THIS IS IMPORTANT : Amendments to the Companies Act have unintended consequences

The Business Laws (Miscellaneous Amendments) Act of 2012 amended the Companies Act No. 12 of 2006 (Act).  The goal?  To create a more conducive climate for doing business.  As it is well known, the Act came into force on March 1, 2006 by GN No. 23 dated February 24, 2006.  

The Act is one of the best drafted pieces of legislation Tanzania has. This is thanks to former Attorney General Andrew Chenge, who made sure the draft was subjected to scrutiny by not only representatives of the private sector or lawyers’ body but by as many of the practising lawyers in town as possible. He made sure the consultants engaged to draft it were conversant with company law. The result was a new law that had many reforms that made it easier to do business.

It is much easier to form a company. Very reformed sample articles of association are attached to the Act. It is easier to operate - very good governance structures provided, accountability through detailed accounting and auditing requirements, easier to be refunded expenses incurred by promoters before incorporation of the company.  It is easier to manage. No need for a seal. Two signatures of directors and director and secretary are equal to a seal on documents executed for the company. It is much easier to dissolve a company through the procedure in section 400 without having to go to court and it is easier to compromise, arrange with creditors or to restructure a company.

Naturally, I was curious as to what new practical changes the 2012 amendments would introduce. Turns out that the amendments introduced a concept of a single individual shareholder who is mandated to hold a 100 per cent shareholding in such company, appoint himself the only director and report to himself as a director to himself as a member in both capacities in an annual meeting made up of himself!

If it increases the number of its shareholders beyond a single individual shareholder, it must register those new members in its register of members. Failure to comply, the company and relevant officer will have committed a criminal offence and if convicted shall be liable to a fine of Sh5 million!   To charge the fine, the company has to be taken to court first  by the prosecution services and be convicted for failing to enter the name of new shareholders into the company’s register of members!

First, before the amendments, companies have to keep a register of members into which the names of all its members including new members are entered. If one fails to do so, it is not a criminal offence but the officer responsible or the company will pay a penalty fine for non- compliance! Why should the failure of a single individual shareholder company to enter the names of new members into register of members be a criminal offence then? What improvement is this?!  I am sure the consequences were not intended. But this is the result. No other type of company is subject to these harsh provisions!

Then you have a company made up of only one single individual shareholder, who may also be the single director reporting in his capacity as a director to himself in his capacity as a member, being exempted from having to appoint a company secretary.  The governance structure introduced is very bad and has no checks and balances which the Act provides in the company form present to a single shareholder company. All other companies must appoint a company secretary upon incorporation!  A company secretary is the officer charged with the responsibility to ensure that the company complies with the Act. 

Now the memorandum and articles of association can be in Kiswahili for the single individual shareholder. The argument would be that everybody can understand them! Why train lawyers. Would we understand medicine or engineering if their documents were converted into Kiswahili? 

The amendments make it more difficult for the single individual shareholder company to do business. It makes the sale of shares in such company or assets expensive because a more rigorous legal and corporate due diligence would be required, may be translation of memorandum and articles into English in order to negotiate a share or asset sale. It is very clear that the amendments did not benefit from the practical experiences of those who use the Act on a daily basis.

The good thing is that the bad provisions need not be applicable to a company. Which lawyer would recommend a single individual shareholder company?