CORPORATE FINANCING

- Shareholders contribute to the start-up money of a company, which is known as that

company’s capital. Capital is divided into shares which may be held by its
shareholders. Company regulates its own classes of shares in accordance with its
memo and articles.

- Corporate financing refers to the process of raising funds for a business or a company
to finance its operations, expansions, and investments. In relation to Zimbabwean
company law, corporate financing involves the various legal and regulatory
frameworks that govern the way companies raise capital and manage their finances.

- Under Zimbabwean company law, companies have several options for corporate
financing, including equity financing, debt financing, and hybrid financing. Equity
financing involves the issuance of shares to investors in exchange for ownership in the
company, while debt financing involves borrowing funds from lenders with an
agreement to repay the loan with interest. Hybrid financing, on the other hand,
involves a combination of both equity and debt financing.

- Zimbabwean company law also regulates the various methods of corporate financing,
including public offerings, private placements, venture capital, and crowdfunding. The
law requires companies to comply with disclosure and reporting requirements when
raising capital from the public, and to ensure that the interests of existing
shareholders are protected.

- Corporate financing in relation to Zimbabwean company law entails the legal and
regulatory frameworks that guide the process of raising funds and managing finances
by companies operating in Zimbabwe.
Advantages of Corporate Financing

1. Increased Access to Capital: With corporate financing, companies can gain access to capital
from various sources, like banks, investors, and the stock market.

2. Lower Cost of Capital: Corporate financing allows companies to access capital at a lower
cost than other financing options, such as personal loans.

3. Limited Risk: Corporate financing requires the company to issue shares to investors, which
means that shareholders share the risk of the business with the company.

4. Greater Flexibility: Corporate financing provides companies with more flexibility in terms
of the amount and timing of funds they can raise.

Disadvantages of Corporate Financing

1. Loss of Control: When companies issue shares to investors, they give up some control of
the company, and they may need to make decisions that are not in their best interest.

2. Complex Legal Framework: Corporate financing in Zimbabwe has a complex legal

framework that can be challenging for companies to navigate.

3. Additional Costs: Corporate financing involves additional costs, like fees paid to lawyers
and investment bankers.

4. Dilution of Ownership: Issuing more shares to raise capital can dilute the ownership of
existing shareholders, giving them less control over the company
Capital Maintenance

The Companies and Other Business Entities Act (Chapter 24:31) of Zimbabwe stipulates that
a company may offer shares to the public by way of a primary offer if it is authorized to do so
by its Memorandum of Association. The primary offer of shares must be made in accordance
with the regulations and provisions set out in the Act.

Some of the key requirements that a company offering shares to the public must comply with
include:

1. Preparation of a prospectus: The company must prepare a prospectus outlining the details
of the offer, including the purpose of the offer, the number and type of shares being offered,
the price per share, and any restrictions on the shares being offered.

2. Approval of the prospectus: The prospectus must be approved by the Registrar of

Companies before it can be issued to the public.

3. Advertisements: The company must advertise the offer in newspapers circulating in

Zimbabwe, providing details of the offer and where to obtain a copy of the prospectus.

4. Application process: The company must provide details of how interested parties can apply
for shares, including payment methods and the time period for which applications will be
accepted.

5. Allocation of shares: If the offer is oversubscribed, the company must allocate shares in
accordance with the rules set out in the Act.

Overall, the Companies and Other Business Entities Act provides detailed guidelines for
companies wishing to make a primary offer of shares in Zimbabwe, with the aim of protecting
investors and ensuring transparency in the process.
Buybacks of shares

The Companies and Other Business Entities Act (Chapter 24:31) allows companies to
repurchase their own shares, but only under certain conditions. Here are some of the key
provisions:

- The company must have the authority to repurchase shares in its articles of association.

- The repurchase must not result in the company becoming unable to pay its debts.

- The company must purchase its own shares using distributable profits or the proceeds of a
new share issue.

- The price paid for the shares must not be more than the higher of the price at which the
shares were issued or the current market price.

- The company must cancel the shares immediately after repurchase.

- The repurchase must be approved by a special resolution of the shareholders.

It's important to note that these provisions apply specifically to companies registered under
the Companies and Other Business Entities Act.

Secondary Offer

The Companies and Other Business Entities Act (Chapter 24:31) of Zimbabwe provides
guidelines on the secondary offer of company shares. A secondary offer refers to the sale of
shares by existing shareholders to other investors.

Section 86 of the Act states that a company must comply with the requirements for a
prospectus or statement in lieu of prospectus before making a secondary offer of its shares
to the public. The prospectus or statement in lieu of prospectus should contain information
about the company's financial position, operations, management, and any risks associated
with investing in the company.
Additionally, Section 86(2) requires that the prospectus or statement in lieu of prospectus be
registered with the Registrar of Companies before being issued to the public. The company
must also ensure that the prospectus or statement is not misleading or deceptive.

Furthermore, Section 87 of the Act deals with the restrictions on the allotment and transfer
of shares in a cooperative company, stating that a company may restrict the transfer of its
shares by means of Articles of Association or a shareholders' agreement.

The Companies and Other Business Entities Act (Chapter 24:31) of Zimbabwe requires
companies to comply with certain legal requirements before making a secondary offer of
shares. It is crucial for companies to follow these guidelines to ensure transparency and
fairness in the process of selling shares.

Types of shares

In terms of section 96 of the COBE a company’s memo must state characteristics of its own
shares. Shares of a fixed amount are called par value (s304). Shares fixed in number only are
no par value shares. NPV shares do not indicate a nominal value. NPV introduced to do away
with the idea of nominal value of par value. NPV may be issued at a higher/lower price than
their first issue price without being issued at a premium or a discount. Issue at a lower price
than previous average price must be authorized by a special resolution unlike in relation to
PV shares.

- PV shares authorized and issued share capital and the division as well as nominal
value. This may be increased or decreased.
- Issued share capital is the amount of shares which have been issued. Shares may only
be issued if full issue price has been paid.
- NPV shares: authorized share capital and stated capital account. Memo must state the
number of shares company is authorized to issue amount of issued NPV shares is
represented by a stated capital account.
CLASSIFICATION OF SHARES

Nature of a share

- Term share means that the holder of that share has a claim to part of the share capital
of the company and does not mean that shareholder is entitled to any part of the net
assets of that company. A share is an interest of a shareholder in a company measured
by a sum of more – Borland’s Trustee v Steel Bros & Co. it is a bundle of personal rights
entitling holder to interest in the company Std Bank of SA Ltd v Ocean Commodities
Inc. Shares are moveable property.
- A share certificate is a tangible document evidencing the legal relationship existing
between the company and the shareholder.

Classes of shares

- Class of share is categorized based on the nature of rights afforded a shareholder. The
categories may be in relation to dividends and participation in a distribution on
liquidation. These categories set out in memo of association. Articles may be altered
to reflect any changes to class structure. Articles also best placed to provide the rights
attaching to each class.

4 main classes: preferences shares, redeemable shares, deferred shares and ordinary
shares.

Preference shares

- Can only exist in the presence of other classes of shares over which these are
preferred.
- Main distinguishing feature of preference shares is that they enjoy a preferential right
to dividend usually expressed as a % of the nominal value of the share. Preference
shares give an investor a fixed income and a reasonable degree of security as to capital
but inflation has eroded this advantage.
 - Shareholders entitled to claim preference dividend if company declares dividend and
if there are funds available. To this end a further reclassification is given i.e. cumulative
and non-cumulative.
- Cumulative – if in a given year no dividend is declared, the arrear and current dividend
is declared in respect of any other class of share non-cumulative – only the current
year’s preference dividend is payable. If there is no specification of whether a share is
cumulative or not, a share is considered non-cumulative.
- At the liquidation of a company, cumulative shares have no preference in respect of
arrears but undeclared dividends unless specified in the articles.
- A shortfall in a given year has to be made good out of profits of the next year before
dividend can be declared on ordinary shares.
- Participating preference shares – preference shares do not participate in profits. The
participation of these in respect of profit is restricted to the fixed % dividend.
However, participatory preference shares entitle holders to both the fixed %
preference dividend as well as to a share in the residual distributable profits. They may
share the distributable profits pro rata with ordinary shareholders only after a
specified has been paid to ordinary shareholders.
- Preferential right to repayment of capital where articles do not stipulate that holders
of preference shares are entitled to preference at liquidation of a company, the
holders must share in the capital with ordinary shareholders on a pro rata basis.

Extinguishment of preference shares

- Courts are bound to approve a reduction of capital by extinguishments of preference

share if, among other things, the statutory requirements have been complied with and
the rights of preferential shareholders are honoured as on winding up.

Voting rights

- Preference shareholders may at times not have voting rights. This, however, does not
apply if preference dividend is in arrear and if there is a resolution, which directly
affects the right, attached to the share or the interests of their holders.
Redeemable preference shares

- As a general rule a company may not repurchase its own shares, as this would
constitute an unauthorized reduction of capital. However there is a special provision
for redeemable preference shares.

Conditions of redemption

I The preference shares can only be redeemable out of 2 possible sources Proceeding of a
fresh issue and profit:

(1) Proceeds of a fresh issue of shares – i.e. shares issued and the purpose of financing the
redemption. The new shares therein fact replace the redeemed shares.

(2) Redeemable shares may also be redeemed out of profits, which would otherwise be
available for dividend. A sum equal to the nominal value of shares must be transferred from
the income statement to a non-distributable reserve – capital redemption reserve fund.

II Secondly the redemption of the redeemable preference shares may not reduce the cols
authorized share capital.

III Notice must be given to Registrar of red….

IV Provision and premium must be made prior to redemption.

Ordinary shares

- These only come into consideration for a dividend after provision for the dividend on
preferred shares has already been made.
- There is no limit to the amount of dividend, which the ordinary shareholder can
receive if divisible profit is available except where preferred shares exist and have to
be paid out.
- On liquidation, ordinary shareholder is considered a residual hair.
- They carry the greatest risk as well as greatest potential advantages.
- Their position is different from preference shareholders who have no right to anything
out of the surplus assets upon liquidation.
Deferred shares (founders shares)

- These come into consideration for a dividend after a prescribed min has been paid to
ordinary shareholders relationship comparable to that existing between preferred
shares and ordinary shares.
- Usually deferred shares issued by way of remunerably promotes for services rendered
in the formation of a company and to persons who have sold assets to the company.
Thus, those who sell a business as a going concern. But not all founders’ shares are
deferred shares.
- They are usually issued for consideration other than cash. Prospectus to disclose
particulars in regard to deferred, founders and vendors shares.

Variation of class rights:

- Rights at to shares may be set out in memorandum

- Articles
- Members/directors resolution governing issue
- Class rights can only exists if there is more than one class of shares.

- Class rights are said to have been varied if after the variation they differ in substance
from what they have been before.

- There is no variation if the class rights are the same in substance but only less
commercially valuation because acts of a company usually affect value and it does not
make sense to require shareholder sanction for all acts of management, which will
affect value. Variation and abrogation of rights. Cancellation of preferred share only
with a loss dividend right as a result of duly authorized capital reduction does not
involve abrogation.

- Rights may only be varied if the variation is not in conflict with the provision of the
memo in regard to such variation. Where class rights are set out in the articles they
may be similarly varied though not as entrenched as in the memo.
 - Variation must be approved before either by consent in writing of the holders of ¾ of
issued shares of that class or by sanction of a resolution passed at a separate general
meeting of holders of such class of shares.

Redress:

- A dissenting shareholder can still have recourse to a court even if the requisite
procedure for variation has been followed.
- He may apply to court and if court finds that the variation was unfairly prejudicial
unjust or inequitable it may make an order it deems fit.
- Particulars of consent or resolution variation must be lodged with the Registrar

Debentures:

- No definition – except that a debenture is an acknowledgement of debt. It is a form

of a loan to a company and forms part of the external capital of a company. Shares
constitute internal capital. Together, debentures and shares constitute a source of
funds to which a company may turn for funds to finance activities.

Borrowing:

- A company may not exercise the power to borrow unless Registrar has issued a
certificate entitling the company to commence business.

Attributes of debentures:

- Issue of a debenture is generally used to obtain long-term funds for a company.

Ordinarily the word debenture denotes a document or certificate issued by a company
which document is called debenture whereby in the document the company
acknowledges it indebtedness to a sum of money. The document may also specify rate
of interest and repayment date as well as conditions of repayment. These must be
specified
- A company may only issue debenture if authorized by memo and articles.
- A debenture may be secured/unsecured. Secured like a mortgage encumbering
property.
- Debt can be converted into shares, which are fully paid up at the option of the holder.
Debenture vs Share

Debenture Share
- a debenture holder is a creditor to - a complex of rights and duties based on a
the company relationship between holders and company
- holder entitled to interest on loan at
a determined rate payable at fixed - holder participates in profits available in
times irrespective of whether the form of dividend, which must be
company has a profit or not. Interest declared.
can be paid out of capital.

- debenture can be issued at a - dividend cannot be paid out of

discount. capital nor discount for shares.

- Debentures can be used to readily obtain funds from the public. A prospectus must
be issued.
- Some rules on transfer, registration applies to debenture as to shares.

Characterisation of Hybrid Securities:

- Companies raise capital either as debt or as equity. Due to the advantages relating to
tax security etc, companies now choose a mixture of the two. However, may
sometimes be necessary e.g. for tax purposes, to consider whether the capital is a
debt or it is equity. Consequently, it is necessary to examine aspects that need to be
taken into consideration before a security is considered as one thing or the other.
 Debt Equity

(Rights of Shareholder)

- Creditor not entitled to attend - Holder is a member of company so

meetings or not entitled to vote at has a say in the affairs of the
general meetings company. May control company

Conclusion through exercise of voting rights. If

holder to attend a meeting.
- A security, which entitles is
indicative of equity.

- Return on investment is certain due - Member’s return on investment is

to need to specify interest and this uncertain. It is dependant on profit if

interest is paid even if no profit. a dividend is declared.

Entitlement to a return on capital which is linked to ……….. and which is variable is indicative
of equity.

Debt Equity
Repayment of capital
Loan capital is repayable to the creditor on the Capital raised by equity need not be paid share
maturity date of the loan or on demand capital paid on winding up.

Conclusion
A security which entitles capital on a fixed
date
debt.a Its holder to a repayment is indicative of

Dividend payout
No right to participate in a distribution Considerable gains through participation in
distribution of profit.