Starting this week – once a month – The NewsHawks will run a column by Beatrice Moyo, a local lawyer practicing at Mushoriwa Pasi Corporate Attorneys and co-author of the Directors Handbook in Zimbabwe, a comprehensive guide on company law provisions every director should know.
Basically, corporate law regulates how corporations, investors, shareholders, directors, employees, creditors, and other stakeholders such as consumers, communities, and the environment interact with one another.
It dictates how corporates are formed, structured, governed and controlled, with corporate governance specifically regulating the balancing of interests among a business’s different stakeholders.
Corporate law and governance therefore directly shape what businesses do and how they do it, and indeed in some ways what they cannot do.
Beyond their distinct legal and policy spheres, the impact of corporate law and governance cut across other important realms, including economic management, transparency, accountability, human rights and environmental matters.
Some of the key concepts and characteristics of corporate law such as legal personality, limited liability, liability within corporate groups, and delegated management have been obstacles to legal accountability for multinational or transnational companies on human-rights related abuses by their business partners and subsidiaries.
Meanwhile, several aspects of corporate law and governance such as rules on company disclosure, non-financial reporting, directors’ duties and stakeholder engagement are important for protection of human rights and remediation of any harms.
CORPORATE law breaches and corporate governance scandals can occur any time anywhere in the world whenever there is evidence of unethical behaviour, negligence, third-party interference or corruption that impacts a company’s performance and reputation.
Some of the most common violations or scandals include creative accounting, dodgy business practices, data breaches, environmental damage or corruption. Examples of the biggest international corporate scandals in recent times – not ranked according to notoriety – include Enron, Volkswagen, Lehman Brothers, BP and Uber.
Closer home in South Africa some of the corporate outrages rocked Steinhoff, Tongaat Hulett, VBS Bank, KPMG and Gupta-related companies, among others.
In Zimbabwe, there have also been many prominent cases of corporate scandals such as those that affected United Merchant Bank, a series of other bank collapses including Trust, Royal, Barbican, Interfin and Time, leaving depositors stranded and a trail of economic instability, and scandals at companies like ENG.
From 2000 to 2015, the Zimbabwean banking sector experienced unprecedented bank closures amid corporate law and governance violations.
Besides that, the Auditor-General every year releases reports showing scandalous corporate governance failures and corruption at state enterprises or parastatals, further shedding light on Zimbabwe’s protracted economic problems.
This has highlighted the importance of corporate law and governance, and the impact of corporates on individuals, communities and society.
In the process, this has brought to the fore the need for legislators and regulators to rethink regulatory frameworks and enforcement, and for companies to re-imagine their organisational structures and focus on business ethics.
There is also need to revisit the underlying body of law to address and regulate corporates in an effort to avoid such corporate scandals and their ramifications.
So one may ask: What is corporate law?
Corporate law comprises of the group of laws which regulate the rights, relations, and conduct of persons, companies, organisations and businesses.
This body of laws has a significant impact on the economy in general and on commercial activity. It ought to promote and facilitate commercial enterprise and economic growth and not restrict it.
Ideally, corporate law should be clear, certain and accessible as companies in general play an important role in wealth creation and growth in any country. It comprises legislation, regulations to statues, case law and common law. In this article we look at the tenets and characteristics of corporate law in general, then discuss the legal framework of companies in Zimbabwe.
Different studies, The Essential Elements of Corporate Law: What is Corporate Law? by John Armour, Henry Hansmann & Reinier Kraakman, for instance, show five core structural characteristics of a business corporation: (i) legal personality, (ii) limited liability, (iii) transferable shares, (iv) centralised management under a board structure, and (v) shared ownership by contributors of capital.
In virtually all economically important jurisdictions, there is a basic statute that provides for the formation of companies with all of these characteristics.
In economics literature, a firm is often characterised as a “nexus of contracts”.
Most research on corporate governance has been concerned with the resolution of this collective action problem.
Alternative mechanisms may mitigate it: (i) partial concentration of ownership and control in the hands of one or a few large investors, (ii) hostile takeovers and proxy voting contests, which concentrate ownership and/or voting power temporarily when needed, (iii) delegation and concentration of control in the board of directors, (iv) alignment of managerial interests with investors through executive compensation contracts, and (v) clearly defined fiduciary duties for CEOs together with class-action suits that either block corporate decisions that go against investors’ interests, or seek compensation for past actions that have harmed their interests.
Tenets of corporate law
There are four basic tenets of corporate law, which when all achieved, result in a good corporate law system that ultimately assists in achieving a prosperous economy.
In brief these include:
Simplicity – Company law should be all-encompassing, but not complex. The laws should be clear and concise, and simplify the procedure for formation of companies as well as ensure affordable costs in forming and maintaining a company.
Transparency – Lawmakers should be open and transparent with businesses when designing and implementing corporate laws. In addition, the laws should be easily accessible, and encourage transparency and high standards of corporate governance.
Fairness – Company law must be applied consistently and equally among business enterprises. The laws ought also to be in harmony with international best practices
Accountability – Company law should facilitate the accountability of business, fostering trust in businesses. It should facilitate greater sensitivity to social and ethical concerns, while ensuring efficiency of companies and their management.
The legal framework of corporate law in Zimbabwe.
In Zimbabwe, the Companies and other Business Entities Act [Chapter 24:31] (Hereinafter, COBE or the New Act) which came into force in the first quarter of 2020 is the primary legislation governing company law.
The Act covers a number of aspects, including registrable entities, directors’ duties, calling and conducting meetings, corporate governance topics as well as shareholder rights and remedies, to name a few.
In addition to COBE, there are a number of statutory instruments to the new Act which regulate various aspects pertaining to companies, including pre-formation requirements and post-formation requirements.
Company law also encompasses case law and common law. Not all rules and principles of company law are sourced in legislation. The common law and case law still apply and assist in the interpretation of the Act. Where the Act is silent, common law will apply. Zimbabwean common law consists of all law that is not found in legislation. It comprises a combination of rules drawn primarily from Roman-Dutch law and, to a lesser extent, from English law.
Prior to this Act, there was a Companies Act [Chapter 24:03], which came into effect on 1 April 1952, to consolidate and amend the laws in force in Zimbabwe relating to the constitution, incorporation, registration, management, administration and winding up of companies and other associations. It became appropriate that the corporate environment in Zimbabwe be updated in line with international developments and trends to ensure that new business initiatives and company expansions take place in Zimbabwe.
The old act lacked adequate mechanisms to address the broader stakeholder concerns. The new Act is applauded for giving significant rights to a variety of stakeholders, including employees, trade unions and minority shareholders.
There are various other acts which, on the broad spectrum, also form part of company law in Zimbabwe for example the Securities and Exchange Act [Chapter 24:25] and the various regulations thereunder which deal with public companies and Public Entities Corporate Governance Act [Chapter 10:31], which deal with state owned entities.
There are also statutes that regulate companies under financial distress like the Insolvency Act [Chapter 6:04]. There are a number of other statutes which will apply depending on the industry in which the company operates.
Characteristics of corporate law
There are a number of characteristics of corporate law. However, there are five major characteristics which include, legal personality – this means that a company or business entity, once registered, acquires a separate legal persona separate from its founder and shareholders.
There is also limited liability, depending on the entity registered, this means that if the company is sued, only its assets are at risk, and not those of the founder or shareholders, except in exceptional circumstances, and where the corporate veil has been pierced.
The limited liability therefore permits owners to take risks and diversify their investments.
Another characteristic of corporate law is that it creates shares, which the owners hold and may easily sell or transfer or bequeath in their personal estates. Thus where an owner decides they no longer want a share in the company, the company itself does not have to shut down.
The fourth characteristic of corporate law is that the owners and the managers of the company may be separated. The owners and shareholders may appoint directors who, at law, are tasked with managing the affairs of the company, while reporting to the shareholders and having, among other things, certain decision ratified by the shareholders.
The final characteristic is that the shareholders of the company have the right to the companies’ profits. Usually, an owner has decision-making authority and profit sharing in proportion to their ownership interest.
To be continued…
About the writer: Beatrice Moyo is a local lawyer at Mushoriwa Pasi Corporate Attorneys and a co-author of the Directors Handbook in Zimbabwe, a comprehensive guide on company law provisions every director should know.
Email: [email protected]