Company Law & Procedure

LPQE 2023-2024 Class

Lecturer: Conrad Sichande
 Layout of Today’s Lecture

I. Group Discussion Questions

II. Topic Outcomes

III. Topic 4: Shares

IV. Reading Assignment

V. Questions and Clarifications

I. GROUP DISCUSSION QUESTION

Group Discussion Question

The doctrine of capital maintenance ensures that the company has raised the
capital it claims to have raised; and that the capital is not subsequently returned,
directly or indirectly, to the shareholders. Explain to what extent this has been
achieved in the Companies Act No 10 of 2017.
I. GROUP DISCUSSION QUESTION-POSSIBLE ANSWER

I wanted you to consider part IX of the Companies Act and pick out
the provisions that speak to the principle of maintenance of share
capital, e.g. restrictions on share capital reduction, restrictions on
payment of dividends and make a case on whether these provide
adequate protection to creditors.
II. SHARES

Learning Outcomes

1. Be able to define what a share is

2. Explain what issuance and allotment of shares mean

3. Define class rights

4. Establish the procedure regarding variation of class rights

 III. TOPIC 4: SHARES-INTRODUCTION

• This topic is about the nature of the asset held by shareholders and the rights that
accrue as a result of that ownership.

• We will look at the initial allocation of financial and voting rights to different classes
of shares and the variation of those rights, the rights to transfer shares and the
protections associated with that.
 III. TOPIC 4: SHARES-INTRODUCTION

• In total these combined rights privileges and limitations on voting and financial rights raise the
question of what it means when we say that the shareholders own the company.

• The answer to that question is material in differentiating the rights of shareholders from those
of creditors, employees and other outsiders as highlighted in the corporate governance debates.
For example the “shareholders” and “stakeholders” views of a company and their impact on
corporate governance issues.
 III. TOPIC 4: SHARES-DEFINITION OF SHARES

• The Companies Act does not define “shares”. All that the Act does in section 3 is to
state that a share includes stock.

• Section 2 of the Securities Act No. 41 of 2016 defines “share” as meaning an

ownership interest or stocks issued or proposed to be issued by a company in the
capital of the company.
 III. TOPIC 4: SHARES-DEFINITION OF SHARES

• The most widely acknowledged definition of “share” is that by Farwell J in Borland’s Trustee
v Steel Brothers & Co. Ltd:

“A share is the interest of a shareholder in the company measured by a sum of

money, for the purpose of liability in the first place, and the interest in the
second, but also consisting of series of mutual covenants entered into by all the
shareholders inter se in accordance with [section 25]. The contract contained in the
articles of association is one of the original incidents of the share. A share is not a sum
of money…but is an interest measured by a sum of money and made up of various
rights contained in the contract, including the right to a sum of money of a more or less
amount.”
 III. TOPIC 4: SHARES-DEFINITION OF SHARES

• A shareholder is an investor in that he pays a sum of money in a company in the

hope of gaining a reward.

• However, the shareholder’s financial interest does not amount to a direct investment
in a company’s assets because the assets of a company belong to the company as a
separate entity.

• Macaura v Northern Assurance Co. Ltd , if a trader sells his business to a company,
he will cease to have an insurable interest in its assets even though he is the
beneficial owner of all the shares.
 III. TOPIC 4: SHARES-DEFINITION OF SHARES

In Short v Treasury Commissioners (1948) 1 KB 116, it was held that a shareholder of

an undertaking is prima facie entitled, to be paid for his shareholding only on the basis
of the value of a single share, and no account is to be taken, in assessing the
compensation payable to him, of the fact that the competent authority in acquiring all the
shares is acquiring, in addition, the exclusive control of the undertaking; for it to add to
each parcel of shares, as sold separately, a ratable proportion of the added or “control”
value of the totality of shares would be to add to each holding an item of value which
the shareholder, as an individual, did not, in fact, possess.
 III. TOPIC 4: SHARES-RIGHTS OF SHAREHOLDERS

In general, shares are a means of denoting three things:

a) The shareholders financial stake in the company (Including liability to

contribute; rights to capital and income from the company)
b) The shareholders interest in the company as an association (rights as
members e.g voting rights etc)
c) The shareholders rights as owners of a share/s as property.
 III. TOPIC 4: SHARES-RIGHTS OF SHAREHOLDERS

The right to attend and vote in meetings of the company on any of the following
resolutions:

a) Appoint or remove a director or auditor;

b) Adopt and alter the articles;
c) Approve an amalgamation of the Company;
d) Put the company in liquidation in accordance with the Corporate Insolvency
Act;
e) The right to receive an equal shares in dividends if and when dividends are
authorized by the board of directors; and
f) The right to participate and have equal share during the distribution of the
surplus assets of the company.
III. TOPIC 4: SHARES-LEGAL NATURE OF SHARES

• Shares are recognised in law as objects of property which are bought,

sold, mortgaged and can also be bequeathed.

• Section 141 of the Companies Act states that a share in a company is

personal property. Since shares are personal property, all the
incidences of ownership will apply subject to any limitation that may
be attached to them in the articles of the company.
III. TOPIC 4: ISSUANCE AND ALLOTMENT OF SHARES

Discussion Question

The company concerned had entered into a contract to buy property in consideration partly of
an issue of paid up shares. 0n 25 January, 1869, an entry was made by the company in its books
to the effect that the relevant shares were allotted to the vendors and some of the shares to one
Tucker as nominee for one of the vendors. Before he had been registered in the company’s
register of members and before the share certificate was issued to him, the nominee sold some
of the shares to one Bush. The company was shortly afterwards wound up.

The question arose whether Bush should be included in the list of contributories.

What do you think?

III. TOPIC 4: ISSUANCE AND ALLOTMENT OF SHARES

Discussion Question

In Re Imperial Rubber Co. (Bush’s Case) [1874] 9 Ch 554

The answer depended on whether the shares were issued before the contract pursuant to which
they were allotted was registered with the Registrar which was before anyone had been
registered as holder of the shares concerned and before any certificate had been issued in
respect thereof.

Judge: There is no evidence that the shares ever left the control of the company, or
ever became the property of Mr. Tucker or anyone else, until the certificate
was issued in accordance with the resolution passed and that his title is
complete.
III. TOPIC 4: SHARES-ISSUANCE AND ALLOTMENT OF
SHARES

In general, issuance of shares by a company involves three steps:

1. Company must decide to make an offer of shares and determine the terms of the
offer.

2. A person must agree with the company to take up the shares (Shares are allotted)

3. The contract between the company and the person who has agreed to take up the
shares is implemented. In other words, that person takes up the shares and they
are made members of the company. This then completes the process of issuance.
See section 157 of the Companies Act.
III. TOPIC 4: SHARES-ISSUANCE AND ALLOTMENT OF
SHARES

Definition of Issuance v Allotment

National Westminster Bank Plc v Inland Revenue Commissioners [1995] 1 AC 111

This case extensively discussed the meaning of “issue of shares” and referred to a
number of cases which highlight the difference between issuance and allotment.

Spitzel v Chinese Corporation [1899] 80 LT 347

Agricultural Mortgage Corporation v Commissioners of Inland Revenue [1978] Ch 72

III. TOPIC 4: SHARES-ISSUANCE AND ALLOTMENT OF
SHARES

A person can become a shareholder in a company in any one of the following ways:-

a) By subscribing to the Incorporation Form on the registration of the company;

b) By applying for shares and if application is accepted shares are allocated after
which the name of the applicant is registered in the register of beneficial
owners; and
c) By a transfer of shares from an existing member followed by registration of the
new member.
 III. TOPIC 4: SHARES-MEMBERSHIP BY SUBSCRIPTION

• By subscription, two or more persons will subscribe their names to the Incorporation
Form in accordance with section 12 (1) of the Companies Act.
• For companies with share capital, each subscriber will be required to take up at least one
share. The subscribers will be deemed to have become shareholders upon registration of
the company whereupon their names will be registered in the Register of Beneficial
Owners.
• Section 123 as read with section 21 of the Companies Act further provides for a
company to maintain a register of beneficial owners and enter therein specified
particulars.
• Section 146 of the Companies Act obliges the company to issue the shares specified in
the application to each qualified person within a reasonable time after incorporation.
 III. TOPIC 4: SHARES- ALLOTMENT OF SHARES

• The appropriation of a certain number of shares to a specific person is what is meant as

allotment.

• In a private company, you apply for shares. The act of allotting shares constitutes the
acceptance while the application is what constitutes an offer. The name of the new member is
then added to the register of beneficial owners.

• In a public limited company, where a prospectus will be issued, the prospectus does not
constitute an offer but is merely an invitation to the public to make offers. An offer will be by
a member of the public who will make an application to the company offering the shares or the
issuing house. The application will be accepted once the company allots a specified number of
shares.
III. TOPIC 4: SHARES-PRIVATE PLACEMENTS

This entails that specific people are discreetly identified for purposes of
issuing them with shares, i.e. the invitation is specific because section
210 of the Companies Act places restrictions on invitation to the public
to acquire shares and debentures in private companies.
 [Link] 4: SHARES-ISSUING SHARES TO THE PUBLIC

• Under Part X of the Act dealing with public issue of shares and debentures, a public limited
company is at liberty to invite members of the public to purchase its shares or debentures upon
fulfilling the conditions stipulated in the Act. (See sections 210 to 224 of the Companies Act).

• The first invitation, which is made to the public, is known as an initial public offering (IPO)
while subsequent invitations will be called public offerings (PO). At incorporation, shares will
be assigned par value, e.g. K1 per share. However, when the company makes its subsequent
offerings, the shares may be offered on par value or at a premium, i.e. a value higher than the
par value (section 145 of the Companies Act) or may be offered at a discount, i.e. at less than
their par value or nominal value.

• There are very strict rules governing issuance of shares at a discount and there must be specific
authorization by the Court allowing the company to issue shares at a discount.
 III. TOPIC 4: SHARES-PROCEDURE ONCE SHARES ISSUED

Whenever a company makes an allotment of its shares (through the Board of Directors
but subject to a special resolution of the shareholders), the company shall within 10 days
thereafter lodge with the Registrar –

a) A return of the allotments in the prescribed form accompanied by a special

resolution of the shareholders for the allotment of the shares by the Company.
b) Subsection (3), provides for offence for failure to comply with section 149 of
the Companies Act.
 III. TOPIC 4: SHARES-TRANSFER OF SHARES

• Transferability is one of the attributes or characteristics of shares.

• Shares are freely transferable unless the articles of the company or the Companies
Act impose some restrictions. A transfer of shares is characterized by 3 elements:

a) It is voluntary, i.e. it arises between a willing buyer and a willing seller;

b) It arises inter vivos, i.e. during the lifetime of the parties to the transfer being
the transferor and transferees; and
c) It is a disposition, i.e. it entails a change in ownership
 III. TOPIC 4: SHARES-TRANSFER OF SHARES

• Section 188 (1) of the Companies Act provides that fully paid up shares can be
transferred in a company by entry of the name of the transferee on the share and
beneficial ownership register and evidenced by registration with the Registrar.

• Under section 188 (2) of the Companies Act, you can transfer shares through a
written instrument called Share Transfer Form (Companies Form 18).

• A company shall within 21 days of receipt of a duly executed share transfer form
register the transferee on the share register as holder of the shares unless otherwise as
provided for under section 188 (5) (a) (b) and (c) of the Companies Act.
 III. TOPIC 4: SHARES-TRANSFER OF SHARES

• Section 189 (1) of the Companies Act provides that shares must be freely
transferable in accordance with section 187 of the Companies Act unless the articles
of the company or the Act impose restrictions.
• The articles of a private company cannot impose restrictions on the transferability of
shares after they have been issued unless all the shareholders have agreed in writing
to impose restrictions.
• Section 189 (3) of the Companies Act provides for circumstances under which the
board of directors shall refuse to register a transfer of shares to any person who
which includes when they are under 18 years old, are of unsound mind as determined
by the court or they are legally bankrupt.
 III. TOPIC 4: SHARES-TRANSFER OF SHARES

• Section 203 (1) of the Companies Act obliges a company, whose shares are not
subject to a listing agreement with a securities exchange, and which has registered
transfer of shares to issue and deliver a share certificate in respect of such share to
the holder of the same within a period of 21 days after issue or registration.

• Section 197 (1) of the Companies Act provides that the share certificate issued by the
company to a person in accordance with section 203 of the Companies Act, and the
entry of the name of the person in the company’s share register shall be prima facie
evidence that legal title to the shares vests in that person.
III. TOPIC 4: SHARES-REVISION & DISCUSSION

DISCUSSION ARISING FROM THE PREVIOUS CLASS

 III. TOPIC 4: SHARES-TRANSMISSION OF SHARES BY
OPERATION OF THE LAW
• The transmission of shares by operation of law arises pursuant to section 190 (1) of
the Companies Act. Unlike in transfer, a transmission of shares is an involuntary
process in the sense that it is non-consensual and non-contractual. It arises by
operation of the law consequent upon a member dying, becoming insane, bankrupt,
or the member being liquidated in case of a corporate member.
• In the case of death of a member, section 190 (2) of the Companies Act provides that
the survivor or survivors where the deceased was a joint holder and the legal
personal or representative only persons recognized by the company as shareholders.
In the event of a member becoming bankrupt, their trustee-in-bankruptcy would
become the member (section 190 (4) of the Companies Act). In a liquidation of a
corporate member the liquidator becomes the member subject to the provisions of the
articles of the company.
 III. TOPIC 4: SHARES-TRANSMISSION OF SHARES BY
OPERATION OF THE LAW
• Under the provisions of section 190 (4) of the Companies Act, the personal
representative of a deceased member may elect to be himself registered as the holder
of a deceased member’s shares or he may decide to transfer the shares to some other
person without first registering himself as the holder of the share.

• Section 190 (6) of the Companies Act provides that the personal representative shall,
prior to registration of himself or a transferee, be entitled to the same dividends and
other advantages as if he were the registered holder and to the same rights and
remedies as if he were a member of the company, except that they shall not, subject
to any order by the Court, before being registered as a member in respect of the
share, be entitled to vote at any meeting of the company.
 III. TOPIC 4: SHARES-OTHER CIRCUMSTANCES BY WHICH
SHARES MAY CHANGE OWNERSHIP

Apart from transfer and transmission, shares may also change ownership
under the following circumstances:

1) By forfeiture,
2) By surrender, and
3) By redemption.
 III. TOPIC 4: SHARES-OTHER CIRCUMSTANCES BY WHICH
SHARES MAY CHANGE OWNERSHIP-FORFEITURE

Section 148 of the Companies Act provides for circumstances

under which a shareholder may forfeit shares in a company.
Once the shares have been forfeited, such a member who has
forfeited the shares will cease to be a member.
 III. TOPIC 4: SHARES-OTHER CIRCUMSTANCES BY WHICH
SHARES MAY CHANGE OWNERSHIP-SURRENDER

Surrender of shares is also provided for under section 148 of the

Companies Act. The articles of association will provide for surrender of
shares. Basically surrendering of shares entails that one surrenders those
shares to the original owner on account of non-payment of calls.
 III. TOPIC 4: SHARES-OTHER CIRCUMSTANCES BY WHICH
SHARES MAY CHANGE OWNERSHIP-REDEMPTION
• Redemption relates to the redeeming of redeemable shares at the option of either the
company or the shareholder (see sections 177, 178, 179, 181 and 182). A company
cannot issue redeemable shares unless it has in existence other classes of shares,
which are not redeemable. Secondly, redeemable shares can only be redeemed if
they are fully paid for.

• It is important to note that a company can only pay for redeemable shares out of
distributable profits or out of profits relating to a fresh issue of shares made for the
purpose of redemption.
 III. TOPIC 4: SHARES-GROUP DISCUSSION QUESTION

Group Discussion Question

Why do you suppose that companies may wish to issue redeemable shares? Is this
common?
 III. TOPIC 4: SHARES-SHARES DISTINGUISHED FROM STOCK

• The Companies Act does not define “stock” but merely provides in
section 3 that “share” includes stock.

• Stock is a mere collection of the shares of a member that are fully paid
up. See regulation 8 in the standard articles for a company limited by
shares, unlimited and public companies.
 III. TOPIC 4: SHARES-SHARES DISTINGUISHED FROM STOCK

The key differences between a share and stock are as follows:

1. The capital of a company is divided into small units which are commonly
known as shares. The conversion of the fully paid up shares of a member into a
single fund is known as stock.
2. Stock cannot be issued directly, while shares can. This is so because stock is a
conversion of shares.
3. Stock must be fully paid up because it is derived from fully paid-up shares. On
the other hand, shares need not be fully paid up. Only fully paid up shares can
be converted into stock, hence stock are shares, which are already paid for.
 III. TOPIC 4: SHARES-SHARES DISTINGUISHED FROM STOCK

4. Stock does not have any distinctive number, but shares usually have a definite
number known as distinctive number. Shares must be distinguished by their
numbers.
5. Stock can be transferred in fractions whereas shares cannot be transferred in
fractions. Shares are calculated, held and transferred as one, two, three, etc,
while stock is calculated in terms of percentage of the total. Stock includes
even goodwill, assets, etc. Shares may be contingent or vested. They are
contingent if the holder has not yet paid for them and they become vested at
the time when the company makes its “call”, i.e. when they become due and
owing.
6. Shares have nominal value while stock does not have any nominal value.
 III. TOPIC 4: SHARES-CLASS OF SHARES AND CLASS RIGHTS

• There is a presumption of equality as between shareholders in a company to the

extent that they will enjoy equal rights in respect of voting and dividends when the
company is a going concern and the right to any surplus in the event of the company
winding up. These are collectively termed as class rights. (See Birch v Cropper
(1889) 14 App Cas 525)

• This presumption is however rebuttable and a company can issue shares with
different class rights. This power by the company will normally be contained in its
articles of association. For example sections 7 (2)(a) and 9 (1)(a) of the Companies
Act provide that the articles of a private company limited by shares (or a public
company) shall state the rights, privileges, restrictions and conditions attaching to
each class of shares.
 III. TOPIC 4: SHARES-CLASS OF SHARES AND CLASS RIGHTS

Section 142 provides that subject to the articles, a company can issue different classes
shares.

These shares may:

a) Be redeemable
b) Confer preferential rights to distribution of income or return of capital
c) Confer special, limited, or conditional voting rights
d) Not confer any voting rights at all.
 III. TOPIC 4: SHARES-CLASS OF SHARES AND CLASS RIGHTS

Meaning of Class Rights

Section 3 of the Companies Act defines “class” as a class of shares which have the same
rights, privileges, limitations or conditions attached to the share.

Cumbria Newspapers Group Ltd v Cumberland and Westmorland Herald Newspaper and
Printing Co. Ltd [1987] Ch 1 (Scott J gives a class wide interpretation)
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

1. Ordinary Shares

• These are the most common class of shares commonly referred to as equities. They
are also the default form of shares. Holders of this type of shares are entitled to
information, to be notified about meetings of a company, and to attend such meetings
and participate in deliberations therein.
• The number of shares held could determine one’s voting power. Ordinary
shareholders have a right to participate in the company’s distributable profits after
payment has been made of any fixed dividends to preference shareholders. As
regards participation in any surplus in the event of a solvent winding-up, their claim
comes after other shareholders have had their capital returned.
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

2. Non-Voting Ordinary Shares

• This is a variant or class of ordinary shares except that it does not carry voting rights.
This type of shares is rare but are normally issued for the purpose of raising capital
and would be taken up by persons who are not desirous or interested in participating
in the management or decision making processes of the company.

• This is quite commonly desired when a family-controlled company looks to outside

investors for additional capital. The Stock or Securities Exchange does not encourage
listed companies to create non-voting shares, although there is no outright ban on
their issuance.
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

3. Preference Shares

Preference shares are so labelled because of the preferred manner in which they enjoy
the rights associated to them. Preference shares will carry rights, which are preferred in
relation to the ordinary shares.

• The right to a fixed dividend: A preference share will carry the right to a fixed
dividend. However, the share usually carries no voting right unless the dividend is
not paid. The dividend is usually expressed to be paid at fixed times during the
financial or calendar year and unless the article specifies otherwise, that dividend
will accumulate and the accumulated arrears will have to be paid ahead of any
payment to holders of ordinary shares.
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

3. Preference Shares

• It is important to ensure that the rights of preference shareholders are set out in the
articles so that both the company and the holders of this class of shares know what
their position is.

• The right to the return of capital at winding-up: Preference shareholders have the
right to a return of capital at winding-up ahead of holders of ordinary shares.
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

The disadvantages of preference shares are the following:

• Usually ordinary preference shares carry no voting rights. This means holders of the
preference shares will not participate in the management of the affairs of the
company.

• Holders of this class of shares do not partake in any excess profit upon winding-up.
This is when the company has paid all dividends due, as well as all creditors and
there are still excess assets or profit.
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

4. Founder (or Management) Shares

Founder (or management) shares are sometimes called deferred shares. This class is
very rarely issued and the modern tendency is to convert existing founder (or
management) shares into ordinary shares. As the name suggests, the class is usually
reserved for the founders of the company. This type of shares is more of an ordinary
share except that the holders of founder shares would have a second bite in that they
would receive a second dividend after everyone else has received their first dividend.
The rights of the holders of these shares depend on the articles or terms of shares.
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

5. Redeemable Shares

These are created on terms that they shall be (or, at the option of the company or of the
member, may be) bought back by the company at a future date. The rules governing
such shares and their redemption are set out in the Companies Act. The Act provides
that a company may, if it is authorized by its articles, issue shares, which are to be
redeemed or liable to be redeemed at the option of the company or the shareholder
(sections 176, 177, 178, 181, 182).
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

6. Golden Share (or Enhanced Voting Rights) or Shares with Limited Voting Rights

This share carries a super vote, which can be used to outvote the other shareholders and
cannot be subject to trading at the stock exchange. According to Professor Gower, by
introducing the golden share, privatization gave way to distortion of company law some
of which could not be countenanced at the Stock or Securities Exchange. For example,
in terms of listings, a golden share is meant to prevent certain undesirable things from
happening in a company. Using the golden share, the government can outvote the other
shareholders.
 III. TOPIC 4: SHARES-EXAMPLES OF CLASS OF SHARES

7. Employees’ Shares

Many companies issue shares to their employees (though not very common in Zambia)
commonly under an “employees share scheme”. These are not usually designated as a
separate class of shares by the articles of association but are issued simply as ordinary
shares (or as the case may be as preference shares etc) ranking pari passu with other
shares of this class. Normally, however, they are subject to special restrictions (e.g. as to
the holder's right of disposal) and would undoubtedly be regarded as a separate class of
shares for some legal purposes. (See section 193 of the Companies Act).
 III. TOPIC 4: SHARES-VARIATION OF CLASS RIGHTS

• Section 143 of the Companies Act, lays down the procedure for effecting a variation
of class rights in companies with share capital. As may already be apparent, the
objective of this procedure is to protect the class rights of shareholders from
variations and abrogations through a simple alteration of the company’s articles of
association or a shareholders resolution.

• The company’s articles may specify either more or less onerous provisions for
variation of class rights than the default provisions in the Act. The model articles of
association (that is, standard articles for Company limited by shares, unlimited and
public companies) makes provision for the issue of shares of different classes and
also for variation of class rights. (See regulation 2 of the first schedule).
 III. TOPIC 4: SHARES-VARIATION OF CLASS RIGHTS

• In all situations involving variation of class rights, it is important to

pay attention to two important issues. Firstly, how the parameters of
class rights determined and secondly whether the action is in fact a
variation or abrogation of class rights.

• We recommend that you do some more research on recent case law to

see how the courts have answered these questions within the context of
the facts they were faced with.
 III. TOPIC 4: SHARES-VARIATION OF CLASS RIGHTS

• The topic has provided an overview of the share as an asset held by a shareholder
and the rights that accrue as a result of that ownership.

• By now you should be familiar with the legal definition of the share and how in
practice one becomes a shareholder and the incidences that follow that ownership.

• In summary, shares provides the shareholders an avenue through which they can
contribute capital to a company and thereby become “owners” of that company.
 III. TOPIC 4: SHARES-GROUP DISCUSSION QUESTION

Group Discussion Question

Critically examine the procedural rules governing the variation of class rights. What
purpose do they serve in practice? Do you think they are adequate and why?
 III. TOPIC 4: SHARES-FURTHER READING

Davies, L.P. Principles of Modern Company Law. Sweet & Maxwell. See Chapters: “The Nature
and Classification of Shares”; “Share Issues: General Rules”; “Public Offer of Shares”; and
“Transfer of Shares”. (Any latest edition)

Dignam, Alan and John Lowry. Company Law. Oxford University Press. See Chapter: “Share
Capital”. (Any latest edition)

Gates, Blankfein R. Gates on Understanding Company Law: A Conceptual and Functional

Approach. 2018. See Chapters: “Shares and Share Capital” and “Public Issues of Shares”.

Sealy, Len and Sarah Worthington. Sealy’s Cases and Materials in Company Law. Oxford
University Press. See Chapter: “Shares”. (9th Edition or any latest edition)
 GROUP DISCUSSION QUESTIONS

Group Discussion

Critically examine the procedural rules governing the variation of class rights. What purpose do
they serve in practice? Do you think they are adequate and why?
 SAMPLE EXAMINATION QUESTION

QUESTION ONE

You have recently been admitted to the Bar and even had a distinction in Company Law
and Procedure. With this in mind, some students have approached you to explain the
following issues which they do not completely understand.

a) Why a company might wish to buy back its own shares, and having done so, explain
why the law has made provisions for a capital maintenance reserve.
 SAMPLE EXAMINATION QUESTION

QUESTION ONE – SUGGESTED ANSWER

The question generally tests the student’s understanding of shares and the rationale of capital maintenance. A
good answer therefore must bring out the following points.
Share buybacks are provided for under section 150 (1) (b) (ii), section 163 and section 164 of the Companies
Act. A share buyback refers to the repurchasing of shares by the company that issued them. A buyback occurs
when the issuing company pays shareholders the market value per share and re-absorbs that portion of its
ownership that was previously distributed among the public and private investors. Some reasons why a
company may wish to buyback its shares include:
This may preserve the share prices. If the economy slows or falls into recession, the company might be forced
to cut its dividend to preserve cash. The result would lead to a sell-off in the shares.
When the company feels the shares are undervalued. The company can repurchase some of its shares at the
reduced price and then re-issue them once the market has corrected thereby increasing its equity capital without
issuing any additional shares.
 SAMPLE EXAMINATION QUESTION
QUESTION ONE – SUGGESTED ANSWER
It can be a quick fix for the financial statements. Buying back shares is one way of making a business look
more attractive to investors. By reducing the number of outstanding shares, a company’s per share ratio is
automatically increased because its annual earnings are now divided by a lower number of outstanding shares.
The provisions on capital maintenance arise from the realisation that the attributes of incorporation may
sometimes be abused by those who incorporate companies. The law ensures that those who take shares in a
company do in fact contribute the value of their shares in money or money’s worth. This fund of contributions
being the company’s legal capital is intended by law to provide creditor protection, in some senses at the
expense of the company’s members.
The law does not restrict every disposal of the company’s assets. However, the ambition of creditor protection
would be defeated if once the funds had been received, companies were completely free to return them to the
members thereby adversely affecting the creditors’ overall position vis a vis the company. So the Companies
Act has provisions that ensure that the company’s legal capital is, as far as possible, maintained in the
company’s hands consistently with all the risks associated with any business venture.
 SAMPLE EXAMINATION QUESTION

QUESTION ONE – SUGGESTED ANSWER

In particular, these rules ensure that a company’s legal capital is not returned to the members themselves
directly or indirectly except as provided in the Act (such as reduction of capital), or redemption or a repurchase
of shares, which provides proper safeguards for creditors and others who might be prejudiced by the diminution
of the company’s assets.

This is important because the creditors are generally denied any recourse against the members, or against the
directors, whilst at the same time allowing corporate entrepreneurial activity to continue without too much state
intervention.
 SAMPLE EXAMINATION QUESTION

QUESTION TWO
Bushman Truckers Limited was incorporated in 1997 with a share capital of K15,000 which was divided in 15,000 shares of
K1 each. The articles of the Company provided that the share capital could be increased but there was no mention of priority
or preference shares.
In order to increase its market share, Bushman Truckers Limited wished to purchase another competitor company, G & B
Movers Limited, from Kwenda and Mukuka who were the only shareholders. The directors of Bushman Truckers Limited then
proposed to change the Company’s articles to allow preferential shares to be issued to Kwenda and Mukuka as part
consideration for the deal. A special resolution was then passed by the shareholders of Bushman Truckers Limited paving the
way for the deal to be done.
One of the shareholders being dissatisfied with this commenced an action in the High Court to stop the whole transaction
arguing that the articles of Bushman Truckers Limited could not be altered to allow for preference shares to be issued as this
would disadvantage the ordinary shareholders thereby abrogating the principle of equality of treatment among shareholders.
You are required to consider the legal issues from the above facts and prepare the judgment of the court.
 SAMPLE EXAMINATION QUESTION

QUESTION TWO – SUGGESTED ANSWER

The questions tests the students’ understanding of shares generally and specifically the principle of equality
among shareholders.

The main legal issue in the question is whether Bushman Truckers Limited could issue shares with different
rights to those of the ordinary shares issued to existing shareholders.

A good answer must start by recognizing that there is a presumption of equality among shareholders in a
company to the extent that they will enjoy equal rights in respect of voting and dividends when the company is
a going concern and the right to any surplus in the event of the company winding up. These are collectively
termed as class rights. The case of Birch v Cropper (1889) 14 App Cas 525 may be cited here as an authority
for this proposition.
 SAMPLE EXAMINATION QUESTION

QUESTION TWO – SUGGESTED ANSWER

The students are, however, expected to point out that this presumption is rebuttable and a company can issue
shares with different class rights. This power by the company will normally be contained in its articles of
association. For example sections 7 (2)(a) and 9 (1)(a) of the Companies Act provide that the articles of a
private company limited by shares (or a public company) shall state the rights, privileges, restrictions and
conditions attaching to each class of shares.

Consequently, the students must argue that on the basis of Andrews v Gas Meter Co. [1897] 1 Ch 361
Bushman Truckers Limited could alter its articles so as to take power to issue shares ranking in preference to
its existing shares. There was no implied condition in a company’s articles that all shares shall be equal.

Ability of the students to make logical arguments and conclusion in the judgement carries some marks.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE
Learning Outcomes
1. Establish the balance of power in the company
2. Be able to state the powers of the shareholders as an organ of the company
3. Be able to explain the decision making process in the company
4. Be able to state the powers and duties of the board of directors as an organ of the company
5. Explain the role of the company secretary
6. Discuss the principles of corporate governance and how they apply to companies
TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE

THE STORY OF ROGER BOISJOLY

 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE: INTRODUCTION
• Corporate governance involves the balance of power and duties within the company. In other
words, it is about who does what and when and for what purpose.
• The law recognizes a company in its own right, capable of having rights, owning property,
making contracts, accepting or incurring obligations, committing wrongs and conducting
litigation. But how does the company perform all these functions in practice?
• As an artificial legal entity, a company can only function through human beings who are
members and officers, and vicariously, through its employees and agents.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE: INTRODUCTION
Two primary corporate organs of the company through which decisions of the company are made:
1. The shareholders (or more generally the members) who exercise their powers through
the meeting of the shareholders and make decisions reserved for members by the
Companies Act (Section 131 of the Companies Act), and
2. The Board of Directors in whom corporate decision making resides. By and large the
function of the board of directors is of an intermittent nature with effectively the
Management team doing the day to day management.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
SHAREHOLDERS AS AN ORGAN OF THE COMPANY

• The Companies Act has reserved certain decisions for members to the exclusion of
the directors. It has been argued that this is so in order to manage the risks associated
with giving the directors too much power to do with the company as they please.
• Section 87 (1) of the Companies Act, the Act has reserved certain matters
exclusively for the members.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
SHAREHOLDERS AS AN ORGAN OF THE COMPANY
The general meeting is an avenue prescribed by the Companies Act as a medium through
which members exercise their powers within the company. Section 56 (1) classifies
general meetings into three categories:
a) An annual general meeting;
b) An extraordinary general meeting; and
c) A class meeting.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
SHAREHOLDERS AS AN ORGAN OF THE COMPANY
Annual General Meeting
• An annual general meeting is a meeting of the shareholders or members of a
company and its board of directors. Generally, it is the only time that the directors
and shareholders will meet throughout the year. (Section 57 of the Companies)
• During an annual general meeting, the shareholders have an opportunity to discuss
the company’s performance with the directors and to challenge them on the strategic
direction of the company.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
SHAREHOLDERS AS AN ORGAN OF THE COMPANY
• Section 58 of the Companies Act prescribes what business shall be
conducted at the annual general meeting.
• Section 61 (Who can call the meeting).
• Section 62 (entitlement to notice of meetings).
• Section 63 (length of notice for convening meeting).
• section 65 (place of meetings).
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
SHAREHOLDERS AS AN ORGAN OF THE COMPANY
• Section 66 (attendance at meetings).
• Sections 67, 68, 69, 70 (conduct of meetings and voting)
• Section 71 (proxies).
• All these provisions are designed to ensure that the general meeting is
conducted in a manner that facilitates decision making by the
members.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
SHAREHOLDERS AS AN ORGAN OF THE COMPANY
Extra-Ordinary General Meeting
• An extraordinary general meeting is not a scheduled or planned meeting as the case
is with an annual general meeting.
• An extraordinary general meeting is intended to transact specific business, which
cannot wait until the time for an annual general meeting. (Section 59 of the
Companies Act).
• The provisions cited before on conduct of meetings also apply to this meeting.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
SHAREHOLDERS AS AN ORGAN OF THE COMPANY

Class Meeting
The Companies Act in section 60 also provides for class meetings of members. The
provisions cited above regarding the conduct of general meetings also apply to these
meetings as appropriate.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
SHAREHOLDERS AS AN ORGAN OF THE COMPANY

Resolutions of the Shareholders

• There are three types of resolutions which a company can pass at any time, namely
ordinary resolution, extraordinary resolution and special resolution.
• These are all defined under section 3 of the Companies Act.
• They are a formal mechanism through which the members make corporate decisions.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
• The Companies Act divides management power in the company
between the general meeting and the board of directors.
• Members cannot direct the board of directors on how they should
exercise the powers that have been assigned solely to the directors.
• The Companies Act has provided for how this power may be exercised
for the benefit of the company and its stakeholders.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
The Company Secretary
• The office of company secretary is a statutory office created by section 82 of the
Companies Act and every company is expected to have a secretary.
• The persons named in the application for incorporation as the first secretary or joint
secretaries of a company shall, on the incorporation of the company, be deemed to
have been appointed as such for a term of one year (section 82 (2)).
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

The Company Secretary

• Two or more persons may act jointly as secretary of a company, just as the secretary
may be a body corporate. The secretary of a company shall be resident in Zambia, if
an individual and incorporated in Zambia, if a body corporate.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Functions of the Company Secretary
• The Companies Act sets out the duties of a secretary in section 83.
• The primary role of a company secretary is to ensure that the company
operates in accordance with its statutory and constitutional regime, i.e.
the company must operate in accordance with the Companies Act, the
Incorporation Form and its articles of association.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Functions of the Company Secretary
• The secretary convenes and attends meetings and takes down the minutes of
meetings (This includes preparation of reports on operations of the company on a
quarterly basis, informs the Directors as to their duties); and calls annual general
meetings.
• The secretary also attends to filing of annual returns, maintenance of registers and
ensures that the seal of the company is properly used.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Functions of the Company Secretary
The Cadbury Report (1993) of the United Kingdom:
“The Company Secretary has a key role to play in ensuring that Board procedures are both
followed and regularly reviewed. The Chairperson and the Board will look to the Company
Secretary for guidance on what their responsibilities are under the rules and regulations to which
they are subject and on how these responsibilities should be discharged. All Directors should have
access to the advice and services of the Company Secretary and should recognise that the
Chairperson is entitled to strong support from the Company Secretary in ensuring the effective
functioning of the Board.”
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Qualifications of the Company Secretary
• The qualifications of a company secretary are set out in section 82 (5).
Please note the exception provided in subsection (6) in relation to
small private companies.
• The definition of small private companies is in SI 14 of 2019.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
THE STORY OF DARWIN SMITH

In 1971, a seemingly ordinary man named Darwin E. Smith was named chief executive of Kimberly-Clark, a stodgy old paper
company whose stock had fallen 36% behind the general market during the previous 20 years. Smith, the company's mild-
mannered in-house lawyer, wasn’t so sure the board had made the right choice, a feeling that was reinforced when a Kimberly-
Clark director pulled him aside and reminded him that he lacked some of the qualifications for the position. But CEO he was,
and CEO he remained for 20 years. What a 20 years it was. In that period, Smith created a stunning transformation at
Kimberly-Clark, turning it into the leading consumer paper products company in the world.
TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

DIESELGATE
THE VOLKSWAGEN EMISSIONS SCANDAL
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Directors
• Section 3 of the Companies Act states that director means a person appointed as a
member of the board of directors and includes an alternate director by whatever
name is designated.
• A director is any person who is appointed by the members of a company to manage,
direct and supervise the business of the company. In charitable companies, a person
may not be known by the title of director but he will for the purpose of company law
be known as director.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Powers and Duties of Directors
Section 86 (1) of the Companies Act provides that, “the business of a company shall be
managed by, or under the direction or supervision of, a board of directors, who may pay
all expenses incurred in promoting and forming the company, and may exercise all such
powers of the company as are not, by this Act or the articles, required to be exercised by
the members.”
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Powers and Duties of Directors
Section 86 (2) prescribes the powers of directors. Specifically the directors may exercise
the powers of the company to borrow money, charge any property or business of the
company including any of its uncalled capital and to issue debentures or give any other
security for a debt, liability or obligation of the company or of any other person.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Limitations on the Powers of Directors
• Section 87 of the Companies Act provides for limitations. There are certain matters
that can only be done upon the specific sanction of the members.
• Further, section 104 of the Companies Act places a duty on a director to act in
accordance with the Act and the Articles.
• Limitations on the directors do not affect the powers exercisable by an insolvency
practitioner appointed in accordance with the Corporate Insolvency Act No. 9 of
2017.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Nature of the Office of Director
• The relationship of the director with the company is that of principal and agent.

• Although directors are appointed by members they only stand in a fiduciary

relationship with the company that they serve. The directors are therefore required to
act in the best interest of the company as opposed to those of the individual
members.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
Section 105 of the Companies Act provides for the general responsibilities of directors:
a) Take necessary measures to prevent, reduce and manage any attendant risks to
the business of the company.
b) Not cause, allow or agree for the business of the company to be conducted in a
manner that is likely to create a substantial risk of serious loss to a member or
creditor of the company.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
Section 105 of the Companies Act provides for the general responsibilities of directors:
c) When exercising powers or performing duties of a director-
(i) Act in good faith and in the best interests of the company; and
(ii) Exercise the degree of care, diligence and skill that may reasonably be
expected of a person carrying out the functions of a director.
See the case of Nkongolo Farm Ltd v Zambia National Commercial Bank, Kent Choice
Ltd and Charles Haruperi [2005] ZR 78.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
Section 106 codifies the fiduciary duties of Directors. These may be summarized as
follows:
1. Exercise the power of the director’s (i) in accordance with the Act and within
the Articles and (ii) for the purpose for which the power was given.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
Compliance:
• The directors must exercise their collective powers in accordance with the
Incorporation Form, articles of association and the law generally.
• For example, if the directors were to declare a dividend when the company had
insufficient funds to warrant that dividend, it would be an example of this breach of
duty.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
2. Promote the success of the company
Loyalty: Directors must act in good faith in doing what they consider to be in the best
interest of the company.
No Secret Profit: The directors must not use their positions for purposes of advancing
their own or anyone’s benefit unless it is allowed by the company’s constitution or in
those cases where the directors will have appropriately declared their interest and the
company consented to the directors retaining the benefit.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
3. Exercise Independent Judgment
Independent judgment is linked to the issue promoting the success of the company or
acting in the best interests of the company. The oversight role that Directors have can
only be effective if the directors are not influenced by anything other than what will
promote the success of the company. Directors must be competent enough not
necessarily in the technical sense of the business but in decision making or providing
strategic direction.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
4. Disclose information about that directors remuneration in the financial
statements of the company
• It has long been recognized that the price that companies must pay for the privileges
of incorporation (separate personality) and limited liability is a fair degree of
openness and publicity about its affairs.
• The Act has placed a duty on the directors to disclose their remuneration. This is just
part of a whole series of disclosure requirements.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
5. Duty of avoid Conflict of Interest
• Directors must never allow their personal interests or duties to conflict with those of
the company (section 107).
• This duty of course goes beyond the board room and encompasses other situations
that fall within section 107.
• Sections 108 to 114 provide details on additional restrictions and procedures to be
followed in certain cases involving conflict of interest.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
6. Directors are Required to Act with Fairness as Between Shareholders

This means they are required to treat all the company’s shareholders equally.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN
Fiduciary Duties of Directors
7. Duty to Exercise Reasonable Care and Skill
• What constitutes reasonable care and skill is a question of fact.
• Directors occupy such a serious position in the company that they should possess the
competence, i.e. reasonable care and skill.
• In Ethiopian Airline Ltd v Sunbird Safaris Ltd & Others SCZ Judgment No. 26 of
2007, the managing director of the first respondent company was held personally
liable for the payment of all the company’s debts and liabilities.
TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

Appointment of Directors

• Section 95 (1) of the Act provides that the number of directors of a

company shall be the number of first directors named in the
application for incorporation, or such other number as the company
may decide by ordinary resolution.
• All subsequent directors are appointed at the general meeting of the
company in accordance with section 85 of the Companies Act.
TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

Persons Deemed Directors by Default

• The definition of directors entails that a director will not be restricted to persons who are
formally appointed as there are other persons who will be treated as directors for purposes of
the Act even though they will not be appointed as directors.

• Accordingly section 85 (5) of the Act provides that, “a person, not being a duly appointed
director of the company, who holds himself out, or knowingly allows himself to be held out,
as a director of the company – a) shall be considered to be a director for the purposes of all
duties and liabilities (including liabilities for criminal penalties) imposed on directors by this
Act.

• A company shall not hold out a person as director who has not been formally appointed as
such (section 85 (6)).
TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

Scope of the Director’s Authority

• Section 85 (7) of the Companies Act provides that, “A limitation on the authority of a
director of a company, whether imposed by the articles or otherwise, shall not be effective
against a person who does not have knowledge of the limitation unless, taking into account
his relationship with the company, he ought to have had such knowledge.”

• The starting point is that a limitation will be ineffective as against a third party with no
knowledge of the limitation. However, where the third party had actual knowledge, he shall
be bound.
TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

Number of Directors

• Section 85 (2) of the Companies Act requires a private company to have at least 2 directors
and for a public limited company at least 3 directors.

• It is an offence for a company to operate for more than 90 days a month with fewer than the
minimum number of directors.

Ethiopian Airline Ltd v Sunbird Safaris Ltd & Others.

 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

Qualifications for Appointment as Director

• Section 92 of the Companies sets out the qualifications of directors. The Companies
Act makes it clear that only a natural person can be appointed as a director.

• Besides the qualifications stipulated under subsection (3), the Act also provides that
the articles of the company may impose further restrictions or qualifications on the
appointment or continuation in office of a director.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

Vacation in Office of Director

Section 99 of the Companies Act makes provision for circumstances under which a
director’s office may become vacant. One of the ways the office of director may become
vacant is through removal of a director in accordance with section 98 of the Companies
Act.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

Types of Directors

• There are some differences between a director that is remunerated through directors’ fees
(referred to as a non-executive director) and the person who in addition to serving as a director
also performs management functions within the Company on a full-time basis or part-time
basis and is remunerated by a salary (referred to as an executive director).

• The Companies Act treats both non-executive directors and executive much the same way in
principle although practically, the difference between the two may be more apparent when it
comes to representing the company in dealings with third parties. It is anticipated that an
executive director would in the ordinary course of things appear to have more
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
BOARD OF DIRECTORS AS AN ORGAN

Types of Directors
Executive Directors
Section 101 of the Companies Act. Executive directors are full time officers of a company who
manage the business on a daily basis but who are also appointed onto the board of directors of the
company.
Non-Executive Directors
Section 85 (1) of the Companies Act. They have no employment or executive functions in the
company and are independent. Corporate governance codes now require that companies have
more non-executive directors than executive directors in order to retain the independence.
Alternate Directors
Section 97 of the Companies Act. The Companies Act simply defines an alternate director as a
director who is specified in section 97.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
RELATIONSHIP BETWEEN THE DIRECTORS AND
THE SHAREHOLDERS
• The split between “ownership” and “control” has generated a lot of debate around the issue of
the agency, that is, how to ensure that the directors are sufficiently accountable to the members
who are loosely speaking the “owners” of the company.
• The Supreme Court in Zambia has had occasion to deal with this matter in the cases that are
referred to below with unsatisfactory results.
a) Van Boxtel v Rosalyn Mary Kearney (a minor by Charles Kearney, her father and
next friend) (1987) ZR 63 (SC)
b) Bank of Zambia v Chibote Meat Corporation
c) ZCCM v Kangwa & Others (2000) ZR 109
• Compare and contrast with some of the English Cases
a) Shaw & Sons (Salford) Ltd v Shaw (1935) 2 KB 113
b) Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

First ever international benchmark for good governance.

King IV Report on Corporate Governance for South Africa 2016.

A widely accepted authority on corporate governance in the world. Devote some time to read and
understand the corporate governance principles contained therein.

Relate the corporate governance principles to the directors’ duties that we have learnt under this
topic.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

First ever international benchmark for good governance.

The ISO 37000 standard distills governance into 11 core principles that are at the heart of any
successful organization [1 primary governance principle; 4 foundational governance principles;
and 6 enabling governance principles]. Then there are also key governance outcomes [ethical
behavior, responsible stewardship and effective performance].
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Primary Principle
1. Purpose
Organisational purpose statement defines, specifies, and communicates the ultimate value the organization
intends to generate for specified stakeholders.

The governing body is responsible for defining and elaborating a meaningful, relevant organizational purpose
as the reason the organisation exists and gives detailed guidance on relevant practice.

Also makes it clear that the governing body should define the organisational values as the compass to guide
how the purpose is achieved.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Foundational Principles

2. Value Generation
A value generation model provides basis for innovation and collaboration with stakeholders.

ISO 37000 establishes the responsibility of the governing body’s role to clarify the value
generation objectives and to govern so that these objectives are met.

The Board must therefore define a clear and transparent value generation model that defines,
creates, delivers and sustains appropriate value.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Foundational Principles

3. Strategy
The organizational strategy reflects the governing body’s intention regarding the organisations
achievement of the strategic outcomes within its changing context.

The governing body should direct and engage with the organizational strategy in accordance with
the value generation model, to fulfil the organizational purpose.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Foundational Principles

4. Accountability
Accountability engenders trust and legitimacy, which leads to improved outcomes. It is demonstrated through
reports, disclosures, effective stakeholder engagement, and applying improvements.

ISO 37000 clarifies that the governing body is responsible for and accountable to the organization as a whole.

Accountability at all levels is a key aspect of governance. Accountability is established through the assignment
of, and agreeing to, responsibility and the delegation of authority. The governing body can delegate but should
demonstrate its willingness to answer for the fulfilment of its responsibilities, even where these have been
delegated.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Foundational Principles

5. Oversight

Oversight by the governing body includes ensuring that an internal control system is implemented and assuring
itself that the governance system is appropriately designed and operating as intended.

ISO 37000 outlines the governing body’s role and responsibility to effectively oversee the organization. It gives
clarity on the nature, elements of and integration into organisations of the internal control system and the
assurance processes.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Enabling Principles

6. Stakeholder Engagement

ISO 37000 outlines why and how the governing body should understand its stakeholders, engage them in
achieving the organizational purpose through strategy, establish clear criteria to determine the relevance of
stakeholder expectations, ensure effective relationships are established and maintained, and that expectations
become an effective part of organizational decision-making.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Enabling Principles

7. Leadership
The governing body should lead by example to create a positive values-based culture, set the tone
for others, and engender trust and mutual cooperation with the organization’s stakeholders.

ISO 37000 clarifies that the governing body should be values-driven and lead the organization
ethically and effectively and ensure such leadership throughout the organization and its external
context.

The governing body should set the tone for an ethical and values based organizational culture.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Enabling Principles

8. Data and Decisions

The governing body should ensure that the organization identifies, manages, monitors and
communicates the nature and extent of its use of data.

ISO 37000 outlines the governing body’s role in recognizing data as a strategic and valuable
resource for decision-making by the governing body.

The governing body must ensure that its own decision-making process and those of others in the
organization are ethical, responsible and effective.
 TOPIC 5: INTERNAL ORGANISATION OF THE COMPANY-
CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Enabling Principles

9. Risk Governance
Value is generated when appropriate risk is taken, transferred or shared in a timely manner. This happens when
the governing body balances risk effectively.
ISO 37000 explains that the governing body sets the tone and shapes the culture for a proactive and anticipative
approach to the management of risk across the organization.
The governing body ensures the systematic assessment of risks and defines the risk criteria, in particular the
appetite for risk and risk limits.
The governing body assesses, treats, monitors, and communicates the nature and extent of the risks faced when
making decisions.
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CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Enabling Principles

10. Social Responsibility

The organization should proactively contribute to sustainable development by generating value in a manner that
meets the needs of the present without compromising the ability of future generations to meet their own needs.

ISO 37000 advocates for the governing body to ensure that decisions are transparent and aligned with broader
societal expectations.

Acting in a socially responsible way means operating within the parameters of acceptable behavior and not
allow actions that are legally or locally permissible but not in line with what is expected of it by its broader
stakeholders and society.
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CORPORATE GOVERNANCE PRINCIPLES

ISO 37000 : 2021 Governance of Organisations

The Enabling Principles

11. Viability and Performance Over Time

Where an organization fails to understand and respond to the needs of the systems of which it is a part, it is
unlikely that the organization will remain viable and perform over time.

ISO 37000 requires governing bodies to identify, describe and assess the key resources and value generation
systems the organization depends on to generate value, how these interrelate and how they are used over time.
It ensures that the organization protects and restores the key resources and systems that it depends on or affects.
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CORPORATE GOVERNANCE PRINCIPLES

The King IV Report on Corporate Governance

The King IV identifies four governance outcomes:

1. Ethical Culture
2. Good Performance
3. Effective Control
4. Legitimacy

It is expected that the application of the 17 principles highlighted in the Report would bring about
the four governance outcomes.
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CORPORATE GOVERNANCE PRINCIPLES

The King IV Report on Corporate Governance

Governance Principles
1. The governing body should lead ethically and effectively.
2. The governing body should govern the ethics of the organization in a way that supports the
establishment of an ethical culture.
3. The governing body should ensure that the organization is and is seen to be a responsible
corporate citizen.
4. The governing body should appreciate that the organization’s core purpose, its risks and
opportunities, strategy, business model, performance and sustainable development are all
inseparable elements of the value creation process.
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CORPORATE GOVERNANCE PRINCIPLES

The King IV Report on Corporate Governance

Governance Principles
5. The governing body should ensure that reports issued by the organization enable stakeholders to
make informed assessments of the organization’s performance and its short, medium and long-
term prospects.
6. The governing body should serve as the focal point and custodian of corporate governance in
the organization.
7. The governing body should comprise the appropriate balance of skills, experience, diversity and
independence for it to discharge its governance role and responsibilities objectively and
effectively.
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CORPORATE GOVERNANCE PRINCIPLES

The King IV Report on Corporate Governance

Governance Principles
8. The governing body should ensure that its arrangements for delegation within its own structures
promote independent judgment, and assist with balance of power and the effective discharge of its
duties.
9. The governing body should ensure that the evaluation of its own performance and that of its
committees, its chair and its individual members, support continued improvement in its
performance and effectiveness.
10. The governing body should ensure that the appointment of, and delegation to, management
contribute to role clarity and the effective exercise of authority and responsibilities.
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CORPORATE GOVERNANCE PRINCIPLES

The King IV Report on Corporate Governance

Governance Principles
11. The governing body should govern risk in a way that supports the organization in setting and
achieving its strategic objectives.
12. The governing body should govern technology and information in a way that supports the
organization setting and achieving its strategic objectives.
13. The governing body should govern compliance with applicable laws and adopted, non-binding
rules, codes and standards in a way that supports the organization being ethical and a good
corporate citizen.
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CORPORATE GOVERNANCE PRINCIPLES

The King IV Report on Corporate Governance

Governance Principles
14. The governing body should ensure that the organization remunerates fairly, responsibility and
transparently so as to promote the achievement of strategic objectives and positive outcomes in the
short, medium and long term.
15. The governing body should ensure that assurance services and functions enable an effective
control environment, and that these support the integrity of information for internal decision-
making and of the organization’s external reports.
16. In the execution of its governance role and responsibilities, the governing body should adopt a
stakeholder-inclusive approach that balances the needs, interests and expectations of material
stakeholders in the best interests of the organization over time.
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CORPORATE GOVERNANCE PRINCIPLES

The King IV Report on Corporate Governance

Governance Principles

17. The governing body of an institutional investor organization should ensure that responsible
investment is practiced by the organization to promote the good governance and the creation of
value by the companies in which it invests.
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CORPORATE GOVERNANCE PRINCIPLES

Other Corporate Governance Codes

G20/OECD Principles of Corporate Governance

Corporate Governance Guidelines Pursuant to Section 60 of the Insurance Act No 38 of 2021

(Still in Draft)
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PRESCRIBED FURTHER READING

Davies, L.P. Principles of Modern Company Law. Sweet & Maxwell. See Chapters: “The Board”;
“Shareholder Decision Making”; “Directors’ Duties”; and “Controlling Members’ Voting”. (Any
latest edition)

Dignam, Alan and John Lowry. Company Law. Oxford University Press. See Chapters:
“Corporate Management” and “Directors’ Duties”. (Any latest edition)

Gates, Blankfein R. Gates on Understanding Company Law: A Conceptual and Functional

Approach. 2018. See Chapter: “Corporate Governance”.

Sealy, Len and Sarah Worthington. Sealy’s Cases and Materials in Company Law. Oxford
University Press. See Chapters: “Shareholders as an Organ of the Company”; “The Board of
Directors as an Organ of the Company” and “Directors’ Duties”. (9th Edition or any latest edition)
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PAST EXAMINATION QUESTION

Maze Limited is a company registered under the Companies Act No. 10 of 2017. It owns large tracks of land which it uses to
grow maize for sale. The Company has adopted the Standards Articles of Association in the Second Schedule of the
Companies Act. The Board of Directors includes Steve, Monga and Judas.

At a recent board meeting, the directors considered an offer from Growers Corporation which was selling part of its land at a
cost of K5 million. The Board of Maze Limited decided that it did not have the ability to raise financing needed to buy the
land offered by Tute Growers Corporation. Monga then subsequently formed her own company, Broods Luck Limited which
purchased the land for K5 million. During the same meeting, the Directors discussed a proposed contract with Earth Movers
Limited, a company in which Steve owns 20% of the shares. This interest was however not revealed at the meeting.

Judas, on the other hand, has had an arrangement with Guyers Limited whereby he receives a 15% commission for all orders
placed with it by Maze Limited. So far he has received in excess of K300,000.00 in commission.

The shareholders of Maze Limited have just become aware of these issues and are understandably furious. They passed an
ordinary resolution directing the Board of Directors to commence legal proceedings against Steve, Monga and Judas.

Discuss the legal issues arising out of the above facts.

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PAST EXAMINATION QUESTION ANSWER

The question generally tests your understanding of the fiduciary duties of the Directors and the powers of the shareholders vis
a vis the Directors and the appropriate organ to commence legal action.

The student must be able to identify the following breaches of duty:

a) In the case of Monga, the duty to avoid conflict of interest. The principle that a director must not make use of the
company’s property, information or opportunities for personal gain. The student must demonstrate an understanding that this
duty goes beyond the board meeting. It is immaterial that the company itself could not take advantage of the opportunity.
Monga can only be exonerated if this interest is properly disclosed and allowed by the other directors.

Reference to relevant section in the Companies Act (Section 107 and section 113) and any relevant case.

b) In the case of Steve the duty to disclose conflict of interest to the other directors during the Board meeting or by
notice in writing. The student must demonstrate that an understanding of disclosure requirements which must be noted by the
directors and act appropriately when considering the particular agenda item.

Reference to relevant section in the Companies Act (sections 110) and any relevant case e.g. Regal (Hastings) Ltd v Gulliver.
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PAST EXAMINATION QUESTION ANSWER

c) In the case of Judas the duty not to accept third party benefits or duty to promote the success of the company.
The student must demonstrate an understanding that the duty involves basic loyalty of the directors. This means the duty to act
in good faith and prohibition against making secret profits without full disclosure.

Reference to relevant section in the Companies Act (sections 109 (1) and 106 (b)) with any relevant case e.g Boston Sea
Fishing v Ansell.

d) As regards the shareholders ordinary resolution directing the board of directors to commence proceedings, the
student is required to demonstrate an understanding on the legality of this directive. Can shareholders properly direct directors
how to act through the ordinary resolution. The student must show that they understand that the Companies Act requires
Directors to act independently. This part does not have a right or wrong answer as the student is free to argue either way. The
most important is for them to show they understand the issues at play.

Relevant sections in the Companies Act (section 86, 106 etc) and any relevant case.

e) Students’ ability to make logical arguments and provide clear advice on the remedies that are open to the
Company.
CONCLUDING REMARKS