This article explains important company documents namely Shareholders' Agreement, Articles of Association, Sale of Shares Agreement, Return of Allotment (CR11, previously known as CR2), Share Transfer document, Share Certificate and Register of Shareholders.
In terms of Section 95 of the new Companies and Other Entities Act (Chapter 24:31) or "the COBE Act" or "the Act" which repealed and replaced the Companies Act (Chapter 24:03) a company is required to have members also known as shareholders.
A Shareholders Agreement, considered optional, governs the relationship between shareholders in a company and can for example be used in a private company with a few shareholders over and above a company's Articles of Association.
For most companies the Articles of Association, which governs the internal affairs of the company, are prepared at the formation of the company and are rarely updated. Some shareholders may prefer to enter into a shareholders' agreement to address shareholder issues in detail.
Such an agreement covers issues such as name of the company subject of the agreement, parties or shareholders to the agreement, preamble giving the background to the agreement, authorised share capital of the company, share capital issued to the shareholders, the current shareholders and their shareholding.
This part is very important as it clarifies how many shares each shareholder holds in the company. The agreement also includes governance of the company addressing for example:
Roles of the shareholders, directors and management.
Meetings of the shareholders ie annual general meetings or extraordinary general meetings.
Decisions requiring approval by members, whether through ordinary or special resolutions.
Composition of the board and its Committees.
Appointment and removal of directors.
Remuneration of board members.
Meetings of the board.
Other aspects covered include terms and conditions for the issue of new shares, transfer of shares including any restrictions, dividend policy, termination of the agreement, breach and consequence thereof and dispute resolution.
Disputes may arise on shareholding, decisions made by the company, transfer of shares, disposal of a major part of the business, conflict of interest, among others. The agreement may also include variation of the agreement, ranking of the agreement against the company's Articles of Association and laws applicable to the agreement.
Articles of Association
Upon registration some companies refer to model Articles in the COBE Act. For example the Sixth Schedule to the COBE Act contains Table B -- Model Articles for Private Companies limited by shares.
This covers key aspects such as definitions of key words used in the Articles, liability of members/ shareholders, directors' powers and responsibilities, decision making by directors, appointment of directors, shares and distribution, dividends and other distributions, organisation of general meetings, voting at general meetings, administrative arrangements among others.
Sale of shares agreement
This is an agreement whereby an existing shareholder sells own shares to another shareholder, existing or new for an agreed price. Like most sale and purchase agreements, it includes elements such as:
The company, which issued the shares being sold.
Parties to the agreement, being the seller ie existing shareholder also called transferor and the buying shareholder, also called transferee.
Number of shares being sold by one party to the other.
Purchase consideration, being the price to be paid by the buyer,
Timing of the transfer of shares, whether before or after full payment of the purchase price.
Return of Allotment (CR11)
Formerly CR2, the return of allotment is required in terms of section 121 of the COBE Act when a company issues or allots new shares to its members. It includes, inter alia, names of the shareholders and number of shares allotted to them.
Share transfer instrument
Section 151 of the COBE Act regulates share transfers in that:
A proper instrument (document) of share transfer has to be completed and delivered to the company for such shares to be transferred.
Upon application by the transferor (existing shareholder), a company shall enter the new shareholder (transferee) in its register of members / shareholders.
Such share transfer instrument is usually a short document signed by both transferor and transferee wherein the transferor transfers to the transferee a certain number of shares subject to certain conditions set by the company.
It forms the basis for issuing a share certificate to the transferee.
According to Section 153(3) of the COBE Act a share certificate shall be prima facie evidence of title of the member/shareholder to such shares. Section 153(1) of the Act requires companies to issue share certificates to its members. Such a certificate contains, inter alia, name of the issuing company, name of the shareholder, number and class of shares, any restrictions on the transfer of the shares. Many private limited companies are not compliant in that they did not issue share certificates to their members.
Register of shareholders
This is a record of a company's shareholders kept by the company.
Godknows Hofisi, LLB (UNISA), B.Acc (UZ), CA(Z), MBA(EBS,UK) is a legal practitioner, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]