Share Companies

Nature
Formation
 Share Companies
Reading assignment
• Distinction between PLC and Share companies.
• Merits of share Company
• Difference between
– Holding: Holding company is an organization that has the
power to control the affairs of another company by virtue
of holding more than 50% of its equity.
– Subsidiary [A subsidiary company is a company of which at
least 50% of the equity is controlled by another company,
sometimes referred to as the parent or holding company] and
– Sister companies: sister companies refer to subsidiaries that
are related solely by virtue of the fact that they are owned by
the same parent company.
 Basics
• Advantages of Investing in a Share Company
– Potential for high returns
– Diversification of investment portfolio
• Risks involved in Investing in a Share
Company
– Market volatility
– Company performance
– Changes in the economy
 Basics: shares
• A share is a unit of ownership in a company
• Shares allow individuals to own a part of a
company and share in its profits or losses
• Types of Shares
– Common Stock: Gives owners voting rights and a
share in company profits
– Preferred Stock: Prioritizes dividends over
common stock, but no voting rights
 Basics: shares
Shareholder Rights
– Voting: Common stockholders have the right to
vote on company decisions
– Dividends: Eligible shareholders receive a portion
of company profits as dividends
– Access to company information: Shareholders
have a right to access information about the
company's performance
Risks and Rewards of Owning Shares
– Risks: Share prices can be volatile and subject to
market changes, companies can go bankrupt
– Rewards: Shares can provide long-term growth
potential and regular income through dividends
 Share Companies
Nature
 A share company is a legal person whose capital is fixed in advance and divided
into shares and whose liabilities are met only by the assets of the company.
 As per article 245, a share company is
 a company whose capital is fixed in advance;
 The capital is divided into shares;
 Whose liabilities are met only by the assets of the company;
 The obligation of the shareholders shall be limited to making the
contribution they pledged to make to the company.
 The assets of a company are the sum total of what the company owns.
 Because of limited liability enjoyed by members and strict regulation of
management, a share company attracts a large number of passive investors.
 Thus Share Company is the business organization for accumulation of large
capital and suitable for many of capital intensive investments.
 It is association of capital rather than association of persons as distinct from
partnerships.
 CAPITAL
 The capital of a share company should be fixed in
advance.
 Capital is the original value of contribution from
members for which corresponding shares are issued.
 The value that a single share represents is known as par
value.
 Thus capital is the sum total of par values or sometimes
known as nominal value.
 Thus capital is part of the asset of the company.
 The capital remains fixed while the assets may be
accumulated more and more.
 CAPITAL
 Capital of the company means what is collected from subscribers
in the form of sale of shares. See 245. So, it does not include
money obtained through loan or other means.
 Though capital is only such amount collected from subscriber
through sale of share, the company, however, obtains resources
both from Equity capital and Debt.
 The capital shall not be less than 50,000 Ethiopian birr. [Art. 247]
 The rational for such requirement is to prevent failure of
companies due to undercapitalization.
 Accumulation of capital often results in efficient operation or
what economists say economies of scale.
 The amount of the par value of each share may not be less than 100
(hundred) Ethiopian Birr. [Art. 247]
 CAPITAL

 In addition to setting a minimum capital, the law also

requires the capital already fixed should be fully
subscribed.
 Subscription means promise to purchase shares when
the shares issued are offered for the public.
 The capital of the company is fully subscribed only when
all of the shares have got investors who promised to buy
and becomes a shareholder.
 Subscription by an investor does not mean that he
should pay the par value immediately.
 CAPITAL
 No requirement that all the capital should be paid up.
 But, as per art 254 (1(b)) one quarter at least of the par value of the shares
should be paid up and deposited in a bank, in the name and to the account
of the company. [281.1]
 Such money may not be withdrawn from the bank account until the company
is registered. 254 (2), 261.2.d
 But, tthe remaining value should be paid within a period of five years from
the date of registration of the company. [281 (2)]
 But, a shorter period is provided in the MOA
 Depositing in the bank rather than paying to founders is preferred to avoid
potential loss of subscribers’ money and encourage more investment.
 Shares representing contributions in kind shall normally be fully paid
at the time of formation of the company and not later than the day of
registration of the company. [Art. 257.5] [261.2 (c)] [255.7 MOA]
 However, formalities regarding transfer of such property to the company shall
be completed within six month from the date of registration of the company.
[282.1] [Art. 257.5]
 Types capital: based on mode of payment

1. Subscribed capital:
 Unless otherwise required subscribers need not pay full amount
of their shares. [Art. 338, 342].
 Subscribed capital represents a portion of the authorized capital that
potential shareholders have agreed to purchase.
 This is an amount of capital that is required to be written on MoA
as per art. 313 (5).
2. Paid-up Capital
 the amount that has been received by the company through the
issue of shares to the shareholders. 
3. Uncalled Capital
 Capital that a company has in the form of shares that have not been
completely paid for by shareholders.
Formation of Share Company
 Formation
• A share company does not come into existence spontaneously.
• Rather it results from the activities of courageous and risk
taker persons known by the name founders.
 General Requirements
Share company may not be formed until [art. 254]:
1) Minimum of five members 252.2, 248.3
2) Minimum initial capital 247
3) Full subscription of the fixed capital 254 (a);
4) At least one quarter of the par value of shares sold in cash
has been paid up and deposited;
5) The formation of a share company shall be by a
memorandum of association. [Art. 255].
 The commercial code recognizes two types of formation.
 Formation as between founders [art. 252]
 Formation of a company by public subscription [art. 259-
264]
 Formation as between founders
 Formation among founders does not need appeal to the public for
fund.
 The founders posses or borrow the required capital and establish
the company among themselves privately.
 A company formed in such manner is sometimes referred to as
closed company.
 It is usually formed among family member or close friends. No
appeal to the public, no prospectus, etc.
 It is likely that they all are involved in the formation process and
are entitled to same rights and obligation.
 Such company there shall be founders and other ordinary
shareholders only if at later time the company called for public
subscription to increase capital.
 Formation as between founders
 The old Code under art. 316, provides four criteria needs to be
fulfilled in order to form companies among founders.
 that all the shares have been allocated;
 At least one quarter of the share value must be deposited in the
bank
 In kind contribution shall be made in accordance with art. 315
and
 Provided administrative organs of the company: Board, auditor
and manager
 Formation as between founders

 But, [under 252] the new Code stipulated that Individuals may,
without offering shares for public subscription, establish a share
company as between themselves, by fulfilling the requirements
of this Code for the formation of a share company.
 The founders shall not be less than five;
 No promoters;
 No prospectus;
 General requirements under 254 shall be fulfilled;
 Formation as between founders
Special rules applicable:
 the contribution in kind shall be verified by the founders of the
company Art. 257.4 see 257.3 for comparison;
 The provisions of Article 259-264 are not applicable these are;
Prospectus;
Offer or a application for share;
Formation audit;
Meeting of Subscribers
 The obligation of promoters are assumed by founders [252.3];
 Absence of these procedures makes it easier to form closed
companies.
 A share company shall be registered in the commercial register
regardless of the manner in which it was formed. [Art.265]
 But, upon application for registration it is not required to produce
some documents see Art. 265.3 only MOA
 Formation through public subscription

 Commonly, ventures that need large capitals are

formed via public subscription.
 The provisions of Article 259-264 of the Code shall
apply to the formation of a company by public
subscription. [Art. 258]
 Four major steps can be identified in these provisions:
[these are in addition to general requirements under
art. 254]
 Step 1: Offer for subscription through prospectus [Art. 259]
 Step 2: Application for Shares [Art. 260]
 Step 3: Auditing Formation Procedure of the Company [Art.
261.]
 Step 4: Meeting of subscribers
Step 1: Offer for subscription through prospectus [Art. 259]

 An offer to subscribers shall be made by a prospectus

signed by all the founders.
 A company's prospectus is a formal legal document
designed to provide information and full details about an
investment offering for sale to the public.
 Contents prospectus [Art. 259]

The prospectus shall include the following:

 the draft memorandum of association;
 a summary of the expert valuation report, if there are
contributions in kind
 the date until when the subscribers are required to discharge
their obligations to pay;
 the price at which shares are to be issued;
 Contents prospectus [Art. 259]

The prospectus shall include the following:

 the amount to be paid up on the shares until the general
meeting of the subscribers;
 the place where and the time when applications to subscribe
shares shall be made;
 the anticipated time within which the formation of the
company is to be completed and the company obtain legal
personality;
 the time set for the completion of the formation of the
company shall not exceed five years under any
circumstances. (259 (1) (g))
 Step 2: Application for Shares [Art. 260]

 Applications for shares shall be submitted by filling out a

form prepared for this purpose
 Share Application Form Shall Contain:
 The date for application
 The name and address of applicant;
 the number of shares he seeks to purchase
 A declaration that that he has read:
 the prospectus,
 the draft memorandum of association; and
 the expert valuation report
 Step 3: Auditing Formation Procedure of the Company [Art.
261.]
 Once the requirements relating to the formation of the company have
been completed, the formation of the company verified by external
Auditors [Art. 261]
 The Audit shall cover the following: [261.2]
 the promoters meet the requirements set by law regarding
promoters;
 full subscription of the capital of the company;
 the contributions in kind have been effected to the company,
valuated by experts and that the expert valuation is correct;
 deposit of cash collected from subscribers in a bank account
opened in the name of the company; (why transfer from the
blocked account to company account?)
 the fulfilment of other requirements set by the law and
memorandum of association for the formation of the company.
 Auditing Formation Procedure of the Company [Art. 261.]

 The Audit report shall be submitted by the Auditor to

the meeting of subscribers and approved by the meeting.
3. Meeting of subscribers 262, 263
 If sufficient capital is collected via such application or the
promoters believe that the collected capital is enough or when the
time for applications has expired, the promoters shall call a
meeting of the subscribers.
 Upon completion of the Audit of company formation, the
promoters shall forthwith call a meeting of subscribers. [262]
 This meeting is to be attended by all subscribers.
 This meeting would be called only where the company is formation
is successful
3. Meeting of subscribers 262, 263
 As per article 263, the purpose of this meeting is to:
 verify that the requirements relating to the formation of the
company have been complied with;
 deliberate on and approve the final text of the memorandum of
association of the company;
 approve the report of the promoters and formation Auditors;
[261.3]
 approve the valuation of contributions in kind, if any,
 determine the share in profits allocated to the promoters;
 make appointments to organs of management of the company to
be made by the meeting of subscribers under the law and the
memorandum of association.
 Formation
4. Registration and deposit of documents [265]
 Registration is the last step in the formation of a company.
 A share company shall be registered in the commercial register
regardless of the manner in which it was formed.
 Share company shall not be registered unless the Audit report
confirms the requirements listed under 262 (2) have been complied
with.
 Spec. Rules Applicable to Resolutions of Subscribers`
Meeting
 Shall be drawn up and signed by all the promoters or founders and
the members of the board of directors that were elected at the
meeting;
 All documents submitted to the meeting shall be annexed to the
resolutions. [This may include expert valuation of in kind
contributions, formation audit report, MOA etc.]
 Persons who contributed in kind may not vote with
regard to a resolution approving the valuation of their
contributions;
 Promoters may not vote with regard to a the special allocation of
profits to them;
 Unanimous approval of subscribers is needed to make amendments
of substance to the draft MOA;
Registration and deposit of documents
 Formation of share companies culminates in its registration.
 (2) The following documents shall be deposited: 265.3
 (a) the memorandum of association;
 (b) the prospectus;
 (c) the minutes of the subscribes‘ meeting and all complementary
documents.
 Who is responsible for registration?
 the registration of the company shall be effected by the promoters or, as
appropriate, the founders or any other person having a power of attorney from
the promoters or founders. Art. 265.2
Registration and deposit of documents
 Where the company has not been registered within
the time limit set in the prospectus prepared pursuant to Article
259 subscribers who do not wish to continue as members of the
company may request the refund with bank interest of the paid-up
sums. [250.1.g]
 Where the promoters have failed to notify in due time the organ
entrusted with the registration of business organizations pursuant
to Sub-Article (3) of this Article to refund the subscriber, they shall
be jointly and severally liable to pay the difference between bank
interest and legal interest commencing from the date on which they
should have made the notification. [Art. 254.3.]
Defective Formation and its Effect
 after all the above painstaking tasks have been performed, the formation
of the company may be found to be defective.
 As companies arise out of MOA the defect may result from non-
fullfilment of fundamental elements of valid contract; or
 The defect may result from non-fullfilment of other formality
requirements;
 like failure to hold meeting of subscribers'
 failure to get at least 1/4 of subscribed capital paid
 In our law, a share company has a legal personality up on registration and
publication notwithstanding that all the legal requirements of formation
have not been complied with. [265.1, ]
 Accordingly, if the requirement of registration is completed, the company
will have legal personality regardless of the existence of other defects.
 If there is no registration, the company will not have legal personality.
 However, it does not mean that other defects of formation have
no effect.
 The existence of the share company would be contested if the
interests of creditors or shareholders are endangered due to the
non fulfilment of the legal requirement. [266.2]
 Accordingly, there are two effects:
 The company may be dissolved;
 Swift corrective measures may be taken to rectify the defect.
 Article 324(3) of the old Code sets three months as period of
limitation for the creditors or shareholders to submit application for
dissolution based on the defects of formation.
 Art. 266.2 of the new Code extended the period for one year.
• Are you now able to advice someone on share
company formation?