According to the Companies and Other Business Entities Act (Chapter 24:31) for Zimbabwe, all companies will need to re-register among a cocktail of other changes that are meant to address some shortcomings of the Companies Act (Chapter 24:03). The Act which became effective in February 2020 also makes changes to share capital rules, contents of the articles of association, pronouncements on the number of directors and introduces a beneficial ownership register. Existing companies have been given 12 months, that is until January 2021, to the re-register and comply with the new requirements. The goals of the new Act include improving governance, identification of beneficial ownership, improving clarity on directors duties, improving financial reporting and improving the ease of doing business.
The Companies and other Business Entities Act excludes financial institutions such as banks, building societies and insurers as they fall under the Banking Act. It also excludes Trade Unions and Cooperatives. Under the new Act, the registerable Institutions include the Public Limited Company, Private Limited Company, Limited Guarantee Company, Cooperative Company, Foreign Company, Private Business Corporation and Partnership agreements.
All companies to re-register
All existing companies in Zimbabwe are required to re-register within 12 months of the Act becoming effective. The re-registration is an administrative exercise. The new Act requires information and disclosures that the old Act did not require and therefore many companies are non-compliant from the start. The re-registration does not amount to a new entity being formed, it is simply updating existing companies and the companies register.
Beneficial ownership register
One of the major highlights of the Companies and Other Business Entities Act is the addition of the Register of beneficial owners (section 72). Companies will be required to maintain a register of beneficial owners. A beneficial owner is defined as a person or entity that directly or indirectly owns or controls 20% or more of the voting rights of a company. This is meant to do away with the concept of identifying companies by their directors and place focus on owners. The Act also provides that not more than 20% of the company’s shares may be held by a nominee on behalf of a beneficial owner. Nominees are appointed by shareholders and are akin to proxies.
Memorandum of Association to show all share types and classes
The new Act requires that all types of share classes be listed in Memorandum of Association or Articles of Association of a company. The previous practice allowed the creation of new types and classes of shares through agreement and these were maintained out of the view of those looking at the memorandum or articles. This new rule is meant to give greater transparency on the makeup of the equity in a company.
Board may increase or decrease shares
The Companies and Other Business Entities Act empowers the board of directors to increase or decrease the number of authorised shares of any class of shares. The board has been given further power to classify any unauthorised shares. Boards have also been given further powers in line with the authorisation of share classes.
Mergers and Acquisitions
Section 228 of the new Act sets out the procedures for companies regarding mergers and acquisitions. Where two or more companies intend to combine or otherwise come together they are required to enter into a written agreement that states clearly the terms and conditions of the procedure including how shares will be dealt with. The recent intent shown by African Sun to acquire Dawn Properties has lacked in detail and disclosure leaving minority shareholders of both entities in a quandary. The rules under section 228 would provide improved transparency on such transactions.
Penalties for breach of duty
Section 67, 68 and 69 of the Act set out penalties for breach of duty. Breach of duty includes providing false statements or oaths in any statement, certificate, return or report that is required of the company by the act. The penalties include fines and up to two years imprisonment for breach of duty. These sections also include fraud, negligence and willfully failing to account for or keep proper records of transactions.
Minimum number of Directors
The Companies and Other Business Entities Act also sets out new rules for the number of directors in a company based on the number of shareholders and members of the company. Section 195 provides that a private company with less than 10 members must have two directors, a private company with more than 10 members must have a minimum of 3 directors and the public company between 7 and 15 directors. Section 206 states that at least 3 of the public company directors must be independent or non-executive directors.
A limited number of boards
According to section 195 of the new Act, no director may sit on the boards of 6 unassociated public companies. This limits the number of boards a director can sit on public companies. It is also coupled with a duty of directors to disclose other directorships in public companies. This is expected to avoid or bring awareness to conflicts of interest.
Directors may not act as proxies
Section 171 prohibits directors or company officers from acting as proxies for any shareholders. This will limit the ability of directors to abuse the power of proxy in decision making. A proxy is a person appointed by a shareholder to exercise their voting rights in the decision-making process. Allowing directors to be proxies gave them an unfair advantage over voting rights.
Duty to disclose loans and guarantees
Section 216 mandates a duty to disclose particulars of any loans to directors, guarantees and security provided by the company for directors or company officers personal borrowing. This creates greater transparency in a space where directors could otherwise use internal loans or get guarantees for loans via the company.
Effects of the New Act
The new Act and its raft of changes to the company reporting landscape will bring many improvements to the system as it is. The greater detail in the responsibilities of directors, boards and company officers will certainly improve governance. Greater disclosure of directors remuneration, loans to directors and guarantees provide a clearer picture of economic flows to directors. The beneficial ownership register brings greater transparency to shareholding and reveals those hiding behind investment vehicles but in control or ownership of significant stakes. The new set of rules also improve minority shareholder protection. The clearing of the company register will also usher in an improved registration process and an opportunity to computerised operations at the company registrar.