TO: The Directors and Shareholders of Indigo Limited
FROM: A Legal Assistant
DATE: 24 May 2024
RE: Legal Opinion on Directors’ Powers, Company Activities and Shareholder Disputes
Introduction
This legal opinion addresses several company law issues that have arisen within Indigo Limited (the “Company”), a private Zambian company. The issues concern the authority of the board of directors, the scope of the Company’s business activities, the duties of the directors, and the rights of a minority shareholder. This opinion will analyse the relevant facts in the context of the Zambian Companies Act No. 10 of 2017 (the “Act”) and advise the parties on their respective legal positions and potential remedies.
The key parties are the directors, Chisomo and Pute, and the shareholders, Tito, Tentani, and Kapilyongo. The opinion will consider four main issues: the validity of the board’s decision to borrow capital against a shareholder resolution; the legality of the Company expanding its business objects; potential breaches of directors’ duties; and the lawfulness of the alteration of the articles to expel a minority shareholder, Tito.
The Board’s Decision to Borrow Capital
The first issue concerns the decision by the directors, Chisomo and Pute, to accept a ZMW 1,000,000 loan despite a special resolution passed by the shareholders directing them not to borrow capital without prior approval by an ordinary resolution.
Under Zambian law, the management of a company is generally entrusted to its board of directors. Section 87(1) of the Act states that “the business and affairs of a company shall be managed by, or under the direction or supervision of, the Board of Directors of the company”. This power, however, is not absolute and is subject to the provisions of the Act and the company’s articles of association. Shareholders can restrict the board’s powers, typically by including specific limitations within the articles.
In this case, the shareholders (Tito, Tentani and Kapilyongo) passed a special resolution to restrict the board’s borrowing powers. A special resolution is a formal decision made by a 75% majority of shareholders. While such a restriction would normally be effected by altering the company’s articles under section 104 of the Act, the resolution passed here serves as a clear instruction from the owners of the company to the board. By ignoring this directive, the directors have acted outside the authority granted to them by the shareholders.
Even though the directors believed the loan was in the Company’s best interests, their primary duty is to act within the powers conferred upon them. Section 101 of the Act imposes a duty on directors to comply with the Act and the company’s constitution. The resolution, having been properly passed by the requisite majority, can be considered a constitutional limitation for these purposes. Therefore, in accepting the loan without the required ordinary resolution, Chisomo and Pute have likely breached their duty under section 101. The fact that the loan proved to be beneficial does not retrospectively validate an act that was beyond their authority at the time it was made.
The Expansion of the Company’s Business
Tito has argued that by expanding into insurance and mobile transactions, the Company is acting “outside the scope of its constitution.” This raises the doctrine of *ultra vires*, which concerns acts done by a company that are beyond the scope of the objects for which it was formed.
The modern position under the Zambian Companies Act 2017 has significantly limited the application of the *ultra vires* doctrine. Section 23 of the Act grants a company the full capacity, rights, and powers of a natural person. Furthermore, section 24(1) explicitly states that no act of a company is invalid simply because the company lacked the capacity or power to perform it.
This means that the expansion of the business into insurance and mobile transactions is a legally valid act and the new business lines cannot be declared void. The Company is bound by the transactions it has entered into in these new areas. However, this does not mean there are no consequences for the directors. Section 24(3) preserves the right of a company or a shareholder to bring an action against the current or former directors for breach of their duty to comply with the company’s articles. Therefore, if the Company’s original articles limited its business to advertising services, Tito could have a claim against Chisomo and Pute for causing the company to act beyond its constitutional objects, which would be another breach of their duty under section 101.
Alteration of the Articles and Oppression of a Minority Shareholder
The most serious issue concerns the decision by the majority (Chisomo, Pute, Tentani, and Kapilyongo) to alter the articles to introduce a power of compulsory share acquisition and then use it to expel Tito.
Section 104 of the Act allows a company to alter its articles by special resolution. However, this power is not absolute and is subject to equitable constraints inherited from common law. The power to alter articles must be exercised *bona fide* (in good faith) for the benefit of the company as a whole, a principle established in cases such as *Allen v Gold Reefs of West Africa Ltd* [1900] 1 Ch 656.
An alteration that is targeted at a specific minority shareholder and is designed to allow their expropriation is subject to strict scrutiny by the courts. In this scenario, the facts state that the majority acted because they were “tired of Tito’s complaints.” This strongly suggests that the purpose of the alteration was not to benefit the Company as a whole, but to oppress a dissenting member. This action is not for a legitimate corporate purpose, such as removing a shareholder who is competing with the company, but simply to silence criticism. This is likely to be viewed by a court as an improper use of the majority’s power and a fraud on the minority.
Tito’s primary remedy lies in Part XV of the Act, which provides protection for minority shareholders. Section 236 allows a member to apply to the court for relief on the grounds that the company’s affairs are being conducted, or the directors’ powers are being exercised, in a manner that is “oppressive or unfairly prejudicial to, or unfairly disregards the interests of,” the member.
The alteration of the articles specifically to expropriate Tito’s shares is a classic example of unfairly prejudicial conduct. It fundamentally changes the nature of his membership against his will and for an improper purpose. If Tito makes an application under section 236, the court has a wide range of powers under section 237. These include an order setting aside the resolution that altered the articles, or, more commonly, an order requiring the other members or the company to purchase the petitioner’s shares at a fair value determined by the court.
Conclusion and Advice
Based on the analysis above, the following advice is rendered to the parties:
1. **Advice for Tito:** You have a very strong claim under section 236 of the Act that the actions of the majority shareholders in altering the articles and expelling you are unfairly prejudicial. A court is highly likely to grant you a remedy. The most probable outcome is an order that the other shareholders (Chisomo, Pute, Tentani, and Kapilyongo) purchase your shares at a fair price, which would be assessed without taking into account the negative impact of the oppressive conduct. You may also have a claim against the directors for their earlier breach of duty in taking the loan and expanding the business against the company’s constitutional framework, but the unfair prejudice action is your most direct and effective remedy.
2. **Advice for Chisomo and Pute:** As directors, you have breached your duty under section 101 of the Act to comply with the company’s constitution by ignoring the shareholder resolution on borrowing. While the company has profited, this does not excuse the breach of your duties. More significantly, by instigating and voting for the alteration of the articles to remove Tito, you have engaged in conduct that is likely to be deemed unfairly prejudicial. You, along with the other majority shareholders, face the prospect of a court order forcing you to purchase Tito’s shares at a fair value.
3. **Advice for Tentani and Kapilyongo:** As shareholders who voted with the majority to alter the articles and expel Tito, you are also participants in the unfairly prejudicial conduct. You cannot escape liability merely because you are not directors. You could be subject to a court order, along with Chisomo and Pute, to purchase Tito’s shares.
All parties should be aware that proceeding with the expulsion of Tito would be a high-risk strategy that is likely to result in legal action and a court-imposed solution.
References
* *Allen v Gold Reefs of West Africa Ltd* [1900] 1 Ch 656
* Zambia, (2017) *Companies Act No. 10 of 2017*. Government of Zambia.
