The 25% Nobody Chooses: Local Shareholding in a Tanzanian Company

Most disputes between a foreign investor and a local shareholder in Tanzania are not caused by the local shareholder. They are caused by the twelve weeks before the money moved, when nobody wrote anything down.

This page is the local shareholding structuring file: what the law reserves, which document actually decides ownership, where these structures fail, and what to settle before capital enters. A recent matter on the Company Setup Desk makes the point exactly. The facts below are stated without identifying the parties.

What is reserved before any process is explained

A foreign reader should know where the door is closed before being shown how to walk through it.

Tanzania reserves participation in several licensed activities for its citizens. The rule that catches mineral traders is the shareholding condition on a mineral dealer’s licence: 25% of the company must be Tanzanian-held, 75% may be foreign. It is mandatory. A dealer’s licence is granted to a company, and the company must carry that shareholding to hold it. The dealer licence walkthrough sets out the class structure that sits on top of it.

Comparable restrictions sit across other sectors — local content requirements in mining services, reserved categories in some licensed trades, and restrictions on foreign occupation of land, which is held by the President as public land and reached by non-citizens through derivative rights, normally via TISEZA. A foreign investor does not choose whether to have a local shareholder in these sectors. The law chooses for them.

That single fact is the origin of most of what follows. An investor who wants a partner negotiates terms. An investor who needs a shareholder to satisfy a licence condition often takes the first Tanzanian who is offered, at the speed the licence timetable demands, and documents nothing.

The matter, in outline

Four non-resident shareholders from one family incorporated a Tanzanian private company limited by shares to trade in gold. The capital was 1,000 ordinary shares. The family subscribed for 750; a Tanzanian subscriber took 250 — the 25% the licence required. All five became directors. The Tanzanian shareholder was also appointed company secretary.

The family funded the business from abroad. The local shareholder contributed nothing to the capital and was never asked to. That was the understanding: he was there because the licence needed him to be.

Nothing else was ever executed. No shareholders agreement. No memorandum of understanding. No non-disclosure and non-circumvention agreement. No declaration of trust. No share transfer instrument. Not one document defined what the 250 shares were for, what the holder could and could not do, or what would happen if the parties fell out.

Eighteen months later, roughly two-fifths of the capital could not be traced to the operation. The local shareholder had lodged a beneficial ownership declaration at the companies registry naming himself the owner of the whole company — 25% directly and 75% indirectly. He told the foreign shareholders he would close the office, take the licence, and have them returned to their home country.

Every one of those threats was empty. Establishing that took a day of reading documents the investors had held all along and never examined.

The register of members is the only document that decides ownership

Company ownership in Tanzania is not decided by who says they own the company, by who holds the login credentials, or by who lodged the most recent form. It is decided by the register of members kept under section 118 of the Companies Act, Cap 212.

Two provisions do the work.

Section 125 of the Act provides that no notice of any trust shall be entered on the register. The registry records the holder, not the arrangement behind the holder.

The company’s own articles almost always repeat it. The standard article — present in this company and in most Tanzanian private companies — provides that no person shall be recognised by the company as holding any share upon any trust, and that the company is not bound by any equitable, contingent, future or partial interest in a share other than an absolute right in the registered holder.

Read together, these are the most important sentences in Tanzanian nominee practice, and they cut in both directions.

Against the local shareholder: a beneficial ownership declaration claiming the foreign shareholders’ shares are held on his behalf is worth nothing against a register that names them as holders in their own right. It is contradicted by the register, contradicted by the memorandum they each signed, and — in this case — contradicted by its own contents, because the section of the form requiring the name of the person holding shares on the declarant’s behalf had been completed with the declarant’s own name. A person cannot hold three-quarters of a company on his own behalf indirectly while holding a quarter of it directly. The entry described an arrangement incapable of existing.

Against the foreign shareholders: the same rule means their local shareholder is not a nominee in law either. With no declaration of trust and no shareholders agreement, he is the registered holder of 25% of the company in his own right, with every protection a member has. Those shares cannot simply be cancelled because he never paid for them, and they do not disappear when he is removed from office.

This is the trap. Investors use the word “nominee” and believe it means the shares are really theirs. In Tanzania, an undocumented nominee is not a nominee. He is a shareholder. The nominee shareholder agreement file and the beneficial versus legal ownership file take that distinction further.

Where the structure actually failed

Six failures, all of them ordinary, all of them avoidable, none of them expensive to fix in advance.

The registered office was the local shareholder’s home. Every statutory notice from the companies registry, the revenue authority and the sector regulator was served at his address. Where a member has supplied no address inside Tanzania, the articles commonly deem notice validly given by display at the registered office — which was his house. The foreign shareholders could have been made unaware of meetings affecting their own company, lawfully.

Every contact of record was his. The registry file, the licence, the lease and the tax profile all carried his telephone and his email. Portal credentials, one-time passwords and regulator correspondence routed to one person. The company could not communicate with the State except through him.

No shareholders agreement. Nothing restrained him from competing with the company, from dealing with its property, or from signing in its name. Nothing fixed what his 25% was worth, what would trigger a buy-out, or how a deadlock would break.

No governance discipline. No board meetings were minuted, no statutory registers were maintained beyond incorporation, and no accounting was ever called for. The investors held four of the five board seats and had never once used them.

The registered tax activity did not match the licensed business. The company’s tax records described extractive activities it had never carried on; its licence permitted mineral trading. A misdescription in front of two authorities, one of which held a copy of the record.

The objects clause did not cover the licensed activity. The memorandum listed mining and extraction. The licence permitted buying and selling gold. Section 37 protects the validity of a company’s acts against a capacity challenge, so contracts were not void — but the mismatch was visible to any regulator who read the constitution against the licence.

What to settle before the capital moves

The following costs a fraction of what a contested removal costs, and takes days rather than months.

Execute the shareholders agreement before the first transfer, not after. It fixes what each party contributes, how decisions are made, what requires unanimity, how shares are valued, what triggers a compulsory sale, and how the relationship ends. Where the local holding exists to satisfy a licence condition, the agreement should say so in terms. The shareholders agreement file sets out what the articles cannot do on their own.

Document the local shareholding for what it is. Where the holder is contributing capital, record it and take the evidence. Where the holder is not, say that too, and set out on what terms the shares are held, what they are worth, and when and at what price they return. Silence is not neutral — it defaults to full beneficial ownership in the registered holder.

Put the registered office at an address the investors control, and register the company’s own email and telephone — not any individual’s. Statutory notice follows the registered office. So does control of the registry account.

Hold the licence in the company’s name and confirm it on the certificate. A licence granted to the company follows the company through a change of officers. A licence in an individual’s name leaves with the individual.

Set a bank mandate requiring two signatures, at least one of them an investor’s. In the matter above this was the investors’ single strongest protection, and it was the only thing they had put in place deliberately.

Keep the books from day one, under section 154. Proper books of account are a statutory duty and the evidence base for every remedy that exists. A demand for an accounting supported by bank records is a demand that holds. A demand supported by assertion invites a denial and forfeits the advantage of moving first.

Make the capital traceable. Remit through the banking system to the company’s own account, record what each payment is for, and issue share certificates against payment for shares. Whether a shareholder has paid for his shares determines which remedies are available later.

Resolve immigration before arrival, not after. Shareholding is not a right to work. A shareholder or director taking an active part in the business needs a work permit from the Labour Commissioner and a residence permit from the Immigration Department — two instruments, two authorities, in sequence, as the investor work permit file sets out. Investors who operate on a visitor’s pass hold a weak position in any dispute and an exposed one with the authorities, independent of the dispute.

Minute the board from the first meeting. Directors who have never met as a board find it harder to act as one in a crisis, and a company with no minute book has no record of who decided what.

If it has already happened

The position is usually better than it looks, because the Companies Act and the company’s own articles give the majority more than most investors realise. In the matter above, four of the five routes needed no court at all.

The company secretary holds office at the directors’ pleasure. Appointment and removal is a matter for the articles, which commonly provide that the secretary is appointed by the directors and may be removed by them. A board resolution ends it the same day.

A director may be removed by ordinary resolution under section 196, before the expiration of his period of office, notwithstanding anything in the articles or in any agreement with him. Where articles require a higher threshold, the statutory route overrides them. It is gated on special notice under section 147 — the notice must reach the company not less than twenty-eight days before the meeting, and the director is entitled to be heard and to circulate written representations of reasonable length. That twenty-eight days is the real timetable, and it cannot be shortened.

Many articles vacate a director’s office automatically where he is requested in writing by all of his co-directors to resign. Where the investors hold every other board seat, this operates on the articles’ own terms without a general meeting.

The board may refuse to register a transfer of the departing holder’s shares to a replacement, in its absolute discretion and without assigning a reason, and pre-emption provisions commonly require any sale to be offered to existing members first at a price agreed or certified by the auditor.

Shares may be forfeited only for non-payment of a call, and only by the route the articles prescribe: a call on not less than fourteen days’ notice, a further notice naming a day not earlier than fourteen days later, then forfeiture by resolution. It is available where the shares were never paid for. It is not a general power to expel a shareholder.

Where the conduct is worse than a governance failure, section 236 allows a member to petition on the ground that the company’s affairs are being conducted in a manner unfairly prejudicial to members, and the court’s orders include requiring shares to be purchased. Section 124 rectifies the register. Section 385 provides a remedy against directors who have misapplied company money. Section 237 carries a derivative action where the claim belongs to the company. A wilfully false statement in a document required by the Act is an offence under section 482.

One warning belongs with all of it. A majority that acts outside this machinery — diluting a member by a share issue, excluding him from a meeting he is entitled to attend, removing him without the notice the Act requires — hands him the same section 236 remedy, and its own conduct becomes the issue before the court. Pre-emption provisions usually require new shares to be offered to existing members proportionally in any event, and a share issue whose purpose is to dilute a member is an exercise of power for an improper purpose under section 187.

The sequence is what makes the outcome hold.

Two questions worth asking before the first transfer

Who receives a letter addressed to this company? If the answer is anyone other than the investors, that is the first thing to change.

If every party stopped cooperating tomorrow, which document decides the outcome? If the answer is that it would have to be argued, the structure is not finished, whatever the certificate of incorporation says.

Mandate-holders this file does not replace

The Registrar of Companies at BRELA owns incorporation, the register the company itself keeps, the beneficial ownership record and every statutory filing. The Mining Commission owns the dealer’s licence and the shareholding condition that sits on it. The Labour Commissioner owns the work permit and the Immigration Department the residence permit. TISEZA owns the certificate of incentives and the derivative right of occupancy. The High Court owns every remedy in section 236, 237, 385 and 124. An advocate of the High Court of Tanzania owns representation, notarisation and the commissioning of oaths. Zatra prepares, structures and coordinates the file, grants no licence and does not practise law.

What to confirm before the Client acts

• Whether the register of members, and not a lodged form, records the holding the Client believes it has.
• Whether the shareholding condition on the intended licence class is the one assumed, confirmed live with the Mining Commission before the structure is fixed.
• Whether the registered office, the registry account, the company email and the company telephone are under the Client’s control rather than an individual’s.
• Whether the objects clause in the memorandum covers the activity the licence will permit.
• Whether every remittance of capital is traceable to the company’s own account and matched by a share certificate.