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5. Company Law

In each country surveyed, there are three types of company, which have common characteristics: the private company, the public company and the company limited by guarantee. Each of these company forms has changed very little in over 100 years (and can be traced back to English company law of the nineteenth century). Only three countries - Namibia, South Africa and Zimbabwe - have developed a more modern corporate vehicle, which is especially suited to meet the needs of the small business (which is known as the ‘close corporation’ in Namibia and South Africa, and as the ‘private business corporation’ in Zimbabwe).

5.1 Types of company available, their advantages and disadvantages

5.1.1 Botswana

There are three types of company available to entrepreneurs in Botswana:

  • Private limited company;
  • Public limited company; and
  • Company limited by guarantee.

These three types of company have the same basic characteristics as their counterparts in other surveyed countries.

A private limited company is one which by its Articles:

  1. limits the number of its members to not more than fifty;
  2. restricts the right to transfer its shares; and
  3. prohibits any invitation to the public to subscribe for its shares (or debentures).

A public limited company is free from such restrictions but is subject to more stringent reporting requirements by the Companies Act. A public company is also more expensive to administer because of accounting and other rules.

A company limited by guarantee is one in which the members

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guarantee to pay a certain amount in the event of the company being wound up. Such companies are typically used for non-profit making ventures such as charities, schools and clubs.

The overwhelming majority of companies in Botswana are private companies limited by shares. Virtually every small and medium sized business, which is registered as a company, is registered as a private limited company. In comparison with a public company, a private company is cheaper to form and has fewer registration rules and other formalities. The main disadvantage of a private company is that it cannot issue invitations to the public to buy its shares. For this reason, large companies with shares quoted on the Stock Exchange are registered as public companies.

In comparison with the sole trader (or partnership), the private company:

  • has a separate legal personality from that of its owners (shareholders). Therefore, it is the company (and not the business owners) that has responsibility for the debts and obligations of the business. It is the company that makes contracts, employs staff and opens a bank account;
  • offers limited liability. The liability of shareholders in a company is limited to the amount that they promise to pay for their shares - this is often a nominal amount, such as P100 where the company issues one hundred one pula shares. Only in very exceptional circumstances can the directors or shareholders be made liable for the debts of the company; and
  • offers ‘perpetual succession’ - meaning that a company is not affected by the death of its shareholders or directors. Since a company is a separate legal person, it continues to exist after the death of the person(s) who managed its affairs. In such circumstances, it is thus much easier for someone in the family to continue the business, or to sell it to another person.

5.1.2 Malawi

The following types of company are available in Malawi:

  1. a company limited by shares which means a company

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    having the liability of its members limited to the amount, if any, unpaid on the shares respectively held by the members;

  2. a company limited by guarantee which means a company having the liability of its members limited to such amount as the members respectively undertake to contribute to the assets of the company in the event of its being wound up; and
  3. an unlimited company which means a company not having any limit on the liability of its members.

Businesses are invariably formed as companies limited by shares, which may be either public or private limited companies (with similar characteristics to their counterparts in Botswana).

5.1.3 Namibia

The following types of company are available in Namibia:

  1. Pty limited company (private company limited by shares) registered in terms of the Companies Act, 1973 (Act 61 of 1973);
  2. Limited company (public company limited by shares) registered in terms of the Companies Act, 1973 (Act 61 of 1973);
  3. Close corporation, registered in terms of the Close Corporations Act, 1988 (Act 26 of 1988); and
  4. A section 21 company, being a company not for gain, registered in terms of the Companies Act, 1973 (Act 61 of 1973)

The close corporation has particular relevance to SMEs, since it offers the benefits of incorporation such as (limited liability) with minimal compliance requirements. The Namibian consultant’s report indicates that only a close corporation can be formed without an attorney’s assistance. It is by far the cheapest and easiest way to form a company.

The limited company is favoured by larger enterprises, as it is only type of company that can be listed on the stock exchange.

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5.1.4 South Africa

Under South African law, there are essentially four types of company structure:

  • the private company;
  • the public company;
  • the company limited by guarantee; and
  • the close corporation.

The private company is one of the most common forms used by smaller businesses. It has a share structure, independent legal existence and offers limited liability for its members. As in other countries, the South Africa private company is limited to a maximum of 50 members and the transfer of shares must be restricted in some way.

The public company form is used by larger businesses, as there is no limit on the number of members that it may have. In a public company, the transfer of shares must be unrestricted. Only public companies are able to list on the Johannesburg Stock Exchange. Public companies are subject to more stringent reporting requirements in terms of the Companies Act, and can be more expensive to administer.

The company limited by guarantee (also known as an association incorporated under section 21) does not have a share structure, although it has an independent legal entity. Instead, members guarantee the liabilities of the company - usually for nominal amount, such as R2. The profits of this type of company may not be distributed in any way to the members and must instead be used in pursuit of the main object of the company. It is therefore used most commonly by altruistic organisations, sporting associations, charity groups and the like.

The close corporation is a form introduced fairly recently (1984) to cater specifically for small businesses in South Africa. The close corporation has an independent legal personality, but is limited to a maximum of 10 members, who own not shares but instead have an interest in the corporation which is expressed as a percentage. Administrative costs are kept to a minimum. The close corporation

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can perhaps best be understood as a partnership with independent legal existence and limited liability for members. Due to various restrictions, it is unsuitable for anything other than a small business.

5.1.5 Swaziland

The following types of companies that may be registered in Swaziland:

  • A company having a share capital, which may take the form either of a private or of a public company; and
  • A company having no share capital (or limited by guarantee).

A public company has the following characteristics:

  1. it has a minimum of seven (7) members. There is no limit on the maximum number of its members;
  2. it allows the transfer of its shares to the public; and
  3. its name ends with the word ‘Limited’ (or ‘Ltd’).

In comparison, a private company has the following characteristics;

  1. a minimum of two and a maximum of fifty members;
  2. it must restrict the sale and transfer of its shares; and
  3. its name ends with the words ‘Proprietary Limited’ (or ‘(Pty) Ltd’).

A public company has the flexibility of selling and transferring its shares to the general public. This enables its members to transfer and dispose its shares easily. The shares and debentures of a public company may be listed for trade on the stock market subject to the rules of each stock market. A listed company may acquire substantial capital from the public. The fact that members are drawn from the general public results in impersonal relationship between the shareholders who own the company and the directors who manage it.

The constitution of a private company must restrict the offer and sale of its shares to the public. The shareholders of a private company may enter into a shareholder's agreement, in terms of

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which they restrict the sale of the company’s shares to specified persons or a specified class of persons. In the shareholders agreement, the members may also regulate matters such as the exercise of voting power, voting procedure, etc. Such self-regulation enables the members to adopt procedures with which they are most comfortable.

A company limited by guarantee is usually not for gain. It is formed in accordance with section 21 of the Companies Act. Profit making is not the main object, which is often to promote communal or group interests such as culture, arts, religious matters, academic matters, charity recreation, etc. This form of company has no share capital, and depends largely upon donations for its administration expenses and voluntary services for its labour. The advantage of this company form is that it empowers individuals to join together to pursue or promote matters of mutual interest without the risk of being personally sued should the project fail.

5.1.6 Tanzania

In Tanzania, there is no close corporation, only private and public companies. These two companies have similar characteristics to their counterparts in the other countries surveyed.

5.1.7 Zambia

In Zambia, there are three main types of company structure available:

  • the private company;
  • the public company; and
  • the company limited by guarantee.

A private company has the following characteristics:

  1. A minimum of two and a maximum of fifty members;
  2. A restriction on the right to transfer its shares; and
  3. A prohibition on any invitation to the public to subscribe for its shares or debentures of the company.

The Companies Act prohibits any private company limited by shares from transacting business or exercising any borrowing powers or incurring any indebtedness unless consideration, whether in cash or in kind to the value of not less than fifty thousand Kwacha has been paid for the issue of its shares, and a declaration to the effect that this requirement has been satisfied is signed by one of the directors or secretary and filed with the Registrar of Companies.

A public company must always have a share capital. By the Companies Act, a public company is one whose articles do not restrict the right to transfer shares other than -

  1. a restriction on the right to transfer any shares on which there is unpaid liability; or
  2. a restriction on the right to transfer shares issued to directors or other officers or employees exercising any rights or options.

A public company must satisfy certain conditions before it is allowed to operate. The Registrar issues a certificate of compliance on application to him by the company, confirming that the nominal value of the company's allotted share capital is not less than the authorised minimum. The „authorised minimum" is ten million Kwacha or such larger or smaller amount as may be prescribed.

A company is limited by guarantee when its members limit their liability by guaranteeing to pay a certain amount in the event of the company being winding up. A company is limited by guarantee may not carry on business for the purpose of making profit for its members nor for anyone concerned in its promotion or management. A company is limited by guarantee is therefore only appropriate for persons wishing to carry on community service, or charitable work, or the furtherance of some other non-profit objective such as the conversation of nature, wildlife, environment etc.

If a company limited by guarantee conducts business for gain or profit, each member and officer of the company incurs individual liability for the discharge of all debts and liabilities incurred by the

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company. In addition, each individual member or officer is liable on conviction to a fine of not more than thirty thousand Kwacha for each day on which that business is carried on.

5.1.8 Zimbabwe

There are three types of company available to the entrepreneur in Zimbabwe, each of which appears to be very similar to its South African counterpart:

  • The private company (similar to the South African private company);
  • The private business corporation (similar to the South African close corporation); and
  • The public company (similar to the South African public company).

5.2 Foreign companies

Each country surveyed appears to have similar rules relating to ‘foreign companies’. In each country, a ‘foreign company’ is defined as a company, which is incorporated (established) in another country. For example, a company, which is incorporated in Botswana, will be regarded as a ‘foreign company’ if it seeks to do business in Malawi or in Zimbabwe. Each country has similar registration rules, which apply to such foreign companies.

For example, in Namibia, a foreign company is defined as a company established in another country other than the Republic of Namibia. Within twenty-one days of establishing a place of business in Namibia, a foreign company is required to register the following documents with the Registrar of Companies:

  1. A certified copy of the memorandum of the company, and - if the memorandum is not in the official language of the Republic of Namibia - a certified translation thereof in English;
  2. A notice in the prescribed form of the registered office and postal addresses of the company. This form (CM22) has to be lodged in duplicate stamped with a N$ 2 revenue stamp;

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  3. The consent of and the name and address of the auditor of the company (which must be a Namibian Auditor). For this purpose, Form CM 31 has to be lodged, stamped with a N$ 2 revenue stamp;
  4. A notice of the financial year of the company. Form CM 49 has to be lodged, stamped with a N$ 50 revenue stamp plus annual duties calculated at N$ 4 for each N$ 10 000 issued share capital and premium account with a minimum of N$ 80;
  5. A list in the prescribed form, CM 29, containing particulars -
    1. in respect of each director, his/her full forenames and surname, nationality, occupation, residential, business and postal addresses and the date of appointment;
    2. in respect of the local manager and in respect of the secretary his/her full forenames and surname, nationality, occupation, residential, business and postal addresses, the date of appointment, and in the case of any local manager or secretary being a corporate body, its registered office;
    3. the name and address of the auditor of the company in the Republic of Namibia. This form has to stamped with a N$ 2 revenue stamp; and
  6. A notice in the prescribed form (CM 37) stamped with a N$ 2,00 Revenue stamp of the name and address of the person authorised by the company to accept service on behalf of the company (this person is known as the ‘documentary agent’ for the foreign company).

In Zambia, a foreign company is obliged to appoint a least one and no more than nine individuals as „local directors". The local directors should be authorised to conduct and manage all the affairs, properties, business and other operations of the company in Zambia. At least one local director of the company shall be resident in Zambia and where the company has more than two local directors, more than half of them shall be residents of Zambia. Failure to comply with this requirement for more than two months would constitute a ground for winding up of the court on the application of the Registrar of Companies. Other country

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reports have no reference to similar rules.

The rules on winding-up of foreign companies appear to be similar in all countries. For example, in Zambia, where a winding up order is made against a foreign company by a court of the country of incorporation (or where a resolution to wind up has been passed by the general meeting of the company), the company’s documentary agent and local directors are required to lodge a notice to that effect with the Registrar of Companies within twenty-eight days after the event.

In Zambia, a foreign company may be wound-up in accordance with the provisions of the Companies Act whether or not the company has been dissolved or has otherwise ceased to exist according to the law of the country of its incorporation. For purposes of such winding up, a foreign company is treated as if it were a company incorporated in Zambia. A foreign company may be wound up by the High Court on the following grounds:-

  1. if it is the course of being wound-up, voluntary or otherwise, in the country of its incorporation;
  2. if it is dissolved in the country of its incorporation or has ceased to carry on business in Zambia, or in carrying on business for the purpose of winding up it affairs; and
  3. If the court is of the opinion that the company is being operated in Zambia for any unlawful purpose.

A foreign company operating in Zambia may also be wound up for all the other reasons that would justify the winding up of any other company, namely:-

  1. if the company has by special resolution resolved that it be wound up by court order;
  2. where the company has failed to commence its business within twelve months after its incorporation or has suspended its business for twelve months;
  3. if the company is unable to pay its debts;
  4. where the company's articles provide that the company shall exist for a specified duration, at the expiry of that period, or where the company is intended to achieve a

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    certain goal, on attainment of that goal or event;

  5. if the number of members is reduced below two; or
  6. if, in the opinion of the court, it is just and equitable that the company should be wound up.

The Registrar of Companies may also petition for the winding up of a company on account of the company's persistent failure to comply with the provisions of the Companies Act.

Where a foreign company ceases to have an established place of business in Zambia, it is required within twenty-eight days after so ceasing, to lodge a notice of that fact with the Registrar of Companies. Where the Registrar has reason to believe that a foreign company has ceased to have an established place of business in Zambia, he shall serve a notice on the company of that fact and if after three months of the notice the Registrar is not satisfied that the foreign company is maintaining an established place of business in Zambia, the company shall be deemed to have lodged a notice of cessation of business on that day.

5.3 Company formation

From section 5.1 above, it can be seen that there are four main types of company form available in the countries surveyed:

  • the private company;
  • the public company;
  • the company limited by guarantee; and
  • the close corporation (known as the private business corporation in Zimbabwe).

However, it should also be noted that the corporate form which has been specifically developed to meet the needs of the modern small business - the close corporation or private business corporation - is only available in Namibia, South Africa and Zimbabwe.

In all countries surveyed, similar rules apply to the formation of each of these types of company.

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5.3.1 The Private Company

The formation of a private company follows a virtually identical procedure in each country surveyed. The provisions of the Botswana Companies Act are typical. The Act states that in order to form a private company, the following documents must be delivered to the Registrar of Companies:

  • Copies of the Memorandum of Association and Articles of Association (if any, see below);
  • A declaration by an attorney engaged in the formation of the company, or by a person named in the Articles as a director or secretary of the company, that the requirements as to registration have been complied with;
  • A registration fee must also be paid to the Registrar, calculated in relation to the amount of the company's nominal capital. The minimum fee is currently P240, payable where the nominal capital is P3 000 or less.

The rules regarding the content of the Memorandum of Association and Articles of Association also appear to be virtually the same in all surveyed countries. The Memorandum is the company's constitution or charter, which defines its identity and the scope of its activities. The Memorandum must state:

  1. the name of the company,
  2. the objects of the company,
  3. that the liability of members is limited, and
  4. the company's share capital or, if it is limited by guarantee, a statement of the amount guaranteed by its members.

Each surveyed country has similar rules regarding the scope and content of these four clauses. By way of example, the rules in Botswana are that:

(i) Regarding the Name Clause

There is a general freedom to choose any name for a company, subject to the following restrictions:

(a) The last word of the name must generally be „Limited", and if the company is a private company, the term „(Proprietary)"

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must be added before „Limited". In the company's day-to-day business, these words may be abbreviated to „Ltd" and „(Pty)";

(b) No company may be registered with a name which is identical to one already registered or which so nearly resembles any such name as to be calculated to deceive;

(c) Unless otherwise ordered by the Minister, the Registrar may refuse to register a name which in his opinion is calculated to mislead the public, or to cause offence to any person or class of persons, or is suggestive of blasphemy or indecency;

(d) Without the consent of the Minister, no company may be registered with a name which includes the words „Commonwealth", „Government", „national", „President", „State", „United Nations" or any other word(s) which import or suggest that it enjoys the patronage of the President or of the Government of Botswana, or of the government of any other country or of any department of any such government or of the United Nations; and

(e) The use of certain other words is restricted by various other statutes. In particular, no person other than a licensed financial institution may, without the prior written consent of the Bank of Botswana, use the words „finance", „loan", „credit", „savings", „trust" or „bank", or any of their derivatives in any language, or any other word indicating or implying the doing of banking business in the name, description or title under which such person is doing business in Botswana;

Written application can be made to the Registrar to reserve a name pending the registration of a company. Such reservation shall be for a period of 30 days or such longer period, not exceeding 60 days, as the Registrar may allow for special reasons.

If a company, through inadvertence or otherwise, is registered with a name that conflicts with any of the above provisions, the Minister within five years of the registration of that name may order the company to change it. A company may also change its name voluntarily, by special resolution and with the written approval of the Registrar.

If a company which has a place of business in Botswana carries on

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business under a name which is not its corporate name, it must register that name in accordance with the Registration of Business Names Act [cap. 42:04], as discussed at 4.4 above.

(ii) Regarding the Objects Clause

The Companies Act places virtually no restrictions on the extent of a company's objects clause. This clause is of vital importance, since at common law a company is governed by the ultra vires rule and may only engage in activities which are expressly or impliedly authorised in its objects clause. If a company purports to make a contract (or to undertake any act) which is ultra vires the objects clause, such a contract is void and cannot be ratified by the company even if all the members consent. Consequently, the draftsman of a company's memorandum endeavours to draft its objects clause as widely as possible, so as to include every conceivable business activity that the company may wish to undertake in the future.

(iii) Regarding limitation of liability

Whether the company is limited by guarantee or by shares, this clause simply states that the liability of members is limited. The nature of the limitation is set out in the clause, which follows.

There are, however, circumstances in which the privilege of limited liability may be lost:

(a) if the number of members falls below the legal minimum (which is two in the case of a private company and seven in the case of a public company), and remains less than that number for six months, every person who becomes or remains a member of the company while that situation continues after the six months has expired is personally liable for the debts of the company incurred while he remains a member and is aware of the position; and

(b) if, in the course of a winding-up or the judicial management of a company or otherwise, it appears that any business of the company was being carried on recklessly or with intent to defraud creditors, the court may declare that any person (including a member) who was knowingly a party thereto shall be personally responsible without limitation of liability for such debts

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or liabilities of the company as the court directs.

(iv) Regarding the Capital Clause

In the case of a company limited by shares, the memorandum must state the amount of (nominal) share capital and its division into shares of a fixed amount. The nominal share capital represents the maximum value of shares that a company is authorised to issue. It is on this amount that the registration fee is based. The nominal capital can subsequently be increased.

(v) Regarding the Association Clause

In this clause, the subscribers to the memorandum declare that they desire to be formed into a company and agree to take the number of shares shown opposite their respective names. There must be at least seven subscribers for a public company and two for a private company. Each subscriber must sign the memorandum in the presence of at least one witness who must attest the signature. Opposite the signature of each subscriber and each witness there must be written his full name, occupation and full residential or business address.

In all countries surveyed, a private company must have Articles of Association. The Articles contain regulations which govern the internal management of the company and the conduct of its business. An indication of the matters normally regulated by the articles is given by reference to the divisions of Table A in the Companies Act in Botswana, which are: Interpretation, Share Capital and Variation of Rights, Lien, Calls on Shares, Transfer of Shares, Transmission of Shares, Forfeiture of Shares, Conversion of Shares into Stock, Alteration of Capital, General Meetings, Notice of General Meetings, Proceedings at General Meetings, Votes of Members, Directors, Borrowing Powers, Powers and Duties of Directors, Disqualification of Directors, Rotation of Directors, Proceedings of Directors, Managing Director, Secretary, The Seal, Dividends and Reserve, Accounts, Capitalisation of Profits, Notices, Winding-Up, and Indemnity. Many of these matters are considered further in the relevant parts of this chapter.

A company limited by shares can choose whether to register its

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own articles, or to rely upon the model set of articles contained in Table A of the First Schedule to the Companies Act. The Table A articles apply to any company limited by shares in so far as they are not excluded or modified.

In Botswana, the professional fees payable to an attorney who assists in the formation of a private company depend primarily upon the complexity of the matter, but are normally around P1,000. Company agents also offer this service, but do so in breach of the Legal Practitioners Act [cap. 61:01], which provides that only a practising advocate, attorney, notary or conveyancer may draw up for a fee or reward any memorandum or articles of association. The typical fee for an "off the shelf" company (that is a shell company which has been registered but is not carrying on business) is approximately P1,750. Approximately similar fees appear to be charged in the other surveyed countries.

5.3.2 The Public Company

In all surveyed countries, the formation of a public company is essentially similar to that of a private company. However, before a public company may commence trading, the law usually requires that the Registrar of Companies must have issued a certificate of compliance. This certificate is issued when the Registrar is satisfied that the nominal value of the company's allotted share capital is not less than the „authorised minimum". For this purpose, a statutory declaration which must be signed and delivered to the Registrar stating the amount of capital paid up at the time of the application, and the amount, or estimated amount of the preliminary expenses that have been paid or is payable. In Zambia, for example, the "authorised minimum" means ten million Kwacha or such larger or smaller amount as may be prescribed.

5.3.3 The Company Limited by Guarantee

It appears that in all countries, the procedure for formation of a company limited by guarantee is similar to that of a private/public company. However, because this type of company does not have a

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share structure, the articles of association usually have to be more carefully prepared, which will affect the costs of professional assistance.

5.3.4 The Close Corporation (and private business corporation in Zimbabwe)

The formation procedure for this type of company appears to be very similar in each of the three countries, which offer this corporate form - Namibia, South Africa and Zimbabwe.

In South Africa, for example, close corporations are regulated by the provisions of the Close Corporations Act, 1984. A close corporation must be registered with the Registrar of Close Corporations in Pretoria by the registration of the necessary forms including the founding statement of the corporation and the details of members. In comparison with other types of company, registration of a close corporation is a simpler procedure (far fewer forms are used), and correspondingly less expensive. It may be completed in between 1 and 4 weeks for a cost ranging between approximately R750 and R2 000. A close corporation is only required to have one member upon formation.

5.4 Management of a company: division of power between shareholders and directors

In the case of private and public companies, similar rules apply in all countries. In general, the directors are responsible for the daily running of the company, and therefore constitute the executive management of the company. The specific powers of the directors of the company will be set out in the articles of association of the company. Shareholders are responsible for the appointment of directors, and their decisions are required in certain instances where special resolutions must be passed (for example, in order to amend the memorandum or articles of association of the company). No country in Southern Africa requires the „dual system" of company management that is found in some European countries such as Germany, consisting of a managing board (Vorstand) and a supervisory board (Aufsichtsrat, with employee

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representation in certain circumstances).

Different rules apply to close corporations. A close corporation is similar to a "partnership" in that no distinction is made between members and directors. Instead, all members are capable of and responsible for, the administration of the corporation. The specific rights and duties of individual members may, however, be regulated and limited by an agreement, known as an association agreement, entered into between all the members.

5.5 Directors

The rules on company directors are generally similar in all countries surveyed. This is an area of law, which gives a high degree of flexibility and autonomy to individual companies. As a general rule, issues such as who is eligible to be appointed as a director, the number of directors to be appointed, and the manner of their appointment, are regarded as internal matters, to be decided by the company’s Articles of Association. The only significant exception to this principle is in relation to the residential qualifications of directors, where the rules in Botswana, Malawi, Zambia and Zimbabwe impose certain restrictions (see next section).

5.5.1 Qualifications of directors

The general rule in all countries surveyed is that a company director does not need any formal qualification. For example, a director of a company is not required to have expert knowledge specific to the industry or business within which the company operates. A director is also not required by the general law to be directly involved with the day to day running of the company.

Unless the Articles specifically so provide, a director is not required to be a shareholder in the company. The general rules on share qualification are summarised in the report from Swaziland, and appear to be relevant in all surveyed countries:

    The qualifications for Directors appear in the articles. Each company determines whether its

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    Directors are required to have qualifying shares or not. Where qualifying shares are stated in the articles a nominated Director who fails to satisfy the requirement cannot take up his post as Director. If a nominated Director takes up his post as such without satisfying the requirement he shall be liable for an offence. However decisions of the board taken with the participation of a Director who failed to satisfy the requirements remain valid.

The only significant difference between the laws of the surveyed countries is in relation to the residential qualifications of directors:

  • In Botswana, at least one director of the company must be resident in Botswana;
  • In Malawi, every company must have at least three directors, the majority of whom must be resident in Malawi;
  • Namibia has no limitations on the nationality or residence of directors;
  • In South Africa, there are also no nationality or residence requirements in respect of directors;
  • In Swaziland also, there are no nationality or residence requirements in respect of directors;
  • Similarly, in Tanzania, there are no nationality or residence requirements in respect of directors;
  • In Zambia, the rule is that more than half of the directors of a company - including where applicable the managing and at least one executive director - must be resident in Zambia; and
  • In Zimbabwe, a company must have not less than two directors, at least one of who must be ordinarily resident in Zimbabwe.

Most countries appear to have rules requiring disclosure of the nationality of directors - for example, on the company’s letterhead.

5.5.2 Appointment of Directors

The rules on appointment of directors appear to be uniform in the

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surveyed countries. The method of appointing directors is regarded as an internal matter, governed by the Articles of the company. The names of first directors are usually stated in the Articles of the company (and unless otherwise stated, the first subscribers are also deemed to be the first directors). Directors are thereafter appointed by the shareholders of the company in a general meeting. In order to give shareholders the opportunity to consider the merits of each director individually, it appears that in each country, the relevant Companies Act prohibits the appointment of two or more directors by the same resolution at a general meeting, unless a resolution that this be done has first been passed without dissent.

In all countries, a company is required to enter the directors’ names and other particulars in a register of directors, and to state his/her name on all business letters, quotations and order forms.

5.5.3 Duties of directors

Once again, there are general common law and statutory principles which apply in all surveyed countries. As an agent of the company, a director owes two basic duties: to exercise his powers in good faith in the interests of the company, and to act with reasonable care and skill. These principles were originally developed at common law in the English courts and in the countries surveyed, they have been supplemented by some statutory provisions.

A director’s duty to exercise all powers in good faith in the interests of the company originates from the fiduciary relationship existing between a director and the company. This relationship arises because a director is appointed by the company to a position of trust, which must not be abused. Three specific rules flow from this principle:

  1. A director must not perform an illegal or unlawful act on behalf of the company. If a director breaks this rule and the company suffers loss, the director will be liable to compensate the company for such loss.
  2. A director must account to the company for any secret profit obtained by virtue of his position. A director should therefore avoid any conflict between his personal interests

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    and those of the company, and should obtain the company’s consent to any unwarranted economic benefit.

  3. In exercising their powers, directors must act in the interests of shareholders as a whole, rather than in the interests of a class of shareholders or in the interests of some other group such as employees or creditors of the company.

There is also a duty to act with reasonable care and skill, which is not very demanding. A director is merely required to exercise that degree of care and skill which can reasonably be expected from someone with his knowledge and experience. Those company directors who are appointed in a non-executive or part-time capacity are not expected to give continuous attention to the company’s affairs.

In the surveyed countries, the respective Companies Acts appear to extend the common law rules in three respects. Firstly, a director is not permitted to contract out of his duties to the company. Any provision of the articles or of any contract for exempting any director (or any other officer or auditor) from any liability, or indemnifying him against any liability, or for any negligence, default, breach of duty or trust towards the company is void.

Secondly, a director who is interested in any way, whether directly or indirectly, in a contract or proposed contract with the company must declare the nature and full extent of his interest at a meeting of the directors.

Thirdly, in order to prevent directors from abusing their position, the respective Companies Acts provide that a company may not make a loan of money or other property to any of its directors, or enter into a guarantee nor provide security for a loan to such a person. However, this prohibition generally does not apply:

  1. to a private company where all the members consent;
  2. (to anything done to assist a person in the performance of his duties, provided the arrangement has received the prior approval of members at a general meeting, or such approval is given at the next general meeting, or the loan

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    is repaid (or the arrangement is discharged) within six months thereafter; or to a company whose ordinary business includes the lending of money or the giving of guarantees, and the arrangement is made in the ordinary course of that business.

5.5.4 Removal of Directors

Here again, the rules, which apply in the surveyed countries, appear to be similar. Procedures for the removal of directors are laid down in the Articles of the company. A fundamental rule which is to be found in the relevant Companies Act of each country is that the shareholders in general meeting always have the power to remove a director from office, notwithstanding anything to the contrary in the memorandum or articles of association of the company. This rule is intended to promote shareholder democracy, and to ensure that a company director can always be removed by the ‘owners’ of the company.

5.6 Disclosure and accounting requirements

Similar disclosure rules apply to private and public companies in all surveyed countries, although different rules apply to close corporations, which are considered separately below (see 5.6.2, below).

5.6.1 Rules applying to private and public companies

The disclosure or publicity requirements are intended to protect persons dealing with a company. In each surveyed country, the Companies Act therefore requires publicity to be given to certain aspects of the company’s affairs. This publicity is achieved in two main ways: by the lodging of certain documents with the Registrar, and by requiring the company to maintain certain registers at its registered office.

The various Companies Acts generally require that the following information must be maintained on the company’s file at the office of the Registrar of Companies, and made available for inspection

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by the public:

  1. The company’s memorandum and articles;
  2. A statement of the address of the registered office;
  3. The annual return with details of the company’s shareholders, officers and issued capital (see below);
  4. A copy of any special resolution and of certain other resolutions such as those altering the company’s capital;
  5. Certain notifications of court action such as an order in connection with a variation of class rights or in connection with a winding up.

In some countries, details of certain mortgage bonds must also be registered in the company’s file at the office of the Registrar of Companies (in other countries, these same details are to be registered at the Deeds Registry).

In all surveyed countries, every private and public company must have a registered office. This requirement often proves inconvenient and comparatively expensive for small companies, which employ the offices of a legal practitioner or accountant to act as their registered office.

A company’s registered office has two main functions. Firstly, it is the address to which all communications and notices may be sent, and at which all legal process may be served. Any notice, order or other document which has to be served on a company may be served by leaving it at, or sending it by prepaid registered post to, the registered office.

Secondly, the registered office is a place where certain information about a company may be obtained by shareholders and/or members of the public. The Companies Acts of the surveyed countries generally require that the following documents should be kept at the registered office:

  1. a register of members, except in certain limited circumstances when it may be kept elsewhere
  2. copies of the books containing the minutes of proceedings of any general meeting of the company;
  3. a register of directors’ shareholdings and debentureholdings;

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  4. a register of directors and secretaries; and
  5. a register of mortgages, notarial bonds and debentures,

These registers must be available for inspection by shareholders of the company on the terms specified in the various Companies Acts. The registers referred to in (i), (iv) and (v) may also generally be inspected by any member of the public.

The rules on the Annual Return also appear to be similar in all surveyed countries. The relevant Companies Act generally requires that in every calendar year from the holding of its first annual general meeting, a company must file with the Registrar of Companies an annual return specifying certain information regarding the company’s shareholders, officers and issued share capital. This rule is a further inconvenience for the small company which may have to employ a company secretary in order to ensure its compliance with this (and other) disclosure requirements.

Publication of the company's name is dealt also with in the Companies Act of each surveyed country. The general requirement is that every company must have its name in legible characters:

  1. continuously displayed in a conspicuous position on the outside of every office or place in which its business is carried on;
  2. engraved on its seal, if any; and
  3. mentioned in all business letters, notices and other official publications, cheques, orders, delivery notes, invoices, receipts, etc.

More stringent disclosure rules tend to apply to public companies, regarding matters such as the presentation of a balance sheet, a directors’ report, and an auditor’s report.

Similar rules appear to apply in all surveyed countries regarding Books of Account. The typical requirement is that every company must keep proper books of account with respect to:

  • all sums of money received and expended by the company and the matters in respect of which the expenditure takes place;

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  • all sales and purchases of goods by the company; and
  • the assets and liabilities of the company.

These books must be maintained in such manner as to give a true and fair view of the state of the company's affairs and to explain its transactions. They must usually be kept at the company’s registered office or at such other place approved by the directors, and must be open to inspection by the directors at all times.

5.6.2 Rules applying to the Close Corporation (and private business corporation in Zimbabwe)

In South Africa, an important distinction between a close corporation and a private/public company is that close corporation is not required to appoint an auditor: instead, it must appoint an "accounting officer", whose obligations are much less stringent than those of an auditor. The close corporation must keep accounting records that fairly reflect its status, affairs and transactions, and these must be checked annually by the accounting officer. The corporation is not, however, required to submit these documents to the Registrar of Companies

5.7 Liquidation and Rescue Procedures

Rules on company liquidation also appear to be similar in the surveyed countries. A company may generally be wound up either by the court or voluntarily by resolution of the members. In both cases, once the winding-up has commenced, the company must cease trading and the powers of the directors are terminated subject to the appointment of a liquidator who is responsible for gathering the assets of the company, paying off creditors and distributing any surplus among the shareholders. When the liquidator has completed the distribution of assets, in the case of a winding up by the court, he/she applies to the Court for release from his/her duties, and in the case of a voluntary liquidation, the liquidator notifies the Court which gives notice thereof to the Registrar and the company is deemed to be dissolved after three months have expired. Only upon dissolution does the company cease to exist as a legal entity and even then its existence may

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usually be revived within two years on application by the liquidator or an interested person (for example where additional assets are discovered).

An alternative to liquidation available in Botswana, Namibia, South Africa, Swaziland and Zimbabwe (and possibly also in the other countries) is known as judicial management. The essence of judicial management is that the company is placed by the court under the control of a judicial manager with the object of avoiding liquidation, where there is a prospect that by proper management the company will overcome its present financial difficulties.

The court may also direct that while the judicial management order is in force, all actions and the execution of all writs, summonses and other processes against the company be stayed and be not proceeded with without leave of the court. An order containing such a direction effectively grants the company a moratorium to inhibit litigation against the company and as such is considered a fairly drastic remedy which will only be granted where there is a reasonable prospect that the company will overcome its difficulties if it is granted such a moratorium and if it is just and equitable to grant such an order.

There are normally two circumstances in which the court has a discretion to place a company under judicial management:

  1. whenever application is made for the liquidation of a company on the ground that the company is unable to pay its debts, or that it is just and equitable that the company should be wound up, and the court is of the view that if the company were placed under a judicial management order there is a reasonable probability that the company would be able to meet its obligations and to remove the occasion for liquidation, and the court also considers it just and equitable that the company should be placed under judicial management; or
  2. on the application of any member or creditor if it appears to the court that by reason of mismanagement or other cause, it is desirable that the company should be placed under judicial management.

© Friedrich Ebert Stiftung | technical support | net edition fes-library | November 2000

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