ZAMBIA INSTITUTE OF ADVANCED LEGAL EDUCATION

COMPANY LAW AND PROCEDURE

CLASS NOTES FOR STUDENTS ONLY

These notes are strictly meant for students at the Zambia Institute of Advanced Legal Education
 TOPIC 3: RAISING CAPITAL

Introduction

This topic introduces the student to the term capital and the process by which it is raised.
Capital is a word that can have many meanings. In company law however capital is used in a
restricted technical sense. Broadly, it is cash (or less often the value of the assets) received by
the Company from investors who subscribe for the company’s shares. The Company’s capital
in this technical sense is measured in terms of ‘value received’ into the company, rather than
the current value of assets themselves, since that will change with the business activities of
the company. The value of the company’s legal capital is likely to be far less than the total
value of the company’s assets.

Why is such a sharp distinction drawn between legal capital (or contributions from
shareholders) and other assets held by the company? The distinction reflects the special
protection provided to creditors by the company’s legal capital. The sale of the shares by
current owners to other future shareholders at a premium does not still alter the company’s
legal capital.

Learning Outcomes

On reading all the materials on this topic you should:

1. Define share capital

2. Explain the difference between a public and private company vis a vis capital raising
3. Be conversant with the methods of raising capital from the public
4. Explain of the rules on maintenance of capital
5. Define forms of capital raising such as debentures and be able to state the place of
charges within that context

3.1 Attracting and Protecting Shareholders and Creditors

The interplay between the rights of the shareholders and the rights of creditors is critical to the
success of companies as business entities. A company is a separate legal person. It follows that the

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claims of the company’s creditors must be met from the company’s assets. The shareholders
capital contributions mitigate the risks to which the creditors are exposed. The returns for
shareholders are proportionately greater if the company is a success, and proportionately worse
if the company is a failure. That is why the cost of equity funding (in terms of expected total
shareholder return) is generally higher than that for debt funding (an expected interest
entitlement). In addition, if the shareholders are to be attracted to this form of investment, then
there must be appropriate protections for their rights and appropriate limitations on their
obligations. And unless shareholders are attracted creditors are unlikely to be forthcoming.

What sort of protections are available to both shareholders and creditors in the law and
specifically the Companies Act:

Shareholders

1. Limitations on the issue of new shares, so that shareholders’ interests in the company are not
unacceptably diluted (pre-emption rights (section 144 of the Companies Act) and limitations
on the Directors powers of allotment (section 149 of the Companies Act).
2. Protection against misleading inducements to purchase shares (section 212 (a) of the
Companies Act).
3. Protection of financial rights attached to shares (including protection of class rights).
4. Protection of shareholders’ established and agreed relationships with the company (e.g.
control over changes to the constitution of the company).
5. Protection of shareholders influence over potential success of the company (e.g. control over
management).

Creditors

What of the protection of the company’s creditors? Normal rules of contract law and security law
provide much assistance. In this context we focus on special protections associated with
acquisition and treatment of company capital. These protective rules include:

1. Rules require the company to have a certain minimum level of capital before it begins trading.
(Banks, Insurance Companies etc) (See SI 14 of 2019 of the Laws of Zambia).

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2. Rules designed to ensure that the amount of legal capital shown in the company records is in
fact received in full by the company.
3. Rules designed to ensure maintenance of stated levels of legal capital by restricting the
freedom of companies to return assets to its shareholders.

3.2 Share Capital

Section 139 (1) of the Companies Act states that a company other than a company limited by
guarantee shall have share capital. Part IX of the Companies Act provides detailed provisions on
how this share capital is dealt with. This is from alteration to payment of dividends to
shareholders.

3.2.1 Nominal or Par Value Shares

The Company’s (Fees) Regulations, Statutory Instrument 15 of 2019 prescribes the minimum
nominal capital for different companies, set in fee units which are determined by the Minister of
Finance. Currently the fee unit is 0.30 ngwee (Fees and Fines Act Cap 45, The Fees and Fines (Fee
and Penalty Unit Value) (Amendment) Regulations SI 41 of 2015). The division of the share capital
into shares to each subscriber is the par value. It has been argued that the par value is no longer
necessary because when selling shares consideration is given to the market value.

Once the company has stated its par value, shares must never be sold below the par value. When
you divide the share capital into shares of a fixed amount of say K1 or K5, the shares will give rise
to par value or nominal value of each individual share. For example, 10,000,000 shares divided
into K1 nominal value or par value. The common Law rationale for this requirement for nominal
value was stated in Ooregum Gold Mining Co. of India Ltd v Roper & Wallroth (1892) AC 125 –
shares must never be sold at a discount, that is, below the par value.

Authorized or nominal share capital - This is the total amount of authorized capital that the
company is allowed to issue, and which is stated on the form of incorporation. Authorized capital
implies that the company would not be permitted to issue shares in excess of the authorised share
capital unless it alters its authorised share capital.

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Issued or allotted share capital – this is the capital which is actually issued to members. It
represents the nominal value of shares which are appropriated to the shareholders.

3.2.2 Alteration and Reduction of Share Capital

Sections 140 and 150 of the Companies Act provide for alteration and reduction of share capital
respectively. In the context of how company law views alteration and reductions of share capital,
these are important provisions to note since they provide stringent procedures by which a
company can achieve those ends. These are particularly useful safeguards against abuse and they
enhance creditor protection. The student is therefore required to know these provisions.

3.3 Raising Capital from the Public

Companies are normally formed for purposes of carrying out individual entrepreneurial
enterprises. This may require massive amounts of money which banks may, especially in the
formative stage, not be able to give. For this reason public limited companies (Plc’s) are
authorized to raise capital from the public. This arises by way of the company inviting external
investors to buy shares in the company. Raising capital in this way which, is also known as equity
capital, is cheaper for the company. It is cheaper for the company to issue shares, which are paid
for because the obligation for the company to obtain a loan is not there.

Raising capital from the public is something, which the law takes seriously. Hence the Companies
Act, Part X sections 208 to 224, sets out the legal requirements that are associated with the public
issue of shares or debentures. This privilege of raising capital from the public is reserved for
public limited companies. However, under section 210(3) (c) of the Act, a private company may
be allowed to invite members of the public to purchase its debentures under the supervision of
the High Court. Please note that inviting members of the public to buy shares is a preserve of
public limited companies.

Being a public limited company is not necessarily synonymous with having every public limited
company’s shares floated on the securities market for purposes of sale to the investing public. If
a public limited company wishes to invite members of the public to acquire shares in the company,
it must first seek to be admitted on the stock market, i.e. Lusaka Securities Exchange in the case
of Zambia.

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Floatation is that process of launching a public company by offering its shares to the public. This
can arise whether the company involved is a brand new public limited company or is a former
private limited company.

Floatation is not the only way in which public limited companies may raise capital from the public.
A company can also raise additional capital by way of rights issues. A rights issue arises by way
of a company offering new shares to existing shareholders in proportion to their existing
shareholding. The other way would be by placing. A placing arises by way of a company
identifying selected investors who agree to take these shares.

The law imposes stringent requirements for a company to be allowed to have its shares publicly
traded. The Companies Act contains provisions regulating the manner in which a company may
trade its shares to the public. The making of public invitation requires that the company which is
trading these shares must prepare a prospectus which must comply with Part X of the Companies
Act dealing with public issue of shares. Apart from compliance with Part X of the Companies Act,
a company which wishes to have its shares listed for purposes of public trading must ensure that
in inviting people to invest or buy the shares so listed, the invitation itself must comply with
section 75 and 76 the Securities Act No. 41 of 2016, in addition to the prospectus.

3.3.1 A Prospectus and Its Function

A prospectus is an invitation that a company makes to members of the public inviting them to
subscribe for shares in the company. The Securities Act No. 41 of 2016 requires any security of a
public company which is publicly traded or directly or indirectly promoted or advertised or offered
for sale to the public to be registered in accordance with the section 75 of the Securities Act. It
should also be noted that any prospectus which is issued or prepared for the purpose of any public
offer must contain or be accompanied by all such information as investors and their professional
advisers would reasonably require, and reasonably expect to find there, for the purpose of making
an informed assessment of the assets and liabilities, financial position, profits and losses and
prospects of the issuer of the securities and the rights attaching to the securities (section 76 (a)).

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Apart from complying with section 76 of the Securities Act, the prospectus must also comply with
the requirements of the Companies Act (section 212) and any directions issued and directed by
the Securities and Exchange Commission (SEC).

As section 211 of the Companies Act provides, an invitation to the public to purchase shares or
debentures in a public company or a proposed public company can only be made if:

a) Within 6 months prior to the making of the invitation, the company concerned prepares and
registers with the Registrar a prospectus relating to the shares or debentures proposed to be
sold to the public. The prospectus must comply strictly with the requirements contained in
Part X of the Companies Act.
b) Every person to whom the invitation is made must be supplied with the true copy of the
prospectus at the time the invitation is first made to that person.
c) Every copy of the prospectus must state on its face that it has been registered with the
Registrar of Companies.

Section 211 (2) of the Companies Act further provides that the contents of the prospectus can be
summarized in the newspaper or advertisement provided that such advertisement does not
contain or is not accompanied by any application form for shares. Secondly, the advertisement
must state with reasonable prominence where copies of the full prospectus can be obtained; the
fact that the prospectus has been registered; and the date of actual registration. The
advertisement itself must be couched in terms, which have been approved by the Registrar of
Companies.

3.3.2 The Prospectus and Its Contents

Section 212 of the Companies Act sets out what should be contained in a prospectus. A prospectus
shall not be lodged with the Registrar of Companies unless:

a) It does not contain any untrue or misleading statements. The directors of the company must
ensure that;
b) It contains all information that prospective purchasers of the shares or debentures and their
advisers would reasonably expect to be provided in order to make a decision on purchase; and

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c) The prospectus must also contain all issues that are addressed by the Third Schedule of the
Companies Act.

Upon being registered, it is a requirement that the registered copy of the prospectus must contain
a statutory declaration by a director and the secretary in which they confirm that the prospectus
will have been prepared in accordance with Part X of the Act. In terms of section 214 of the Act,
the Registrar is empowered to decline to register a prospectus for shares or debentures in a
company or in a company proposed to be formed if the copy lodged does not conform to Part X of
the Act.

3.4 Maintenance of Capital

As we stated before, the concern of the law is to see that those who take up shares in a company
do in fact contribute the value of their shares in money or money’s worth. This fund of
contributions being the company’s legal capital is intended by law to provide creditor protection,
in some sense at the expense of the company’s members.

The law does not restrict every disposal of the company’s assets. However, the ambition of creditor
protection would be defeated if once the funds had been received, companies were completely free
to return them to the members thereby adversely affecting the creditors’ overall position vis a vis
the company. So the Companies Act has provisions that ensure that the company’s legal capital
is, as far as possible, maintained in the company’s hands consistently with all the risks associated
with any business venture. In particular, these rules ensure that a company’s legal capital is not
returned to the members themselves directly or indirectly except as provided in the Act (such as
reduction of capital), or redemption or a repurchase of shares, which provides proper safeguards
for creditors and others who might be prejudiced by the diminution of the company’s assets.

This is important because the creditors are generally denied any recourse against the members,
or against the directors, whilst at the same time allowing corporate entrepreneurial activity to
continue without too much state intervention.

There is of course only so much protection that the law or formal rules can give creditors. So the
creditors do accept that there may be risks that are inflation based for example. But the law does

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also to some extent try to help by requiring the publicity given to company accounts and through
remedial regime provided by the Corporate Insolvency Act.

3.5 Raising Capital: Debentures and Charges

The student is encouraged to read Part XI of the Companies Act particularly sections 225 to 245
to have a better understanding of this section.

Apart from issuing shares, a company can also raise capital through borrowing. We will not go
into great detail on the range of loan capital that is provided by financial institutions but we do
recommend that the student familiarize themselves with these in order to get a more general
appreciation of this topic. In this manual, we will focus on the corporate borrowing through
debentures and debenture stock. Invariably, we will also examine the charges that a company
would issue to creditors as security for their lending.

3.5.1 Debentures

What then is a debenture? A debenture is any document evidencing indebtedness of a company.

Section 3 of the Companies Act defines a debenture as a document issued by a corporate that
evidences or acknowledges a debt of the corporate, whether or not it constitutes a charge on
property of the corporate, in respect of money that is or may be deposited with or lent to the
corporate. The Act extends the definition to include: a unit of debenture; debenture stock; and
bonds and any other securities issued by a corporation, whether or not they constitute a charge
on the assets of the company. It does not include every document of a routine kind.

Debenture stock is money borrowed from a number of different lenders all on the same terms. In
effect, the lenders become a class of creditors and their rights are set out in a document called a
trust deed which would provide for appointment of trustees to represent the creditors. Other
terms include a list of events which would trigger enforceability of the security, provisions relating
to meetings of debenture holders and the transfer of debenture stock.

The legal nature of a debenture, relative to a share, is that the former gives rise to a contractual
relationship of debtor and creditor, coupled, if the debt is secured on some or all of the company’s

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assets, with that of mortgagor and mortgagee. In contrast with a shareholder, the debenture-
holder is not a member of the company having rights in it, but a creditor having rights against it.

3.5.2 Charges

In the commercial world, borrowing is usually secured by some form of security provided by the
borrower. In the event of default, the lender can take steps to enforce that security. Thus, the
principal purpose of the security is to enable the lender to recover from the company or borrower
in the event of default. In the context of company borrowing, the most common form of charges
as security interests is the fixed charge and the floating charge.

A charge is a security interest created in or over an asset or assets by their owner (the “charger”)
in favour of a creditor (the “charge”), by which it is agreed that that property shall be appropriated
to the discharge of a debt or other obligation. There is no transfer of title. Section 3 of the
Companies Act merely provides that a charge means a charge created in any way and includes a
security interest or security agreement; mortgage and an agreement to give or execute the
mortgage whether on demand or otherwise; a debenture; or an agreement for sale and purchase
of land under which the seller remains in occupation, until such time as the whole of the purchase
price is paid.

The charges rights may be enforced by the sale of the property, if necessary by court order; but in
practice most security documents expressly empower the charge to sell the property for this
purpose without recourse to the court. Legal charges are possible over some forms of property,
such as land, but not over personality.

3.6. Summary

As a student of company law, you need to understand the term capital and the process by which
it is raised. Capital is a word that can have many meanings. In company law however capital is
used in a restricted technical sense. Broadly, it is cash (or less often the value of the assets)
received by the Company from investors who subscribe for the company’s shares. The Company’s
capital in this technical sense is measured in terms of ‘value received’ into the company, rather
than the current value of assets themselves, since that will change with the business activities of

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the company. The value of the company’s legal capital is likely to be far less than the total value of
the company’s assets.

This topic has provided an overview of how this capital is raised either through shares or through
debt financing including how the law protects this capital in practice. By now, you should be fully
familiar with all these statutory protections in the Companies Act.

3.7. Group Discussion Questions

1. The doctrine of capital maintenance ensures that the company has raised the capital it claims
to have raised; and that the capital is not subsequently returned, directly or indirectly, to the
shareholders. Explain to what extent this has been achieved in Zambia.

2. There is considerable debate as to whether or not the holder of a floating charge has an
equitable proprietary interest prior to its crystallisation. After reading up on the differences
between fixed and floating charges what would you contribute to this debate?

PRESCRIBED FURTHER READING

Davies, L.P. Principles of Modern Company Law. Sweet & Maxwell. See Chapters: “Legal Capital
and Minimum Capital”; “Capital Maintenance”; “Debentures” and Company Charges” (Any latest
edition)

Dignam, Alan and John Lowry. Company Law. Oxford University Press. See Chapters: “Raising
Capital: Equity and Its Consequences” and “Raising Capital: Debentures: Fixed and Floating
Charges”. (Any latest edition)

Gates, Blankfein R. Gates on Understanding Company Law: A Conceptual and Functional

Approach. 2018. See Chapter: “Debentures and Charges”.

Sealy, Len and Sarah Worthington. Sealy’s Cases and Materials in Company Law. Oxford
University Press. See Chapters: “The Raising of Capital” and “Distributions and Capital
Maintenance” and “Borrowing, Debentures and Charges”. (9th Edition or any latest edition)

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