Class 4 Company Law II Guidance Notes by Jasper Lubeto

These notes are not a substitute for class readings. They merely highlight the salient points and
students must consult recommended reading materials. Students are expected to have read these
notes prior to the class and undertaken further research.

Class objectives: Discuss and understand Corporate Capital

 Raising and Maintenance of Capital
 The Share Capital
 Types and Classes of Shares
 Reorganization of Share Capital
 Reduction of Share Capital
 Share Re-purchase and Buybacks
 Treasury Shares
 Distribution of Company Assets

I. What is Capital
Per section 3 of the Act, equity share capital – means a company’s issued share capital excluding
any part of that capital that does not confer any right, either with respect to dividends or to capital,
to participate beyond a specified amount in a distribution.
Per section 14 of the Act, requirement for a statement of share capital comprising details on: (i)
the total number of shares of the company to be taken on formation by the subscribers to the
Memorandum of Association, (ii) the aggregate nominal value of those shares, (iii) for each class
of shares – the particulars of the rights attached to the shares, the total number of shares of that
class, and the aggregate nominal value of shares of that class, (iv) the amount to be paid up and
the amount (if any) to be unpaid on each share, whether on account of the nominal value or in the
form of a premium.

II. Shares
Per section 3, shares – (i) in relation to an undertaking with a share capital, means shares in the
share capital of the undertaking; (ii) in relation to an undertaking with capital but no share capital,
means rights to share in the capital of the undertaking; (iii) in relation to an undertaking without
capital, means interests – conferring a right to share in the profits, or the liability to contribute to
the losses, of the undertaking, or giving rise to an obligation to contribute to the debts or expenses
of the undertaking in the event of liquidation.
In essence, shares denote ownership and are accompanied by peculiar rights. There are numerous
types of shares, with two predominant types to wit Ordinary Shares and Preference Shares. See
sections 484(9)(b), 523(3), 17, and 18 where the Act intimates on preference shares.
Section 324(1) shares in a limited company having a share capital are each to have a fixed nominal
value; and s 324(2) shares in a limited company having a share capital are required to be
denominated in shillings.
Section 392(1) shares are of one class if the rights attached to them are in all respects uniform –
implication – it is the rights that determine different types of shares. The Act leaves the choice on
various shares to the Company’s Articles. However, any changes should be notified to the
Registrar – see 400(1) and penalty on company officers s. 400(2).
Types of Shares in brief:
 a) Ordinary shares: these are equity securities that denote ownership of the Company. They
enjoy residual gains/losses of the company; and often retain the ultimate voting and
participation rights. Section 3 of the Act, ordinary shares – means shares other than shares
that, with respect to dividends and capital, confer a right to participate only up to a specified
amount in a distribution.
b) Preference shares – these are variations or constellations of shares with varying amounts
of rights often prescribed by the Articles of the Company.
a. Redeemable shares – see Part 20 of the Act. Section 520(1) – A limited company
having a share capital may issue redeemable shares that are to be redeemed or are
liable to be redeemed at the option of the company or the shareholder. See s. 523(1)
for sources of funds for redemption of shares – distributable profits of the company
or proceeds of fresh issue of shares made for the purposes. See s. 524 on effect of
redemption of shares – cancelled from the register of shares; and the amount of
issued share capital reduces by the nominal value of the redeemed shares.
b. Treasury shares – this is new set of shares under the 2015 Act. Companies are
allowed to purchase their own shares; and the Treasury Shares are the only category
of shares that can be subjected to an own purchase by the Company. ** (debatable).
See section 526. 526(4) company shall enter its name in the register of members as
the member holding the treasury shares where it so owns them. See s. 527 – treasury
shares cannot exceed more than 10% of the class of shares under which they are
held. For instance, if the treasury shares fall under the ordinary shares class, the
maximum treasury shares shall only be 10% of the ordinary shares. Section 528
implies that treasury shares are “dead shares” – no participation rights (voting or
dividends). What is their use then – section 529 – may be transferred for cash or for
employee share ownership scheme (ESOPs). Real value of treasury shares lies in
the ability to play with supply/demand of shares in the market hence determine
market price of the share. Section 531 may allow company to cancel all or any of
the shares.
c. Golden shares – Facebook (Zuckerberg).
d. Sweat equity
e. Share warrants. See section 504(1) prohibiting share warrants.
f. Share options (employee motivation? Vesting period?).

III. How to raise and maintain Capital

Capital is raised through allotment of shares. Group to present on rules of share allotment. Other
capital raising options are – bonus issues, rights issues, increased in nominal capital with fresh
allotments, etc etc.
However, after raise of the capital, the Act requires that the said capital is maintained and not
wasted away. A number of cumulative provision aim at the preservation of capital. Examples
include: Section 528(4) No dividend can be paid, and no other distribution or the company’s assets
can be made to the company, in respect of treasury shares. Section 424(2) allows acquisition of
own shares for valuable consideration and consequential cancellation. Also note reduction options
and various incentives inherent.

IV. Reorganization of Share Capital

See section 404(1) increase share capital by allotting new shares or reduce share capital. See
405(1)(a) – share split by subdivision, and (b) share consolidation by merger of shares. What are
the merits for share reorganization by splitting or consolidating?

V. Reduction of Share Capital

Section 407(1) allows a limited company to reduce its share capital by a special resolution. See
407(4) and explain merits in reduction of share capital.

VI. Share Purchase

A company may desire to purchase its own shares for one reason or another. What may be some
reasons?
Section 424(1) lays out the general rule against company purchase of its own shares. Exceptions
invited by this Part 16 of the Act, to wit: (i) acquisition of any of its own fully paid shares for
valuable consideration, (ii) acquisition of shares in a reduction of capital duly made, (iii) forfeiture
shares, or accepting the surrender of shares, in accordance with a company’s articles. See 424(2)
and (3).
Rules on financial assistance for acquisition of shares:
1. s. 441(1) a person acquiring shares in a private company, for which a public company is its
subsidiary, then the public company cannot give financial assistance whether directly or indirectly
– exceptions 441(2) principal purpose in giving the assistance is not for the purpose of the
acquisition and giving financial assistance for acquisition purposes is only incidental to achieving
some larger purpose of the company.
2. Section 442(1) If a person is acquiring shares in a public company, that public company or its
subsidiary cannot give financial assistance (directly or indirectly) for the purposes of the
acquisition. Exception similar as above.
3. Section 443(1) prohibition of public companies giving assistance for acquisition of shares in
its private company. (Note the typographical error in the Act; ripe for rectification).
4. Section 447(1) company may purchase its own shares; however, not allowed if issued shares
would be fully depleted other than redeemable and/or treasury shares. S. 448 a limited company
can only purchase fully paid up shares; and must pay for them on purchase. Note source of funding
– distributable profits or proceeds of fresh issue of shares made for purposes of financing said
purchase.

VII. Conclusion
Plenary – questions.

Group Assignments: Do research and present exhaustively on the following broad areas:
I) Share Allotments.
II) Pre-emptive rights.
III) Share Premium.
IV) Distribution of Company Assets.