Professional Documents
Culture Documents
CORPORATE LAW NOTES
CORPORATE LAW NOTES
PREPARED BY:
Joel Laurent LL.B (Hons) Dar, LL.M (Corporate Law and Finance)
Widener, USA
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Under Halsbury’s Laws of England, the term "company" has been defined
as a collection of many individuals united into one body under special
domination, having perpetual succession under an artificial form and
vested by law with the capacity of acting in several respect as an
individual, particularly for taking and granting of property, for
contracting obligation and for suing and being sued, for enjoying
privileges and immunities in common and exercising a variety of political
rights, more or less extensive, according to the design of its institution or
the powers upon it, either at the time of its creation or at any subsequent
period of its existence. Normally, in the world of commerce the word
“company” is used to denote an association of people so associated for an
economic purpose e.g. business. Please note that companies can be
formed for other purposes as well – for example – for charity.
1
Taken from Saleemi N.A & Opiyo, A.G, Company Law Simplified (1997) at p.1
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Capacity to sue and being sued: A company can sue or be sued in its
own name as distinct from its members. It may also inflict or suffer
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wrongs. It can in fact do or have done to it most of the things which may
be done by or to a human being.
The company is only able to sue or be sued in its own name when it has
been registered. If the company has not acquired legal personality (not
fully registered) it cannot institute a suit2. In the case of Fort Hall Bakery
Supply co. v. Federic Muigai Wangoe (1959) E.A. 474 a suit was instituted
by an unregistered firm of over twenty members whose existence as body
was not recognized in law. The high Court of Kenya stated at page 475.
2
The proper procedure for seeking legal remedy in a court by a body of persons who have no corporate
existence, is by way of a representative suit as provided under Order 1 rule 8 of the Civil Procedure Code
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Both trial judge and the Court of Appeal held that Mr. Salomon was
liable for the company’s debts, on the ground that the company was
either an agent, a trustee or a nominee of the true owner. The House of
Lords rejected this view on corporations. Lord Halsbury said4:
From juristic point of view a company is a legal person different from its
members Salomon v Salomon & Co Ltd. (1897) A.C. 22.The principle may
be referred to as the ‘Veil of incorporation”. The courts in general
consider themselves bound by this principle. The effect of this principle
is that there is a fictional veil (and not a wall) between the company and
its members. That is, the company has a corporate personality which is
distinct from its members.
3
[1897] A.C. 22 (Eng., H.L.)
4
See Salomon v. Salomon., op. cit., at p. 31
5
See MALLOR J. et al., Business Law and the Regulatory Environment. Concepts and Cases: 10th Edn:
Boston: Mc Graw-Hill Companies, Inc., 1998, at p. 826.
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Protection of Revenue
The court may ignore the corporate entity where company is used for tax
evasion. Tax planning may be legitimate as it is within the framework of
6
(1905) 142 Fed 247
7
(1969) WLR 1241
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the law. Where it is desired to determine for tax purposes the residence
of a company the court will lift the veil and find out where its central
management is, and that place will determine the residence of the
company.
In the case of Gilford Co. Ltd v Horne (1933) Ch. 935 C.A. Horne a former
employee of a company was subject to a covenant not to solicit its
customers. He formed a company to carry on a business that, if he had
done so personally, would have been a breach of the covenant. An
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injunction was granted against him and the company to restrain from
carrying business. The company was described in a judgment as “a
device, a stratagem” and a as a mere crack or sham for the purpose of
enabling the defendant to commit a breach of his covenant against
solicitation.”
The courts invariably lift the corporate veil to protect public policy and
prevent transactions contrary to public policy. In the case of Connors v.
Connors Ltd (1940) 4 All ER 174 it was held that where there is a conflict
with public policy, the court will lift the veil of incorporation.
Statutory lifting
Apart from judicial considerations, the exercise may also be carried out
statutorily under the provisions of Companies Act e.g. where the number
of members is reduced bellow the statutory minimum
One must also not confuse a business with a company. For that purpose
it is important to appreciate distinction between Sole Proprietorship, a
Partnership & a Company:
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When two or more people join together for a common purpose, usually
the purpose of doing business for profit, such an association is called a
Partnership. Partners do business under a trade name for instance Mr.
Kagya of the Sole Proprietorship can bring in his friend Mr. Lau as a
partner and can trade under the name of Nshomi Trading Company. For
purposes of the law it really means Kagya and Lau trading in partnership
under the name and style of Nshomi Trading Company. The Partnership
has an existence of its own to the extent that it can sue and be sued in
its own name. However, the consequences of a liability against the
partnership are that each of the partners is fully liable to the entire
extent of the debt. In law, each partner is the agent for the other. The act
of one partner binds the firm and the other partners.
3. Property of the firm belongs to the partners and they are collectively
entitled to it. In case of a company, the property belongs to the company
and not to its members.
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TYPES OF COMPANIES
Basic Characteristics
Basic characteristics
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S 28 of the Act states that if a private company alters its articles such
that they no longer include the provisions required for a private company
(s.27), the company shall on the date of the alteration, cease to be a
private company and shall amend its memorandum to state that it is a
public company. The company should, within 14 days send notification
to the registrar who shall issue a certificate to the effect that the
company is the public company.
(v) Shares are normally partly or fully paid for when issued, so company
will have a contributed capital.
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The liability of members to pay the guaranteed amount arises only when
the company has gone into liquidation and not when it is a going
concern. Members, therefore, do not have to pay anything as long as
company is a going concern - so company has no contributed capital.
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The promoters enter into preliminary contracts with vendors and make
arrangements for the preparation, advertisement and the circulation of
prospectus and placement of capital. However, a person who merely acts
in his professional capacity on behalf of the promoter (e.g. lawyer,
Accountants, etc) for drawing up the agreement or other documents or
prepares the figures on behalf of the promoter and who is paid by the
promoter is not a promoter.
Legal Status
“Although not an agent for the company nor trustee for it before its
formation, the old familiar principles of law of agency and of
trusteeship have been extended and very popularly extended to
meet such cases.”
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1. He must not make any secret profit out of the promotion of the
company. Secret profit is made by entering into a transaction on
his own behalf and then sells the property to the company at a
profit without making disclosure of the profit to the company or its
members. The promoter can make profits in his dealings with the
company provided he discloses these profits to the company and
its members. What is not permitted is making secret profits i.e.
making profits without disclosing them to the company and its
members8. He must also make full disclosure to the company of all
relevant facts including to any profit made by him in transaction
with the company.
2. He must not make unfair use of position and must take care to
avoid anything which has appearance of undue influence or fraud
3. The promoter, once he has begun to act in the promotion of the
company, must give the benefit of any negotiations or contracts
into which he enters in respect of the company. Thus where he
purchases some property he cannot rightfully sell the property to
the company at a price higher than he gave for it. If he does so the
company may upon discovering it, rescind the contract and recover
purchase price.
8
disclosure may be made to either an independent board of directors or the existing and intended
shareholders e.g. by making disclosure in the prospectus
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3. The promoter may sell his property for fully paid shares in the
company after making full disclosures.
4. The promoter may be given an option to buy further shares in the
company.
5. The promoter may be given commission on shares sold.
6. The articles of the Company may provide for fixed sum to be paid
by the company to him. However, such provision has no legal effect
and the promoter cannot sue to enforce it but if the company
makes such payment, it cannot recover it back.
Pre-Incorporation Contracts
Position of promoters:
• Company is not bound by pre-incorporation contracts
• Company cannot enforce pre-incorporation contract
• Promoters remain personally liable.
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9
Simply making the contract with the third party and allowing the promoter to assign the benefit of it
to the company when it is formed is not recommended because the law does not allow a person to
assign the burden of a contract. Therefore the promoter remains personally liable for the performance
of the agreement even after the assignment to the contract.
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Formation of companies
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10
It is very important to take not that the registrar has absolute discretion to register the memorandum and
articles of association. The registrar is not bound to give reasons. However, where the registrar refuses to
register the Memorandum and articles delivered to him, he shall return the same to the person who tendered
them for registration and shall advise the applicant in writing that in exercise of the power or, as the case
may be, he refuses to register the memorandum and articles of association.
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MEMORANDUM OF ASSOCIATION
B: Purposes of Memorandum
The purposes of memorandum of are two-fold:-
(i) The prospective shareholders shall know the field in or the
purpose for which their money is going to be used by the
company and what risks they are undertaking in making
investment.
(ii) The outsiders dealing with the company shall know with
certainty as to what objects of the company are and as to
whether the contractual relation into which they contemplate
11
S.2 of the Companies Act, Cap.212
12
Kapoor N.D. Elements of Company Law (1991) at pg.67.
13
Saleemi NA & Opiyo, A.G. Company Law simplified (1997) at pg.57
14
Ashbury Rly carriage & Iron Co. Ltd. V. Riche (1875) LR7 HL.653
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Section 4(1) of the Companies Act 2002 states that the memorandum of
every company shall be printed in English language. Section 5 of the
same Act states that the memorandum shall be dated and shall be
signed by each subscriber in the presence of at least one attesting
witness. Opposite the signature of every subscriber and attesting
witness there shall be written in legible characters his full names, his
occupation and postal address.
The name of the company establishes the identity and is a symbol of the
company. The promoters have to choose the name with which the
company is to be registered. They should avoid undesirable names16,
names which are misleading or too similar. No company is to be
registered with a name that is similar with the existing company. This is
due to the fact that the name of a company is part of its business
reputation.
15
Cotman v Brougham (1918) AC 514
16
s.30 (2) of cap.212 e.g names which suggest a criminal or immoral intent, or names which are
misleading.
17
s.112 of Cap.212
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end with the words “Public Limited Company” and for private company
with the word “Limited”18.
Alteration
The minister responsible for trade may direct the company to change its
name if, in his opinion the name by which a company is registered gives
so misleading an indication of the nature of its activities as to be likely to
cause harm to the public (s.33(1)
The direction must be complied with within six weeks unless there is an
application to the court to set aside. Such an application to the court
must be made within three weeks from the date of the direction (s. 33(2)
& (3)
The company may change the situation of its registered office from time
to time by giving notice in the prescribed form to the Registrar within
fourteen days after the date of change.
18
s.4(1)(a) of Cap.212
19
s.31(1) of Cap.212
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The objects clause defines the sphere of the company’s activities, the
aims that its formation seeks to achieve and the kind of activities or
business that it proposes to undertake. A company cannot conduct any
business foreign to its objects clause. If anything which is not
authorized by the object clause is undertaken, it is considered ultra vires
and hence not biding on the company20.
The objects clause gives protection to shareholders who learn from it the
purposes for which their money can be applied. It ensures them that
their money will not be risked in any business other than that for which
they have been asked to invest. Similarly, it protects individuals who
deal with the company and who can infer from it the extent of the
company’s powers.
Alteration (s. 8)
By special resolution
Application for confirmation – who can apply? – s.8(2)
Holder of not less in the aggregate than 10% in nominal
value of the company’s issued share capital or any class
thereof or, if the company is not limited by shares, not less
than 10% of the company’s members or
Holders of not less than 15% of the company’s debentures
entitling the holders to object the alterations of its
memorandum
Application should be made within 30 days after the date on which
the resolution altering the company’s memorandum was passed.
If no application is made the company shall within fourteen days
from the end of the period for making such application deliver to
the registrar a printed copy of its memorandum as altered
[s.8(9)(a)].s,
If application is made – s.8(9)(b).
20
Saleem et al., op.cit. at p.61
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Ultra vires act is void, as such it can not create any legal relationship.
Such an act being void cannot be ratified even by the whole body of
shareholders. The leading case on this point is Ashbury Rly carriage and
Iron Co. Ltd. V. Riche (1878) Lt 7 HL 653. In this case a company was
incorporated with the following objects
(a) to make, sell or lend on hire, railway carriages and wagons;
(b) to carry on the business of mechanical engineers and
general contractors;
(c) to purchase, lease, work and sell mines, minerals, land and
buildings. The company entered into a contract with Riche
for financing of the construction of railway line in Belgium.
The question raised was whether that contract was covered
within the meaning of “general contractors”. The House of
Lords held that the contract was ultra vires the company and
void so that not even the subsequent assent of the whole
body of shareholders could ratify it.
To overcome the obstacles imposed by the ultra vires doctrine, experts
have come up with three ways/methods of drafting the objects clause:
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LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
The capital clause of a company states the amount of capital with which
it is registered, divided into shares of fixed amount. The amount of such
capital is determined by the cost of starting the business and there is no
statutory limitation regarding minimum or maximum. The capital is
called authorized, nominal or registered.
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The law relating to the capital of a company has something sacred. The
general principles of law founded on principles of public policy and
rigidly enforced by courts is that no action resulting in a reduction of
capital should be permitted unless reduction is effected
Reduction of capital in any other form apart from the ways stated above
must be carried out in conformity with the provision of sections 68 – 72
21
Under the new Companies Act reduction of share capital do not apply to an open – ended investment
company whose establishment has been duly authorized under the Capital Markets and Securities Act. See
Section 68. Open-ended investment companies (OEIC) is a company that is able to redeem its own shares
for cash and manages a portfolio of investments on behalf of its members.
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Section 69 gives the company the power to reduce its share capital in
any way but specifically mentioning the following ways in which the
reduction of capital may be effected.
1. Special resolution
Notice calling a meeting to propose a resolution must be
accompanied
i. Director’s certificate of solvency
ii. Auditors report
Any director of a company giving a certificate of solvency without
reasonable ground shall be liable to imprisonment or fine or both.
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4. File a resolution to the Registrar thirty five days from the date
when a resolution was passed.
The increase must not be done with ill motive. In the case of Clemens v.
Clemens Bros. Ltd (1976) 2 All E.R 268 resolutions to increase the capital
and issue of new shares in such a way as to deprive the plaintiff, a
shareholder her “negative control” of the defendant company were set
aside as having been passed by an inequitable use of defendant’s rights.
In this case the plaintiff owned 45% of the issued share capital of the
defendant company and her aunt owned the remaining 55%. Although at
one time both the plaintiff and her aunt had been directors of the
defendant company, at the relevant time the plaintiff was no longer a
director, the aunt and her fellow directors proposed to increase the
company’s share capital by the creation and issue of further shares. The
plaintiff concerned was that the proposed share issue would dilute her
holding and voting power from 45% to 25%. She commenced proceedings
against the company and the aunt seeking a declaration that the
resolutions were oppressive, and an order setting them aside. It was held
that resolutions were specifically and carefully designed to ensure not
only that the plaintiff can never get the control of the company but
deprive her of what has been called her negative control i.e. powers to
prevent the passage of any special resolution of which she disapproved.
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In this clause, the subscribers declare that they desire to be formed into
a company and agree to take the shares stated against their names.
2. ARTICLES OF ASSOCIATION
A: Meaning
The articles of association are the rules and regulations of a
company formed for the purpose of internal management. The
articles regulate the manner in which the company’s affairs will be
managed. While the memorandum lays down the objects and
purposes for which the company is formed, the articles lay down
rules and regulations for the attainment of these objects.
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violate any provisions of the Act. If they do, they would be ultra
vires the memorandum or the Act, and will be null and void.
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23
(1901)1 Ch.279
24
(1897) AC.299
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25
(1875) LR7 HL 869
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(2) Forgery
The doctrine does not protect a person where forgery is involved. A
company cannot be held liable for forgeries committed by its
officers.
26
(1856) 6E & B 327
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Partnership firm
Insolvents
Companies
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The court may order rectification of the register if any one is improperly
omitted or included in it (s. 121). This is in fact the procedure where by
title to shares is established.
Cessation of membership
Rights of members
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company or by the general law. These rights are such as right to vote,
right to demand a poll or join in the demand for poll, right to transfer
shares, rights to participate in appointing directors and auditors in the
annual general meeting, rights to receive dividend when declared.
Liability of members
No Notice of Trust
The company is not allowed to enter any notice of trust on the register –
thus the registered owner is treated as the beneficial owner so far as the
company is concerned even if he is a trustee for someone else.
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For all practical purposes, a trustee is the shareholder and is liable for
calls, even though the calls exceed the value of the trust property in his
hands (Phoenix Life Ass. Co. Re.(1862) 31 L.J. Ch. 749). The trustee,
however, is entitled to be indemnified by the beneficiary who is ultimately
liable for calls [Hardoon v. Belilios (1901) A.C. 118. Section 122 clearly
states that no notice of any trust, express, implied or constructive, shall
be entered on the register of members. The object of S. 122 is
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PROSPECTUS
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has been filed with the registrar. It was not publicly advertised and was
stated to have been distributed by the promoters only to shareholders in
certain gas companies in which they were interested. 3000 copies were
sent out. It was held that it was offer of shares to the public.
An offer will not be treated as made to the public
(1) If it is not calculated to result directly or indirectly, in the
shares or debentures becoming available for subscription or
purchase by persons other than those receiving the offer or
invitation.
(2) It is domestic concern of the persons making and receiving the
offer or invitation. Thus an offer to one’s kid cannot be
considered to be an invitation to public; Sherevell V Combined
Incandescent Mantle’s Syndicate (1907) 2.3 T.L.R 482.
S.47 (1) States that offer document issued before on behalf of the
company or, by or on behalf of any person who was engaged or interested
in the formation of a company must state the matters specified and
contains in the reports required to be included from time to time in
regulations made by the Minister for the time being responsible for
finance or by the Capital Markets and Security Authority or such other
authority as may be designated by that minister for the purpose.
Prospectus is not required to be issued in the following cases.
(1) Where shares are not issued to the public.
(2) Where shares or debentures are offered to existing members or
debentures holders.
(3) Where shares/debentures offered are uniform in all respects with
previously issued shares/debentures.
(4) Where an offer is made in connection with a bona fide invitation to
a person to enter into an underwriting agreement with respect to
the shares/debentures.
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Misstatements in Prospectus
If there is any misstatement of a material fact in a prospectus or if the
prospectus is wanting in any material fact, there may arise
1) Civil liability – s. 50
2) Criminal liability- s. 51 & 472
A person who has been induced to subscribe for shares (or debentures)
on the faith of a misleading prospectus has remedies against the
Company, and the directors, promoters and experts.
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c) It must be untrue
A statement is deemed to be untrue if it is misleading in the form
and context in which it is included. Where an omission is
calculated to mislead, the prospectus is deemed in respect to such
omission, to be a prospectus in which untrue statement is
included. But a mere non-disclosure does not amount to
misrepresentation unless the concealment has prevented an
adequate appreciation of what was stated.
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The legal concept of capital crops up in the law of trusts and revenue law
as well as company law. In trust law it describes the original trust fund
and any assets which replace the items in the original fund. A distinction
is drawn between capital and income. In revenue law, there is the same
capital and income distinction. In modern company law capital is used to
cover:
Share
Share Certificate
A share certificate is merely a prima facie evidence of the fact that the
person stated as being the owner of the shares is the owner and that the
shares are paid up to the amount so stated (s. 83(1). On the other hand
the company cannot deny the truth of these statements against anyone
who relied on the certificate to his detriment unless the share certificate
is a forgery. (See Re Bahia and San Fransico Rly Co. (1868) LR 3 QB 584
and Reuben v. Great Fingall Consolidated (1906) AC 439)
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Share Capital
This means the capital raised by a company by the issue of shares. The
capital clause in Memorandum of Association must state the amount of
capital with which company is registered giving details of number of
shares and the type of shares of the company. A company cannot issue
share capital in excess of the limit specified in the Capital clause without
altering the capital clause of the memorandum of association. The
following different terms are used to denote different aspects of share
capital: -
Issued capital means the nominal value of the shares which are offered
to the public for subscription. A company does not normally issue capital
at once, so that issued capital in such case is less than the authorized
capital. The issued capital can never exceed the authorized capital, it can
at most be equal to the authorized capital which is the case when all
shares have been issued to the public.
Called-up capital this is that part of the issued capital which have been
called up on the shares. It is the total amount called upon the shares
issued and which the shareholders continue to be liable to pay as and
when called. I.e. if the face value of a share is Tsh. 500/- but the
company requires only Tsh 200/- at present, it may call only Tsh. 200/-
now and the balance Tsh 300/- at a later date. Tsh. 200/- is the called
up share capital and Tsh. 300/- is the uncalled share capital.
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Call on shares
Transfer of shares
A company may refuse to register the transfer of its shares and shall
within sixty days from the date, on which the instrument of transfer was
delivered to the company, send a notice of the refusal to the transferee
(S. 80(1)). If default is made in complying with this provision, the
company, and every officer of the company who is in default, shall be
liable to the default fine.
Forged transfer
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transferor at his address and inform him/her that such transfer has
been lodged and that if no objection is made before a specified day, it
would be registered. But in spite of these precautions forged transfer may
be registered.
Unless the articles provide some restriction on transfer all shares are
freely transferable. Listed companies can not impose any restriction
because of stock exchange rules. Restrictions take one of the following
forms:-
Such clauses usually allow the director to refuse to register any transfer
in their absolute discretion and without giving any reason thereof. The
court will not interfere unless the directors have acted in bad faith, nor
can they be compelled to state their reasons unless the articles require
them to do so. (See Re smith and Fawcett Ltd (1942) Ch. 304 and Berry
and Stewart v. Tottenham Hotspur Football (1935) Ch 718.) Any transfer
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Such clauses require members to offer their shares first to the existing
members before they may sell them to outsiders. A transfer in breach of
the pre- emption clause cannot be registered but it may operate as a
transfer of the beneficial interest.
Transmission of shares
This occurs where the rights encompassed in the holding of shares vest
in another by operation of law and not by reason of transfer. It occurs in
the following circumstances:-
Forfeiture of shares
If the shareholder having been called upon to pay on any call of his
shares fails to pay the call, the company has two remedies against the
shareholder
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Classes of shares
Ordinary shares will usually carry one vote per share although
companies may attach such voting rights as they choose. As preference
shares have only a restricted right to vote, ordinary shares will carry
voting control in general meetings. Non- voting ordinary shares can be
issued but they are not common.
Preference Shares
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These types of shares are usually issued to the founders of the company
as reward to their services. They are usually given rights to a portion of
the profits if the dividend on ordinary shares exceeds a certain fixed
amount. The rights attaching to them are determined by the
memorandum or articles.
Corporate shares
These are shares created by a company for issue to its employees. They
are, therefore, shares that serve special purpose. They are usually given
to employees as a means of winning their corporation with the company’s
management and owners. Normally, the company pays for them to the
employees as fully paid up shares. Since the employees will one day leave
the company employment, the company’s trustee will look after these
shares in the event of an employee leaving the company. These shares
are normally issued without voting rights but have the rights to earn
dividends.
Stocks
The conditions under which the shares may be converted into stock are
governed by Section 51 and 52 of Cap 212. These conditions may be
summarized has follows:
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The rights, duties and liabilities of all shareholders are clearly defined at
the time of issue of the shares. Once the rights of shareholders are fixed,
they cannot be altered unless the provisions of the Companies Act for
this purpose are complied with. The rights attached to the shares of any
class can be varied only with the consent of any specified proportion of
the holders of the issued shares of that class or with the sanction of
special resolution passed at a separate meeting of the holders of issued
shares of that class. However, the following conditions also must be
complied with: -
The rights of the shareholders who did not consent to or vote for
variation of their rights are protected by the Companies Ordinance. If the
rights of any class of the shareholders are varied, the holders of not less
than 15 per cent of the shares of that class, being persons who did not
consent to or vote in favor of resolution for variation of their rights can
apply to the court to have the variation cancelled. Where such
application is made to the court, such variation will not be given effect
unless and until it is confirmed by the court.
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Debentures
In Levy v Abercorris Slate & Slab Co. (1897) 37 Ch. D 260; Debenture
was said to mean a document which either creates a debt or
acknowledges it.
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Classes of debentures
According to negotiability
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According to security
According to permanence
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the charge together with the instrument by which the charge was created
must be delivered to the Registrar for registration.
Consequences of Non-Registration:
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DIRECTORS
A company from juristic point of view is a legal/artificial person. It
has no physical existence. As such it cannot act in its own person.
It can only do so only through human agency i.e. directors.
27
(1866) LR 2 Ch. App.77
28
(1854) 1 Macq 461
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Definition:
Section 2 of Cap.212 defines director to include any person
occupying the position of director by whatever name called.
Number of directors:
Every company must have at least two directors [s.186 & 187)].
Qualifications of directors
For a person to be appointed a director he must have the following
qualifications.
(1) Must be of the age of majority according to the law to
which he is subject.
29
(1878) 10 chD 450
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Directors as agents:
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Directors as Trustees
Directors are treated as trustees
(1) of the company’s money and property; and
(2) of the powers entrusted to them.
30
(1872) LR 8 Ch.App.149
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Directors are, however, not trustees in the real sense of the word
because they are not vested with the ownership of the company’s
property. It is only as regards some of their obligations to the
company and certain powers that they are regarded as trustees of
the company.
31
(1920) 1 Ch.77
32
(1878) 10 Ch.D 450
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11. POWERS
The Board of directors of a company is entitled to exercise such
powers, and to do all such acts and things, as the company is
authorised to exercise and do. However, wherever the law requires
authorization by the members in a general meeting, the directors
can do such act only on receiving such authorisation.
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Duties of directors
The fiduciary position occupied by directors, that which arise from their
being characterized as trustees and agents, gives rise to three major
duties.
1. Duty to act bonafide in the interest of the company (181 & 182(1)
A director of the company when performing his duties is required to act
honestly and in good faith and in what he believes to be the best interest
of the company.
The gist of this rule is that, where a director makes some judgment
which he is required or permitted to exercise under his company’s
constitution, if he does so bonafide, there is no liability for the
consequences of a faulty judgment.
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Romer, J. in Re: city equitable fire insurance co. Ltd laid down three
propositions which define the directors’ duty of care, skill and diligence.
First, that a director need not exhibit in the performance of his duties a
greater skill than may reasonably be expected of a person of his
knowledge and experience. This means that no minimum reasonable
amount of skill is required. Thus, the less knowledge and experience a
director has, the less skill is expected of him and the less likely he is to
be liable when something goes wrong. The standard of care expected of a
director is that of a reasonable man. This proposition positively
encourages incompetent people to accept directorship, because the law
expects little or nothing of them.
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DIRECTORS’ LIABILITY
Fraudulent trading (s.383)
Wrongful trading (s.384 CA)
Disqualification order (s. 197)
Criminal liability (s.314 Penal Code)
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COMPANY MEETINGS
I. Meetings of Members:
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The requisition must state the objects of the meetings and must be
signed by the requisitioning members. The requisition must be
deposited at the company's registered office. When the requisition is
deposited at the registered office of the company, the directors
should within 21 days, move to call a meeting. If the directors fail to
call and hold the meeting as aforesaid, the members who required
the meeting or any of them meeting the requirements at (a) or (b)
above, as the case may be, may themselves proceed to call meeting
within 3 months from the date of the requisition, and claim the
necessary expenses from the company. The company can make good
this sum from the directors in default. At such an EGM, any
business which is not covered by the agenda mentioned in the notice
of the meeting cannot be voted upon.
D. Class Meeting
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B. Meeting of creditors
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A notice calling a meeting must state the place, day and hour of
the meeting and must contain the agenda of the meeting. If the
meeting is a statutory or annual general meeting, notice must
describe it as such. Where any items of special business are to be
transacted at the meeting, an explanatory statement setting out all
materials facts concerning each item of the special business
including the concern or interest, if any, therein of every director
and manager, is any, must be annexed to the notice. If it is
intended to propose any resolution as a special resolution, such
intention should be specified.
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Proxy
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Quorum
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Chairman
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Motion
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Amendment
Kinds of Resolutions
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favour are more than votes cast against it. Voting may be by
way of a show of hands or by a poll provided 14 days notice
has been given for the meeting.
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It may be noted that the rule in Foss v. Harbottle will apply only
when the act done by the majority is one which the company is
authorized by its memorandum to do. Any act done by the majority
beyond the object clause is ultra vires and it can not be ratified
even if every shareholder is willing to do so. In the case of ultra
vires acts even a single shareholder can restrain the company from
committing those acts by filling a suit for injunction. Similarly the
majority rule will not apply if the act is illegal.
The rule in Foss v. Harbottle will not apply to such acts of majority
which constitute fraud on majority. Majority powers must be
exercised bona fide for the benefit of the company as whole. A
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2. if the company does not commence business within one year from its
incorporation or it suspends business for a whole year.
3. The number of its members falls below the minimum required i.e. 2
(i) If a creditor to whom the company owes more than fifty thousands
shillings has served a notice on the company in writing demanding that
his debt be settled and the company has failed to pay or secure or
compound that debt within 3 weeks.
(ii) If it is proved to the satisfaction of the Court that the company cannot
pay its debts
6. The Court is of the opinion that it’s just and equitable to wind up the
company e.g. (a) Where the whole object of the company was fraudulent
(b) Where the substratum of the company is gone33. (c) Where the
company is insolvent. (d) Where there has been mismanagement of funds
by the directors. (e) Where there is honest difference of a director and the
33
See pages 304 – 308 Saleemi & Another, Company law Simplified, Saleemi Publishers, Nairobi, 1997
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1. The Company i.e. the company itself may present a petition to the
court for winding up after it has passed a special resolution. A company
does not often represent a petition to have itself wound up by the court
as it can achieve this object more conveniently by passing a special
resolution to wind up voluntarily. If at the general meeting the company
resolves that it shall, however, be wound up by the court; it may present
a petition for winding up order.
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Where, before the presentation of the petition for the winding up of the
company by the court, a resolution has been passed by the company for
voluntary winding up, the winding up shall be deemed
When winding up order has been made no suit or other legal proceedings
shall be commenced against the company except by the leave of the
court.
An order for winding up a company shall operate in favour of all the
creditors and all of the contributories of the company as if it had been
made on the joint petition of a creditor and a contributory.
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VOLUNTARY WINDING UP
When the period fixed for the duration of the company in its
articles has expired.
When an event on the happening of which the company is to be
dissolved as per its articles happens.
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