The Importance of Legal and Corporate Literacy in Promoting Entrepreneurship (C2C)

Entrepreneurship is a critical driver in eliminating or reducing poverty because when it is done in a proper manner, it results in employment creation and it increases competition in the marketplace with a potential to lower prices and increase quality of products in the community.

However, despite its various benefits, a number of potential entrepreneurs are dissuaded from engaging in it because of the statistics of failure that they see and the mysterious nature of problems that they observe as being faced from time to time by those already in business.

More-so, some are discouraged from continuing as entrepreneurs because of the complex legal and corporate technicalities that they face on their own or those which they see other entrepreneurs going through.

The mysteriousness and the complexities of the issues around entrepreneurship can be easily solved when there is a deliberate and concentrated effort towards literacy on business issues as is being done through the economically empowering Connections2Communities (C2C) initiatives.

C2C legal and corporate literacy initiatives are aimed at developing a shared understanding on the identity as well as duties and obligations of shareholders and directors in relation to a company.

In one of the literacy sessions that I participated in, I engaged in a conversation with businessman Mr Mutumwa Mawere, and we had two companies that we looked into as our case studies.

One of the companies is Setheo Engineering, a South African entity that signed a contract with City Power to upgrade an electricity substation in Eldorado Park suburbs but the contract got terminated at the instigation of Herman Mashaba as the Mayor of Johannesburg.

The City of Johannesburg is a local government authority which owns 100% shareholding in City Power, an electricity distribution company.

The second company is a Zimbabwean pharmaceutical drugs manufacture, CAPS, whose other shareholder, CAPS Pharmaceuticals Trust is disputing the appointment of directors which was effected by the government of Zimbabwe through an Industry and Commerce Minister, Dr Sekai Nzenza.

Both the case involving Setheo and City Power as well as the other one involving CAPS and the government of Zimbabwe all put under the spotlight the principle of separate legal identity of a business and the separation of powers between shareholders and directors in a business.

All these two cases also expose the degree and extent of interference that central and local governments have on the administration of companies that they hold shares in and highlights the need to for extensive literacy initiatives and or curriculum on the same matter.

More-so, I have come to understand that the legal hassles which happen when there is lack of literacy and effective curriculum on corporate and legal matters is very financially costly to many other stakeholders.

For example, in the Setheo case, some employees who were suspended and or dismissed in 2017 are still subject to court proceedings at their own expense even though it’s almost three years later because the matter is taking various twist and turns as there is no clarity of locus the role of complainants.

As such, even though they may be out of employment but having the necessary skills, it’s still a tall order for such employees to imagine being entrepreneurs on their own when they are considering the challenges that they have seen other entrepreneurs going through.

This therefore have a tendency to dissuade them and many others from engaging in business because of the losses they witnessed as associated with signing a contract with one party (the contractor) and then later having it terminated by a third a part (shareholder).

Such circumstances are very common in the business environment especially when the parties involved are not well versed with corporate and legal matters.

For example, a 23 November 2020 news article titled CAPS new board faces court interdict published by The Chronicle says: “CAPS Pharmaceutical Trust (CPT), the majority shareholder in CAPS Private Ltd, has filed an urgent chamber application seeking to interdict the recently appointed board members by the Government from carrying out any activities, arguing the appointment was irregular.

According to court papers (case number HC6683/20 and lodged at the High Court on November 13, 2020) CPT claims that it owns 51 percent in CAPS, one of the largest manufacturers of medical drugs and supplies while CAPS Holdings own the remainder.

The shareholding in CAPS Holdings continues to be mired in controversy as one of the major shareholders, Fred Mutanda, has persistently disputed claims by the Government that it owns 68 percent stake. Mutanda argues that while he entered into an agreement with the Government to dispose of his 68 percent around 2015, the shareholding was never paid for, leading to the cancellation of the agreement.”

The above issue exposes how instead of promoting entrepreneurship and investment, the central and local government as shareholders can actually do the opposite when its officers act in ways that frustrate entrepreneurs and mystify the business landscape through failure to apply due processes in corporate matters.

This means that young entrepreneurs who lack the financial wherewithal to engage in legal suits with the government may just back off and many others will be discouraged to follow the entrepreneurship route when they believe that the central or local government under unclear circumstances may choose to take over your business or contract under unclear circumstances.

However, despite all that, just like the C2C Legal and Corporate initiatives, there are many legal judgements which help people to understand the nature of business institutions and the relationship thereof with various stakeholders.

For example, a judgement by The Supreme Court of Appeal in South Africa gave a judgment on the interpretation of the Companies Act regarding the liability of directors and auditors in the event of a dispute with shareholders.

In that judgement, as explained by lawyers, Clyde&Co in an article titled Directors owe duties to the company, not to shareholders, the following points were highlighted:

1. “Where a wrong is done to a company, only the company alone may sue for damage caused to it” and that “shareholders … do not have a direct cause of action against the wrongdoer“. 
2. The duty of auditors is owed primarily to the company. Auditors have no duty to third parties with whom there is no relationship; and
3. Individual shareholders do not have claims against the auditors, because financial statements are not prepared for the benefit of shareholders’ individual investment decisions.  The purpose of audit reports is neither to protect the interests of investors nor individual shareholders, but to report on the stewardship of the directors to the shareholders as a body.
4. directors do not owe fiduciary duties to shareholders, but to the company itself

As such, in the discussions that I had with Mr Mawere concerning court judgements and other related legal proceedings to do with these entities and many others, I learnt the following facts:

1. Directors have a duty and or obligation to the company and not to shareholders
2. Shareholders have the capacity and obligation to appoint the board of directors
3. A Memorandum of Association is the constitution of a company.
4. The majority shareholder(s), those with 51+1 shareholding have the power to appoint directors and also to prevent the appointment of certain people as directors.
5. Some companies especially state or local government affiliated entities have a sui generis personality whose dispute resolution approaches may adopt a different approach to that of traditionally registered companies and thus entrepreneurs must familiarise with the provisions thereof.