company profit for the year. If the
profit target is achieved, a formula is used which determines a proportion of the
profits which is set aside for the profit-sharing scheme. The proportion of the
profits is then used to either subscribe for the employer’s shares or to purchase
the shares in the market. The shares are then held in a trust for a qualifying
period (say at least two or three years) before they are released to the
employee. No performance conditions usually apply in the qualifying period as
the performance was met at the outset by the company achieving the target
profit level. The employer would need to consider when drafting the scheme
rules whether the participant should have a beneficial interest during the
qualifying period e.g. be eligible to receive any dividends or to vote via proxy at
general meetings.

DID YOU KNOW?

Company share option plans and share incentive schemes provide a

combination of tax efficiency with reduced administrative burden. Both of these
factors would be important to a qualifying company when considering the
appropriate design of an employee share scheme.

6. INTRODUCING AND ADMINISTERING AN EMPLOYEE SHARE SCHEME

Despite the advantages of giving employees an interest in the company,

employee share schemes are medium to long term benefits, and employers
should consider all the issues carefully before introducing a scheme. The overall
aim is to provide a meaningful incentive to employees which the company is
able to afford and its shareholders are able to endorse.

Shareholders should approve all share schemes.

Share option and share purchase schemes usually involve a share trust which
requires administrative costs.
While share option schemes which provide for the annual vesting of rights, after
a minimum period, are more attractive to employees, the cost of administrating
the scheme increases.

6.1. Design of employee share schemes

There are many issues to consider when designing a scheme which is attractive,
to both the company and its employees. The following are some of the key
design issues the company will need to consider and of which the secretary
should be aware:
 How will any new employee scheme compliment other existing share
schemes or benefits? How will any proposed scheme fit with other
incentives, ensuring that the combination of incentive arrangements target
the desired employee audiences?
 All-employee or discretionary? The employer will need to decide whether to
operate a scheme for all employees or whether to operate a discretionary
plan for the purposes of motivating a select group of employees, such as
executives. Many companies operate different kinds of schemes in order to
provide incentives which attract, retain and motivate a wide range of
employees. (e.g. A share/option scheme and a share purchase scheme.)
 Whether to use external consultants, including tax consultants: To help
identify and implement the most appropriate arrangements, some larger
companies hire employee incentive consultants to advise on the most
effective type of employee share scheme(s) for their organisation.
 For larger international companies, whether to operate the same scheme on
a global basis or to customise a scheme for each specific country: Larger
companies need to consider whether it is more appropriate to provide the
same benefit worldwide, in order to provide a common incentive for the
entire workforce and to facilitate staff transfers, or whether the scheme
should be customised for each country. Two key considerations are:
 the prevailing tax regime in each country and whether the employee
share scheme would maximise any tax reliefs available in that
country; and
 the additional administrative burden of operating different types of
schemes in each country. (e.g. When transferring individuals
between countries.)
 How the scheme will affect the finances of the company: The company will
need to consider the financial impact of operating an employee share
scheme.
 Whether shareholders would be prepared to tolerate the dilution impact on
the issued share capital. As shareholders will be affected by the employee
share scheme’s dilutive impact (i.e. profits are divided between more shares)
the introduction of a new scheme requires shareholder approval. Approval is
likely only if the shareholders consider the dilution impact is outweighed by
the positive motivational effect the share scheme will have on the workforce
to improve the company’s performance.
 General cost and administrative burden to the company: If the scheme is
particularly complex, then there will be increased costs of administration for
the company. The same is true for all-employee schemes where there is a
large workforce. Many companies contract out the administration of their
share schemes to external third parties and it is often the duty of the
secretary to manage the relationship with the external contractor.
 Ability for participants to realise value from the employee share option
scheme: The employer will need to consider how the participant will realise
value from the scheme, for example, by selling some or all of the options
awarded. This should be no problem for listed companies, but presents
difficulties for private or non-listed public companies.
 The value of shares in listed companies can be affected by many issues apart
from the efforts of employees. Share prices, if tied to a single commodity can
rise and fall with international commodity prices (e.g. gold, maize and coal),
economic and trading conditions generally rather than being related to the
standing of the company in its sector. As a result, some employees may
become disenchanted with the scheme if it is difficult for them to realise
value from the scheme because there is too much fluctuation in prices.
Foreign currency fluctuations may also adversely affect the share price and
consequently the profits which well motivated staff and executives would
otherwise enjoy.
 Potential for discrimination: Any discretionary scheme will involve the
selection of participants by the board or board committee. It is important
that participants are selected in a fair manner and in one which will not result
in non-participating employees claiming they have been unfairly
discriminated, for example, on grounds of gender.

6.2. Scheme rules

There are some principal features common to most employee share schemes.
These features are usually contained in the scheme rules. Typical features in
scheme rules include:
 Name of the scheme: Each employee share scheme should have a unique
name.
 Duration of the scheme: The date the employee share scheme was approved
by shareholders.
 Number of options or shares available: Either a maximum number of shares
or options available under the employee share scheme.
 Definition of who is eligible to participate: This usually takes the form of a
description of an eligible employee or director of the company, or subsidiary
company.
 Form of documentation: A general provision which empowers the trustees
to decide or to modify the specific form of documentation to be issued in
respect of exercising options or other key events. This permits flexibility so
that the scheme rules do not have to be amended each time the
documentation changes.
 Description of option price, shares, incentive or other benefit: Either:
 an exhaustive description of how the option price, shares, incentive or
other benefit shall be determined and calculated; or
 a more generic description of the calculation with authority for the
directors to determine certain specific issues at the time of grant.
 Concessionary features for involuntary leavers: Features which permit
employees who have left involuntarily to exercise options, receive shares or
other incentives early in situations where they would not normally be
entitled had they remained in employment. This is a recognition of the fact
that the company may have denied the employee the possibility of remaining
in employment until the time when the benefit would have vested.
 Potential loss of benefits for voluntary leavers: Certain restrictions on the
ability to exercise an option, receive a share or other incentive where the
employee has left voluntarily.
 Exercise period and procedure: The general period and manner in which the
participant may exercise their option or receive their other share incentive.
 Power to modify the scheme rules: A provision which allows directors to
make minor modifications to the scheme rules, for example, to benefit the
administration of the employee share scheme. Any major modifications
usually require shareholder approval.
 Variations of share capital: Power for the directors to adjust the value and/or
number of options, shares or other incentives granted in the event of a
capital transaction such as a rights issue, sub-division or consolidation of the
share capital. For example, if an employee had been granted an option to
purchase 10,000 shares at a price of $2.00 per share under a long term
incentive plan and the company underwent a two shares for one sub-division
 of share capital, the trustees, which should not include executive directors,
would be authorised to adjust the grant retrospectively to 20,000 shares at
$1.00 each, to preserve the original value of the award.
 Takeover or change of control of the company: If the company is taken over
by another organisation, it may no longer be appropriate to continue to
operate the employee scheme based on the shares of the acquiring
company. Scheme rules usually contain provisions which allow some or all of
the option, share or other incentive to be received early. Alternatively, the
scheme rules may contain authority, with or without the permission of
participants, to exchange the benefit into options or shares of the acquiring
company.
 Treatment of incentive in case of winding-up, insolvency, scheme of
arrangement etc: How the incentive will be affected by such corporate
events affecting the company. If the company is being wound-up, there may
be a risk of forfeiture of incentive if action is not taken within a particular
time.

6.3. Establishing an employee share scheme

Establishing an employee share scheme requires much work and the secretary
is an important part of ensuring the process is a success. The following is an
outline of the key points of a typical process in establishing an employee share
scheme:

Prior to obtaining approval

 Consider the most appropriate type of employee share based or option
scheme: The company will need to consider which type of employee share
scheme is best suited for both the company and its employees. This may
involve consultation with employees to ensure that any proposed scheme
will provide the necessary incentive to attract, retain and motivate staff.
 Draft required documentation: Each employee scheme will require scheme
rules, option or other grant certificates, explanatory booklets, an employee
presentation, maturity documentation and other support materials.
 Check Memorandum and Articles of Association: The Memorandum and
Articles of Association should be checked to ensure there is nothing to
prevent the directors from operating an employee share or option scheme.
Any amendment to the Memorandum and Articles will require a special
resolution.
 If applicable, consult with major institutional shareholders: Listed companies
may need to consult with their major institutional shareholders prior to
 obtaining board approval to ascertain if they would be willing to support the
proposal. If the institutional holders have been consulted and have indicated
their support, it is good corporate governance that this should be disclosed
in any circular seeking shareholder approval.

Obtaining approval and making an initial grant

 Obtain board approval: The scheme rules, other key documentation and a
description of the scheme should be presented to the board for its
consideration and approval.
 Ensure that the scheme rues comply with the listings requirements of the ZSE
(see introduction to this chapter).
 The approval of the ZSE should be obtained to the circular sent to
shareholders.
 Send the notice and circular to shareholders.
 Obtain shareholder approval: Shareholder approval will be required in most
cases and an ordinary resolution should suffice. If the employee share
scheme involves the issue of shares from its authorised but unissued share
capital, the shareholders should also pass an ordinary resolution to authorise
the directors to allot shares from time-to-time, in terms of the employee
share/option scheme.
 When obtaining shareholder approval by a listed company, the company
must also disclose the full text of the scheme (usually contained in the
scheme rules) or the details of its most important terms in a shareholder
circular.
 Board or duly authorised committee of the board to approve first grant: The
scheme rules may stipulate a certain timescale or procedure which should be
followed in making grants to participants.
 Board to appoint the compliance offer (see introduction to this chapter.)
 Prepare and issue documentation and begin employee briefings: Option or
other grant certificates must be issued to employees together with
explanatory booklets. If employees are unfamiliar with the scheme then
appropriate briefings should be carried out.

6.4. Role of the company secretary

As noted above, the company secretary is often central to the responsibilities

and duties involved in the establishment and administration of employee share
schemes. In larger organisations, some of these responsibilities are contracted
out to third party external service providers. No matter who actually performs
the duties, the work required is still the same:
 Establish and maintain a register of participants: It is necessary to establish a
robust system, with supporting administrative procedures, to ensure an
accurate register of participants is kept. Whether the system is computer or
paper-based, necessary precautions and procedures must be taken regarding
data security, integrity and data protection. If directors of the company
participate in the employee share scheme any such participation must also
be recorded in the statutory register of directors’ interests.
 Establish and maintain a central file of documentation: A central file with all
pertinent documentation relating to the employee share scheme (e.g. the
scheme rules, pro-forma option or grant certificates) should be maintained
and updated as appropriate.
 Issue grant documentation: The secretary is often responsible for issuing
grant documentation and for monitoring the level of interest shown by
employees following the issue of such documentation.
 The secretary is responsible for keeping track of when prior grants are going
to mature or vest and also when they are due to lapse.
 Deal with queries: It is essential that the secretary is familiar with the scheme
rules and other formal documentation to ensure he or she is able to deal with
queries raised by participants or the board. This will also involve the secretary
keeping up to date with the taxation provisions applicable to employee share
schemes. The secretary may also be responsible for administrative matters
such as a participant’s change of address, or dealing with share scheme
documentation for a participant who has left the company.
 The secretary will also need to deal with third parties, such as ZIMRA or those
enquiring on behalf of participants. For example, most scheme rules provide
that the personal representatives of a deceased participant may exercise the
participant’s options up to 12 months following the death of the participant.
The secretary would therefore need to deal with the personal
representatives and would need to ensure that they are authorised to
represent the deceased (e.g. they would require sight of the letters of
executorship).
 Manage ad-hoc events: For example:
 Scalebacks may need to be implemented for all employee schemes
where the employees are invited to apply for options or shares. The
scheme rules for all employee schemes usually contain a provision as to
the maximum amount of options or shares which are available.
 Any variations in share capital, such as a rights issue or a bonus issue,
may need to be reflected in the employee share scheme. Calculations
 will need to be made to adjust the number and/or value of options or
shares granted and explanatory documentation will need to be issued
to participants.
 Prepare and issue maturity packs: Employees should be made aware when
options, shares or other incentives have vested and should also be briefed of
the choices available to them and the timescales in which they must take
action prior to any lapse. It is good practice therefore to issue a maturity pack
to the participant prior to vesting to inform them in good time before they
need to take any action.
 Issue ad-hoc documentation: Some employee schemes provide that
participants will receive information on a regular basis or an ad-hoc basis, for
example, the annual report. It is usually the duty of the secretary to ensure
the register of participants is accurate and up to date and to ensure
participants receive the required documentation.

TEST YOUR KNOWLEDGE

You are company secretary of Prestige Products Ltd, a company whose shares
are listed on the ZSE. The directors of the company wish to encourage
employees to acquire shares in Prestige. They have decided to introduce a
savings-related share option scheme. Prepare a working programme indicating
the matters that will need to be considered and administered.

7. ADDITIONAL ISSUES FOR LISTED COMPANIES

7.1. Other considerations for listed companies

Directors and certain other employees of listed companies and their share
option/incentive schemes are also subject to the closed period and insider
trading provisions. Share schemes should not trade during the period between
the end of a financial period and the publication of results (the closed period) or
while the company is engaged in transactions which are materially price
sensitive. ‘Dealing’ includes the grant or exercise of options under option
schemes and also the transfer or disposal of shares or other rights under
employee share schemes.

Following the exercise of a right by a participant in an employee share scheme,

shares will be issued, the share issue duty paid and, if applicable, the allotment
form (CR 2) returned to the Registrar of Companies.
Disclosure of directors’ remuneration, including participation in employee share
schemes, must be made in the company’s annual report and accounts.

PRACTICAL QUESTIONS

 You work for Ready Registrars, who are registrars to a number of public and
private companies. Your manager has asked you to deal with the following
matters which have arisen and to produce a checklist of steps Ready
Registrars should take after they receive the letter and the Power of
Attorney.
a) Mr Smith is a shareholder in Super Shops Limited, and he has one share
certificate for 20,0000 shares. Mr Smith wishes to transfer 1,000 of his
shares to Mrs Jones for $10,000 (for which the board of Super Shops have
already given their approval). Mr Smith is unfamiliar with the share
transfer process and has asked if Ready Registrars could provide him with
a guidance note of all the steps and procedures either he, Mrs Jones or
the registrar will take; and
b) a covering letter and a Power of Attorney has been received from Mr Rich,
a shareholder in Acme Widgets Ltd. In his letter, Mr Rich states that he is
going abroad on a six-month cruise but that he would like his lawyer, Mr
Legal, to sell 2,000 shares in Acme Widgets on his behalf whilst he is away.