About share capital of private companies

This articles touches on areas of interest to many entrepreneurs and executives. It is about ownership of a private company. Section 2 of the Companies and Other Business Entities Act (“COBE Act”) or (“the Act”) defines a share as a share in the capital of a company.

Share capital of a business is the part of a company’s capital that comes from the issue of shares.

The following pertinent areas as regards capital are explained.

Legal nature and requirement to have shares

According to section 95 of the Act:

A share issued by a company is a movable property and transferable in any manner provided for by the articles of the company or recognised by the Act or any other law,

Subject to section 304 (Transitional provisions) a share does not have a nominal or par value,

A company may not issue shares to itself

An authorised share has no rights associated with it until it has been issued:

Shares of a company that have been issued and subsequently acquired by that company or surrendered to it have the same status as shares that have been authorised but not issued.

Crucially, in terms of section 95(6), despite the repeal of the Companies Act (Chapter 24:03) effective February 2020 a share issued by a pre-existing company and held by a shareholder immediately before that effective date of the COBE Act, continues to have all of the rights associated with it immediately before the effective date, irrespective of whether those rights existed in terms of the company’s memorandum or articles, only subject to:

Subsequent amendments to the company’s memorandum or articles of association,

Operation of section 95(5).

Authorisation for shares

Section 96 applies. This section provides that a company’s memorandum:

Must set out the classes of shares, and the number of shares of each class that the company is authorised to issue.

Must set out, with respect to each class of shares, a distinguishing designation for that class and the preferences, rights, limitations and other terms associated with that class.

Section 96(2) provides that the authorisation and classification of shares, the number of authorised shares of each class, and the preferences, rights, limitations and other terms associated with each class of shares, as set out in a company’s memorandum, may be changed only by:

An amendment of the memorandum by special resolution of the shareholders, or

The board of directors in terms of section 96(3), unless the memorandum provides otherwise.

In terms of section 96(3), unless varied by the company’s memorandum provides otherwise, the company’s board of directors may:

Increase or decrease the number of a company’s authorised shares of any class,

Reclassify any unclassified authorised but unissued shares,

Determine the preferences, rights, limitations or other terms of shares in a class.

Preferences, rights, limitations and other share terms

These are provided in section 97 of the COBE Act. Most important is that section 97(3) requires that a company must always have ordinary shares.

Section 97(8) provides protection to dissenting shareholders whose rights might be materially and adversely affected by the amendment of a company’s memorandum of association.

Issuing of shares

Section 98 applies. For example section 98(1) provides that the board of directors may resolve to issue shares of the company at any time, but only within the classes, and to the extent, that the shares have been authorised by or in terms of the company’s memorandum, in accordance with section 96.

According to section 98(2) if a company issues shares that have not been authorised in accordance with section 96 or in excess of the authorised shares the issuance of those shares may be retroactively authorised in accordance with section 96 otherwise the share issue is a nullity to the extent that is exceeds any authorisation.

Subscription for additional shares in a private company

Section 99 applies. In terms of section 99(2) if a private company proposes to issue any shares other than as contemplated in section 99(1)(b), each shareholder thereof shall have a pre-emptive right to be offered and, within a reasonable time to subscribe for a pro-rata number of shares.

Consideration for shares

According to section 100(1) the board of directors may issue authorised shares only:

For the adequate consideration to the company as determined by the board of directors or,

In terms of conversion rights associated with previously issued shares.

According to section 100(3) the consideration for shares may be in money, in other tangible or intangible property, other rights having monetary value, a binding obligation to pay money or services previously performed.

The value of any non-monetary consideration shall be verified by an independent expert and approved by existing members.

This simplified article is for general information purposes only and does not constitute the writer’s professional advice. -heral.dl.zw