Company Law 2012 1

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Section 89 of the Constitution of Zimbabwe provides that the;
“subject to the provisions of any law for the time being in force in Zimbabwe relating to the application of the law to be administered by the
Supreme Court, the High Court and by any courts in Zimbabwe subordinate to the High Court shall be the law in force in the Colony of the Cape of Good
Hope on 10 th June 1891, as modified by subsequent legislation having in Zimbabwe the force of law”
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The law applicable to companies in the Colony of the Cape of Good Hope as at 10 June 1891 was solidly based on the English law particularly the
Limited Liability Act of 1855 as incorporated in the Joint Stock Companies Act of 1856
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Consequently the common law applicable to companies in Zimbabwe is based on English law and in order to gain a working understanding of the historical development of company law in
Zimbabwe it is imperative to study the development of the modern company in England
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The general idea of a company in the sense of a fictitious legal person distinct from the actual persons who compose it, is very old
It can be traced as far back as the ancient Greek and Roman civilizations
The 1 st company that bears the greatest resemblance to the modern public company is the joint stock company the 1 st being the Dutch East
India Company which was created in 1600
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The English followed suit two years later by granting a charter to the British East India
Company which was charted by Queen Elizabeth
I in 1602
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The joint stock company coincided with the great exploration age and outset of mercantile capitalism driven by the discovery of the new world, and the thorough exploration of the
Atlantic and Indian oceans it had become self evident that the capital required to fund these overseas voyages was beyond the capacity any individual merchant or a small groups of individual merchants to raise and there was a need to for a large number of people to pool their capital in a joint stock in order to finance these overseas trading activities
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Due to the high level of risk involved in backing such expeditions to the far corners of the modern globe, financiers of such voyages sought to spread their capital among a number of voyages and fleets
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With pooled capital, investors were for the first time detached from the actual individuals constituting the corporation.
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This emerging idea would come to transform the idea of a corporation as a legal entity existing apart from its owners
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The early joint stock companies were created by the granting by the crown of charters, the 1st such company being the British East India Company
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Charters were instruments of privilege that were designed to elevate the economic and legal rights of the corporation in question above those of their actual and potential competitors.
For example, in 1600, the East India
Company’s charter granted it monopoly trading rights to trade with all the countries east of the Cape of Good
Hope
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Due to the privileged manner in which this
‘charter’ companies were created they had a distinct quasi-public character like, to some extent, our parastatals unlike today’s companies that are largely characterised by their virtually exclusive private interests defined by shareholder value maximization mandate
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The object of a chartered company was one of managing and ordering the trade in which it was engaged coupled with the private motive of making a profit for it members
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Early companies like the English East India
Company performed quasi-public functions like administering the colony of India were it exercised all the functions that a government would have performed
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These quasi-public functions were also apparent in the early American companies that extensively used charter companies in its developmental stages to construct railway lines, roads and canals
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The creation was an exercise of royal prerogative in
England and state legislature prerogative in the
United States
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They were instruments of privilege
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They performed quasi-public functions i.e. they were partly created to serve some public policy objectives
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They had a definite time period in which they were allowed to operate, i.e. they didn’t possess the attribute of perpetual succession
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For example the English East India
Company was originally granted a 21 year monopoly over trade in India
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There was no limited liability for the members of these joint stock companies and the members were jointly and severally liable for the debts of the company
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There was rampant financial speculation in early joint-stock companies, inevitable market corrections and “bubbles” developed similar to ones that can also be seen in today’s markets and the significance of the
South Sea Company was the first company in history to push its share prices by false pretences much in the same manner as
Enron and precipitated the first ‘bubble bursting’ that shifted the trajectory of the development of English company law
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The South Sea Company was a joint stock company that was chartered in 1711 to trade in the
Spanish South American colonies
These monopoly rights were anchored in the Treaty of Utrecht which was signed as a settlement to end the war of Spanish Succession which gave England rights to sell slaves in the region for 30 years
However, the Spanish remained hostile and only allowed one ship a year to enter but the investors in
England remained in the dark about these problems
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Driven by extravagant promises made by the company, investors in England brought shares by the thousand driving the share prices to record despite the fact that the company wasn’t conducting any real business
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By 1717 the South Sea Company was so wealthy that it bought government debt and exchange it for its own company shares by persuading the holders of government bonds and debentures that these shares were highly valuable commodities
By 1720 the bubble ‘burst’ and the share price plummeted from an all time of £ 1000 to £100 this spectacular collapse of the South Sea took down the English economy with it
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This directly led to Bubble Act of 1720 which prohibited companies that freely issued shares and
English company law was from this point greatly influenced by the law of partnerships
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The prohibition of joint stock companies was short lived because of the impetus of the emerging industrial revolution by people and the government had lost faith in the chartered joint stock company
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In 1844 the parliament passed the Joint Stock
Companies Registration Act This Act allowed ordinary people, for the first time , through a simple procedure of registration to incorporate without the need for a charter
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By providing incorporation by registration, without the need for a charter, letters patent or a special
Act of Parliament, the Joint Stock Companies
Registration Act replaced incorporation as a privilege with incorporation as a right
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The first Office of the Registrar was set up
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The Act provided unlimited personal liability of members, but the company had to be excused first
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Personal liability of a member ceased three years
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The 1844 Act was amended by the Limited Liability
Act of 1855 which adopted the principle of limited liability for all registered companies
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The Limited Liability Act in turn was revised a year later by the Joint Stock Companies Act of 1856 which established the framework for the modern company which is incorporated by registration with its members enjoying limited liability
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These series of English Companies Act formed the basis of the Cape Colony’s Joint Stock Companies
Act Limited Liability Act 23 of 1861 which was largely based on the English Limited Liability Act of
1855
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The Cape Companies Act of 1862 which replaced the 1861 Act was modelled on the English
Companies Act of 1862
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Because of the operation of section 89 of the
Zimbabwean Constitution the English Act discussed above form the basis of our Company
Law
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Post revolution United States was largely an agricultural nation and lagged behind
England and continental Europe in terms of
Industrial development
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The American corporations were relatively small and chartered at state level for specific purposes such as banking and sea fairing.
There was no limited liability for the members of the corporations
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Three events accelerated the development of the American charter companies to the modern company modelled along the English company
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 railroad construction was the impetus to the
American industrial revolution
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Railroads were not just the first modern businesses in the United States; they also enabled the development of other companies, “helped build . . . the infrastructure of a modern economy,” “provided the right-ofway for telegraph and telephone lines” and “revolutionized the Post Office,” and made it possible to move goods throughout the country quickly and predictably
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As a result of railroad construction there was an upsurge in chartered companies
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The second most important event in the development of the American corporation was legal and it came in the form of the decision in
Dartmouth College v. Woodward
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The American Federal Supreme Court held in a ruling regarding the status of Dartmouth College that states could not rewrite corporate charters capriciously because the corporation possessed certain private rights.
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This created a framework of protection for corporations against government encroachment and as a result numerous constitutional rights previously accorded only to private citizens were extended to corporations as well.
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The final prompt was political in nature.
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 by the beginning of the 1830s, states began considering the impact that pro-business statutes could have on a state’s ability to attract corporations to relocate within their borders.
In 1830, Massachusetts decided that companies didn’t have to be engaged in public works to be awarded a state charter
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In 1837, Connecticut allowed incorporation of most businesses without a special legislative enactment
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Finally in 1899 the State of New Jersey loosened its incorporation rules so that any corporation chartered in the state could hold stock in any other corporation in the country
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This revision of New Jersey law soon made it the preferred state in which to incorporate and by 1901, seventy-one percent of all
United States corporations or greater were founded in New Jersey
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This generated a lot of incorporation revenues for New Jersey and this success precipitated a ‘race to the bottom’ by states to provide the most favourable incorporation terms and what eventually emerged was a modern corporate law which reflected English law
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The race to the bottom was eventually one by the state of Delaware when it passed its
‘General Incorporation law’
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To this day over 60% of the Fortune 500 companies are incorporated in the state
Delaware
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Today the modern company plays a pivotal role in the world economy and has even being described as the dominant institution of our time
In wealth, power and organisation today’s great companies are states within states.
Their policies can make or mar the fortunes of cities and entire countries
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The modern company has proven itself beyond doubt as the most successful wealth generating vehicle and today the largest 200 companies account for 28% of the world
GDP
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The economies of the largest companies dwarf that of many countries and in fact of the 100 largest economies in the world 51 are companies and only
49 are countries
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For instance the market capitalization for Exxon
Mobile stands at around US$ 417,66 billion which dwarfs the total size of the South African economy which currently stands at around US$363, 655 billion measured by GDP or that of Norway that stands at around US$412, 990 billion in fact its market cap is larger that of all countries after the largest 24 state economies measured by GDP
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The fundamental purpose of company law is to facilitate to create a nurturing a legal environment that encourages instead of hindering the use of the corporate form
“ a shell of the oyster”
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This approach was aptly captured by Lord Goff in the following manner;
“... We are here to help businessmen, not hinder them: we are there to give effect to their transactions, not frustrate them: we are there to oil the wheels of commerce, not put spanners in the works, or even grit in the oil.”
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