Corporate Governance and Capitalisation

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Globalization has resulted in the opening of markets and injection of direct foreign investment in markets of emerging economies. The foregoing has witnessed market reforms whereas Governments’ investments in business have been on the decline while private capital has assumed a centre role.

That as from 1967 to 1992 all big corporations in Tanzania were state owned. These Corporations were characterised by corruption, in form of embezzlement of public resources and favoritism, managerial incompetence, political interference and government subsidization.[1] Tanzanians state owned corporations at that time were operated without regard to market discipline with lack of effective control and accountability as managers had uncontrolled powers.[2]

Injection of Private capital in direct foreign investment has caused and/or has been through the corporate vehicle. The foregoing influenced companies do business through public listed companies with wide spread shareholders, both local and foreign. The foregoing has seen most African governments pulling away from business and selling their shares, on conditions, some of which makes it mandatory for citizens to hold certain share percentages in the newly formed public Corporations. The foregoing has raised the number of listed public corporations in Tanzania that now stands at 15,[3] the number is destined to increase, compared to early 1990s. The said increment needs as conditions precedent, a supportive and protective legal and regulatory framework for protection of shareholders, that is corporate governance.

However corporate governance has seen a number of corporate scandals in the developed markets of America, Delaware, and Europe which scandals forced state intervention and control from security authorities. This paper seeks to research on whether shareholders of listed companies in Tanzania are protected under relevant securities laws, whether the said laws and institutions created there under adequately meet the challenges and whether there is any need for improvements and/or amendments to the laws and institutions. The foregoing will be weighed against lessons learnt from recent corporate scandals in Europe and America.

Most if not all previous researches on this subject in Tanzania has been conducted by economist who looked at shareholder protection as a component of corporate governance from an economic perspective. This paper will attempt to analyse the said issues from a legal perspective.


1.2 Defining Corporate Governance and Capitalisation

There is no precise legal or economic definition of corporate governance. However a clearer and widely used definition of corporate governance is that found under the Organisation for Economic Co-operation and Development, OECD. Under the OECD preamble corporate governance is defined as ‘a set of relationships between a company’s management, its board, its shareholders and other stakeholders’. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining the objectives and monitoring performance are determined.'[4]

The main theory behind corporate governance is the control of the corporation that is vested in a board of directors elected by shareholders to run the business. The primary relationship that has shaped corporate law is between managers on the one hand and on the other hand the owners (Shareholders).[5] The possible mismanagement or self dealing by the managers in control of the corporation is the focus of corporate governance. However a balance must be struck between the shareholders to monitor management and the need for the managers to take risks and operate the business in an effective and profitable manner.[6]

There are two main categories of corporations. In this paper the words “public listed corporation(s)” is used synonymously with the word “public listed company(s).” There two main categories of companies, namely private or closely held corporations and public or listed corporations. The major difference between the two is that public listed corporations are companies whose shares are listed and publicly traded at stock markets while private/closely headed corporations do not trade shares publicly nor are they listed in any stock markets. Issues of corporate governance in public listed companies have revolved around shareholders right to a voice in corporate matters and the monitoring of managers against managers’ power to operate the business without shareholders interference.[7]

This dissertation focuses on public listed corporations in Tanzania.

1.3 Capitalisation: Shares and Equity

Corporations require capital to function. In corporations capital is raised vide equity creation that includes investment of funds by owners or by creation of debt through borrowing.[8] It is the protection of the former, shareholders, that this paper shall dwell on. Basically shareholders are classified into two main groups; namely common shareholders and preferred shareholders.

Common shareholders have been defined as the residual claimants in the corporation as they have a claim to receive income and assets of the corporation after all other claims have been settled. They are directly concerned with the success of the business as their returns are dependent upon the profitability of the company.[9]

On the other hand preferred shareholders only hold preferred shares when authorized under articles of association. This group receives fix dividends, when, declared after creditors are paid their interest but before common shareholders are paid dividends, however as opposed to common shareholders who have rights to vote, preferred shareholders have no such rights to vote.[10]

When talking of shareholders protection under corporate governance regarding public listed corporations it is pertinent to list that there are two categories of such shareholders, namely majority shareholders on the one hand, who are normal controlling shareholders and minority shareholders on the other hand.

A majority shareholder has been defined as a shareholder or a group of shareholders who acting together own a majority or 51% or more of the voting shares of a corporation thus de jure control for most shareholder decisions, including selection of directors.[11]However the percentage needed to take control in public listed companies depends on a number of factors including how widely dispersed are the other shareholders, thus at times a shareholder or a group of shareholders acting together may be controlling shareholders though they hold less that 51% of voting rights, still being the biggest holders of percentage in ownership or in a situation of parent subsidiary where the parent has larger voting rights as against other shareholders.

1.4 Shareholders protection

That as the main focus on this paper is shareholders protection in Tanzania it is worthy at this stage to define what the term entails as that will be the scope of the paper.

Shareholders protection is defined as a set of laws or rules protecting the rights of non controlling shareholders.[12] This paper shall discuss on the protection of shareholders in public listed companies with special focus on Tanzania, a country in the Eastern part of the African continent.

Marco Pagano and Pablo Volpine have stated that the managers use of their control over companies resources for their own advantage, at times, to the detriment of the non controlling shareholders, as a potential area of conflict of interests. Thus from the foregoing the authors arrive at a conclusion that a set of laws and regulations protecting the rights of the non controlling shareholders is the fundamental definition of shareholder protection[13].

In their assumption Pagano and Volpine state that profits are not entirely verifiable by non controlling shareholders thus can be appropriated not only by managers but also workers in terms of managerial packages, higher bonuses, empire building, and easy life. Thus the foregoing at times turns workers into allies of the sitting management against the thread of corporate raiders.[14]

Under the OECD principles areas that shareholders rights and shareholders need protection are listed[15] as:

i) Ensuring the basis of effective corporate governance framework including that of ensuring that the governance framework promotes openness, transparency and efficient markets, consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities

ii) Right of shareholders and key ownership functions that encompass corporate governance should protect and facilitate the exercise of shareholders rights

iii) Equitable treatment of shareholders both minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress against violation of their interests

iv) Disclosure and transparency, ensured timely and accurate disclosure is made on all material matters pertaining to the corporation, including the financial position, performance, ownership and governance of the company.

Part One article VI of the OECD contains principals that state the responsibilities of the Board. It should be born in mind that most of the shareholders rights and protection, subject matter of this paper are related to the actions and omissions of and/or by the Board(s).

That under the said article it provides that corporate Governance should ensure the strategic guidance of the company, the effective monitoring of the management by the board, and the boards’ general accountability to the company and shareholders. [16]The article goes further and points out that the board should;

a) Act on a fully informed basis, in good faith, with due diligence and care, in the best interests of the company as a whole

b) Where the decisions may affect different shareholders groups differently, the board should treat all shareholders fairly

c) Apply high ethical standards taking into account interests of stakeholders

d) Fulfill its key functions.

That in the following chapters this paper aims at analyzing whether the legal and institutional frame work in Tanzania accords shareholders of public listed companies protection in accordance with the OECD Principles, assuming that the principals provides minimum standards, of effective corporate governance and shareholder protection.



The development of modern corporate governance and its relationship with shareholders protection has been shaped to a great extent by several corporate scandals that rocked America and Europe.


The first avalanche of corporate scandals that rocked the United States of America resulted from the corporate boom in the 1920s. The stock market boom of the 1920s saw shares in corporations rising steadily in one direction, upwards, leading to what experts called ‘market bubble’. This market bubble led to a burst in 1929.[17]

When he came into office President Franklin Roosevelt tried to address the market crush by legislation as it was widely believed that the market crush had to a great extent been caused by fraud in stock markets by many publicly traded corporations and self dealing in the financial sector.[18]The foregoing state of affairs resulted in great reforms at the federal level that saw the passage of federal security laws. The above laws insisted on disclosure to investors, regulation of proxies, anti fraud and insider trading rules, the role of independent accountants and reform of the stock markets including insider trading rules.[19]

The second wave of corporate scandals in the United states of America followed the 1990s’ stock market boom caused by technological revolutions in telecommunications and high technology sector and the rise of the internet. Investors were rushing to invest in stock markets thus resulting into a sharp investment rise in the above said sectors. Thus the foregoing led to over valuation of the stock markets that led to another bubble as at the beginning of 2001.[20] The said bubble evidenced a number of corporate scandals.

Corporate Scandals that arose included the Enron scandal. The shares of Enron, as a trading Company traded as high as 90 US Dollars thus making it a Wall Street star. That as the scandal unfolded it was discovered that Enron had been cheating by making its income statements look better through trading with fictitious independent entities. Most of the said transactions were illegitimate and designed to remove liabilities from its balance sheet and increasing revenue and profits on its statement, thus fraudulent accounting aimed at increasing its shares and share value[21]. Share increase justified increased salaries and bonuses for managers and enabled them to cash in on higher market prices the value of their stock options with some directors involved in both sides of the said illegitimate transactions.[22] Further, from the said accounting frauds Enron executives received the sum of $ 1.4 billion as compensation in year 2000 and $ 745 in 2001.[23] On the part of employees, it witnessed a loss of pensions and stock options that were invested in Enron shares. That the foregoing happened despite Enron having outside lawyers, independent directors and gatekeepers like accountants and auditors, none of them stopped the said scandal from happening or the will to report the same to relevant authorities.[24]

Further Enron and other trading companies were held accountable for manipulating the electricity market in California, actions that resulted in huge rises of the price of electricity, that caused enormous financial losses that brought one of California public utility to its collapse.[25] Further Enron used to cook its books for purposes of tax gimmicks that generated income for purposes of reporting to investors and at the same time created losses for tax purposes.[26]

Further, the foregoing scandals forced Enron into bankruptcy that caused great financial loss by eroding down shareholders value and many employees pensions that had been invested into the company.[27]

The Enron scandal had a wide net which saw a number of banks taken to task for assisting and or facilitating the scandals. Citigroup made $ 188million out of Enron related transactions and as a result Citigroup suffered a loss of $ 11 billion in value.[28] JP Morgan Chase suffered a loss of $ 322 in 2001as a result of assisting Enron and Argentina. [29] That from the foregoing in July 2003 JP Morgan and Citigroup paid fines totaling $ 255 million to SEC for assisting Enron in its wrongdoing and further JP Morgan and Citigroup paid $ 162.5 million and $50 million to the state of New York to avoid criminal prosecution. [30]

Further auditing companies were not spared of the roles they played in facilitating the Enron scandals. Arthur Anderson & Co, an audit firm that gave unqualified opinions on Enron’s annual statement reports, like 2001 statement filed at SEC that stated that Enron’s accounting and financial disclosures were right in all material aspects and made $ 52 million from Enron. Enron offices in Huston had destroyed large amounts of Enron’s documents and deleted computer files and emails, Oregon and Chicago offices followed the line in attempts to conceal records.[31]

The foregoing Enron scandals was soon followed by other major corporate scandals in America including but not limited to WorldCom that involved massive accounting malpractices that improperly inflated earnings by $ 11 Billion, this scandal was later labeled as the largest bankruptcy record in the World.[32] There were a number of more financial scandals like Adelphi, communications, Imclone and Tyco.

That apart from massive fines that corporations paid, over 30 officers were charged with crimes related to Enron scandal, including more than 20 former Enron executives, including Michael Kopper who for leniency of jail sentence agreed to testify against former Enron executives [33]however he too was sent to jail.


Europe was not spared of the said corporate scandals as the Enron scandal spread. The Royal Bank of Scotland was charged by the Enron Bankruptcy examiner of having actual knowledge of the wrongdoings of Enron and for lending substantial assistance to that conduct through and finance by the bank.[34]Barclays bank was also trapped in the web, charged by the bankruptcy examiner, along with Citigroup, Deustch Bank, JP Morgan and the Bank of America for acting as placement agents for Euro 1.0 billion of Enron’s zero coupon convertible bonds in 2001. A class action suit was brought up against Barclays bank for financial irregularities related to backing up Enron’s commercial paper debt. It was further charged for financing several of Enron’s questionable transactions that concealed debt off Enron’s balance sheet and increased its cash flow.[35]

Detailed discussions of the scandals might need thousands of pages, but for purposes of demonstration in this limited paper the foregoing suffices.

Pinto and Branson go further and point out that one major difference in the scandals of 1929 and 2001 is that the 2001affected many widely dispersed shareholders who had invested personal savings and/or retirement benefits. The foregoing raised public outcry and raised political temperature that forced politicians into action.[36] In response thereto, United States of America Congress in a bipartisan support enacted the Sarbanes-Oxley Act of 2002, hereinafter referred to as ‘Sarbanes-Oxley’.[37]


That as a result of these corporate scandals, especial the WorldCom scandal, pressure increased for more legislation. The said pressure resulted into the enactment of the Sarbanes-Oxley Corporate Reform Act of 2002. It was signed into law on July, 30th, 2002 after having passed through Congress. The act created a public organization, the Public Accounting Oversight Board (PCAOB). The act further required all chief executives and chief financial officers of publicly traded companies to certify the accuracy of financial reports knowingly false statements carried jail sentences of up to 20 years and penalties of up to $ 5 million. SEC was authorized to seek freezing orders for extraordinary payments made to executives at companies with accounting problems. The law further provided for protection of whistleblowers. Documents retention period was increased to five years with 20 years jail term for violation. The act further barred corporations from making personal loans to managers.[38]

However, since then the corporate world has been crying of losses they incur in the process of compliance to the requirements under Sarbanes-Oxley while corporate scandals continued to surface thereafter.[39]

The foregoing scandals raised issues among others as to whether there were sufficient laws and regulations protecting among others shareholders of public listed corporations in America and by analogy in other places of the World.

Despite the Sarbanes-Oxley and European Union Regulations the world witnessed yet another wave of corporate scandals between 2005-2009, an era involving major banks in Europe and America.


Jerry Markham laments that despite several regulatory reforms introduced after the happening of major corporate scandals, more scandals were witnessed. He states the 1929 market crash resulted in a new deal and the adoption of further federal security laws and regulations on the concept that forced disclosures would prevent corporate misconduct. That attempt proved to be an empty shell.[40]

The author goes and argues that for a complex economy like that of the United States of America, needs more that haphazard and costly approach of legislation and regulations. He argues that a cost benefit analysis should be conducted before passing any such legislation and regulations initiated by law Professors who have little or no experience in operations and management of businesses. The foregoing he complains is still the norm despite the never ending cycle of reform, failure, and then more regulations, Sarbanes -Oxley being the most recent failure.[41]

The pump and dump schemes of the 1990s continued to surface after passing of the Sarbanes-Oxley. Such scandals included Great White Marine & Recreation in which $10 million scheme was witnessed. Ponzi schemes like Global Express Capital Real Estate Investment ILLC ran a $48 million Ponzi scheme and the New York stock Exchange scandal over the $187.5 million retirement package given to its executive Richard Grasso and other market abuses that forced SEC to charge and fine NYSE. [42]All these scandals were witnessed after Sarbanes -Oxley

On the other hand Pinto and Branson in support of the legislatives moves like the Sarbanes-Oxley argue that the corporate scandals discussed above needed federal regulatory response such as those introduced by the Act including addition of criminal remedies to enforce fiduciary duties and the act intended to fill the gap created by failure of the market mechanism to protect investors. However Pinto and Branson are in agreement with Markham that the effectiveness of the laws, Sarbanes-Oxley inclusive, remains unclear and further reforms might be necessary.[43]

In my opinion despite the recurrence of corporate scandals post Sarbanes -Oxley as argued by Jerry Markham, those reforms are aimed at preventing corporate scandals, the reforms cannot be expected to be water tight as unscrupulous managers will always find ways to go round the regulations, but one thing for sure is that such managers know very well that they will be caught, they will be shamed, charged, fined and jailed. The foregoing criminal and civil penalties imposed by the reforms have to a great extent minimized the scandals and sent a clear message that no manager will get away by commissions and/or omissions detrimental to shareholders, public, Governments and society at large. Thus the said regulations were necessary as doing nothing was not and will never be an option.




Formation and registration of companies, including public companies in Tanzania is regulated by the Companies Act 2002.[44] Registration or incorporation of new companies is provided under part II of the said Act, by the presentation to the Registrar of companies, a Memorandum and Articles of Association under section 14. However under section 14(5) of the Companies Act, the Registrar shall not register an open-ended investment company unless the memorandum and articles of association have previous been approved by the Tanzania Capital Markets Development Authority.

That upon registration, the Registrar is obliged to certify under his hand that the company is incorporated. The Registrar shall also state whether the incorporated company is limited, in case the company is public, he shall state that the company is public[45] and shall thereafter issue a certificate of incorporation which shall be conclusive evidence that all registration requirements under the Act have been fulfilled.[46]

Further, the law permits a private company to change its status to a public company upon fulfilling requirements listed thereunder.[47]


That as pointed out before, the incorporation of companies in Tanzania, inclusive of public companies that might later be listed, is subject to and involves not only the company registry, the Capital Markets Regulatory Authority is involved in case the intended company to be registered is an open ended investments company.

That as for public companies the law prescribes conditions for the making of an offer document subject to regulations made by the Tanzanian Capital Markets Regulatory Authority.[48]

Tanzania Capital Markets and Securities Regulatory Authority

The Tanzania Capital Markets and Securities (CMSA), hereinafter referred to as the Authority, is a fully fledged Government Agency established to promote and regulate securities business within the United Republic of Tanzania.[49] It is a creature of statute, the Capital Markets and Securities Act, 1994 [as amended by Act No. 4 of 1997]. The Act is supplemented by regulations in line with its regulatory functions that include:

* To register, license, authorize and/or regulate stock exchanges, investment advisers, securities dealers, their agents and/or representatives.

* To be a watchdog over securities, to guarantee orderly, fair and equitable dealings in securities.

* To control and supervise activities of market stakeholders for the purpose of maintaining proper standards of conduct and professionalism in the securities sector.

* To formulate principles for the guidance of the securities sector.

* To determine the minimum required capital for a license holder, depending on the size of operations and risk involved at the material time

* To follow up on the solvency of license holders and take necessary steps to protect the interests of customers where the solvency of any such licence holder is in doubt.

* To protect the integrity of the securities market against any abuses arising from the practice of insider trading

* To review, approve and regulate takeovers, mergers, acquisitions and all other forms of corporate business combinations.[50]

That for a company registered at the company registry to qualify as a listed company it has to be a public company as defined under the Tanzania Capital Markets and Securities Act. Under the said act a public company is defined as;

“…a company whose articles of association do not restrict the right to transfer its shares, do not limit the number of its Members and do not prohibit any invitation to the public to subscribe for any shares or debentures of the company.”[51]

That from the foregoing for a company to trade its securities it has to be listed at a stock market or stock exchange. The establishment of a stock market or a stock exchange is provided for under section 25 of The Capital Markets and Securities Act which provides inter-alia;

“that no person shall establish or assist in establishing or maintain or hold himself out as providing or maintaining a stock market unless it is a stock market or a stock exchange”.

Under the said Act “stock exchange” is defined as any body corporate which has been approved by the Authority under section 26 and a stock market is defined as a market, exchange or other place, at which, or a facility by means of which, securities are regularly offered for sale, purchase or exchange.[52]

That under section 26 the Authority has the sole mandate to approve a body corporate to operate as a stock exchange upon that body making an application and fulfillment of criteria provided under the said law.[53]

That further under the law, a stock exchange is obligated to provide assistance to the Authority as well as exercise disciplinary powers over its members on behalf of the Authority, subject to review of such powers by the Authority.[54] However the Authority retains powers to issue directions to a stock exchange as and when it deems fit.[55]

The Dar es Salaam Stock Exchange

That since the law came into force, only one stock exchange has been approved, that is the Dar es Salaam Stock Exchange, hereinafter referred to as the DSE. The Dar es Salaam Stock Exchange (DSE) was incorporated in 1996 as a company limited by guarantee without a share capital. It became operational in April, 1998. The DSE is a non-profit making company created to facilitate the Government implementation of financial reforms and to encourage wider share ownership of privatized and all other companies in Tanzania.[56]

Listed companies at the Dar es Salaam Stock Exchange based on data from its website,, as visited on 15th April 2010 are as hereunder;


1. TOL GAS LIMITED TOL 42,472,537
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