MEMBERSHIP & SECURITIES

Beverly Akinyi -------Wambui WanguiPauline Atiika ------Wangui Mbugua

Company Membership

DEFINITION?

• Companies Act definition?• Two ways to become a member:A) Subscribing to the memorandum of the companyB) By agreeing to become a member of the company.

Subscribing to the Memorandum of the Company

• Subscribers shall be deemed to have agreed to become members of the company.

• On the company’s registration, the subscribers shall be entered as members in it’s register of members.

• What occurrence is this provision preventing?

• A shareholder is not necessarily a member of the company.

Agreeing to become a member of the company• Every person other than a

subscriber, who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company.• Through the following ways:

• Allotment: membership commences once his/her name is entered in the company’s register of members

• Transfer: where shares are bought from a company’s shareholder rather than from the company itself.

• Transmission: process by which ownership of shares changes automatically when the registered holder dies or becomes bankrupt.

• Compliance with s. 182: A person who has consented to be a director gives the statutory undertaking to take and pay for his qualification shares.

Cessation of Membership

• 1)Transfer: When an existing member sells their shares to a third party (only ceases to be a member if she transfers all her shares)

• 2) Forfeiture: Re: Esparto Trading Co.* A person whose shares have been forfeited shall cease to be a member with respect to the forfeited shares.

• 3)Surrender of shares.: A person’s membership will come to an end if he surrenders all his shares to the company with the approval of the directors.

• 4)Transmission on death of a member• 5)Transmission on bankruptcy of a

member• 6) Sale by a company under it’s lien :

where a company sells all the shares held by a member, the membership comes to an end from the moment the buyers name is entered in the register.

• 7) Redemption of redeemable preference shares

• Repudiation by an infant : Steinberg v. Scala

• Liquidation: liquidation terminates the membership of all former members from the moment it becomes effective.

Capacity to be a MemberGEN RULE: anyone who has the capacity to enter a contract may become a member of a company.A)Infants: Has capacity to buy shares and thus

to become a member. But it is voidable at his option. * Steinburg v. Scala

B)Personal representatives: on a members death their representative will be registered as a member

C)Corporations: A cp. May on authorization of it’s memorandum take shares in a company and become a member of it.

• Any allotment or transfer of shares in a company to it’s subsidiaries shall be void except:

• - where the subsidiary is concerned as personal representative/ trustee

• - where the subsidiary was a member of the holding company on the date of commencement of the Act.*help?

THE REGISTER OF MEMBERS

The Register of members is a document containing certain prescribed information on all company members.

Sec 112(1)- provides for the requirement of a register of members as well as its contents

Contents of Register

i. Names and postal address of membersii. The statement of shares held by each of

the membersiii. The amount paid or agreed to be so done

by each memberiv. Date each member was entered in the

registryv. Date any person ceased to be a member

NB where the company has converted any of its shares

into stock the register shall show the amount of stock held by each member instead of the amount of shares and the particulars relating to shares- Sec 112(1)

Further…. Failure to poses a register renders the company

liable as well as its officers who are liable in default. Sec 112(4)

Sec 120- register of members is prima facie evidence of its contents

Location

• The register of members is to be kept at the registered office of the company.

• It may also be kept at any other office of the company however, in this instance, the Registrar must be notified

• The registrar must be notified of change in location of the office within 14days of change. An officer in default of this shall b held liable to a default fine

- Sec 112(2)

Index of Members

• A company with more than 50 members required to keep an index of the names of the members. This is where the register of members does not have an index.

• Contents: name and information of member and account

• Alteration of register: co. has 14days to alter index

Sec 113(1)

Def: Co. is to strike out the name of a member issued

with a share warrant from the register and shall enteri. Fact of the warrant issueii. Statement of shares included in the warrantiii. Date of issue of the warrantSubject to the AOA; the bearer of the warrant shall be

entitled to having their name in the register on surrendering the warrant for cancellation.

Sec- 114(1)

Share Warrants

• The register is open for inspection to members during business hours and at a fee to the public

• Where copy is required, its to be availed with 14 days .

• Where company officer refuses an inspection; any officer in default will be liable for a fine

• Court may; compel inspection or direct furnishing of copies or make an order against officer in default Sec

115(1)• Sec 117- A company may close the register of names for not more

than a month on giving notice by advertisement or at the company office.

Inspection of Register

• Sec 118(1)-The High Court may rectify the register of members if

1. The name of a person is entered or omitted from the register without any cause

2. There’s default or unnecessary delay in entering on the register the fact of any person ceasing to be a member

• Application for rectification may be done bya) Aggrieved personb) Any memberc) The company

• On application court may ;a) Refuse applicationb) Order rectification

Rectification of the register

Re Sussex Brick Co. • Enunciated that rectification can be done

during winding up of the company.Burns v Siemens Bros Dynamic Works Ltd.

• Stated rectification can be done where a name stand s in the register without sufficient cause

Trans Atlantic Life Assurance Co. Ltd• Stated, rectification need not be deletion of a

name but of a set of shares of a shareholder.

Notice of Trusts

• Sec 119- there should be no notice of any trust either express, implied or constructive on the register

• Consequence; Company treats every person whose name is

on the register as owner of the shares and will therefore not be liable to beneficiaries of the trust if a sale is in breach of the trust

Simpson v Molson Bank

Notice contd.

The company is not a trustee for persons claiming shares under equitable titles

Societe Generale de Paris v WalkerHowever, the owner of an equitable

interest may protect his interest by serving the company a stop notice/ notice in lieu of distringas.

Branch Register

• Sec 121(1) -Where AOA gives authority, company may have a branch register in a country aside from Kenya, within the Commonwealth. Such register must be kept in the same manner-sec 122

• Sec 121(2)-Registrar of Companies must be informed of its existence, change or discontinuance

The Annual Return

• Sec 125(1) – provides that every company with a share capital must at least once a year make a return to the Registrar of Companies

NB No return is required in the year of incorporation

save for where S. 131 requires a General Meeting

• Contents of the return are provided under in Part 1 of the 5th Schedule.

• Sec 127(1) – the return must be completed with 42 days of the annual G.M and signed by a director and the secretary and delivered to the Registrar within 42 days.

If not complied with the company and any officer in default is liable

Documents to be annexed

Sec. 128(1)- Annexed to the annual return shall be:

1. A copy of the balance sheet brought before the company during the G.M of the year the return concerns. To be signed by a director and secretary.

2. Copy of the auditor’s and director’s report on each balance sheet.

NB Provisions don’t apply to a private co. save for where

one shareholder is a public co.

Certificate to Accompany Annual Return

• Sec 129- the annual return of a private co. is to be accompanied by certificate signed by a director and the secretary of the company showing; Since its incorporation, the company has not issued

any invitation to the public to subscribe for shares or debentures

That the excess of 50 are past or present employeesThe certificate is only made where members are more

than 50

COMPANY SHARES

Does the law define what a share is ?

• What does Section 2 of the Companies Act state?

means share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied.

Farwell J in Borland’s Trustee v Steel Brothers • Attempted to place a juridical definition, where

he acknowledged that • 1. a share is the interest of a shareholder in the

company measured by a sum of money for the purpose of liability in the first place and of interest in the second place

• 2. but also consisting of mutual covenants entered into by all shareholders inter se in accordance with section 22 of the Companies Act

• 3.the contract contained in the articles of association is one of the original incidents of the share .

• 4. a share is not a sum of money but an interest measures by a sum of money and made up of various rights contained in the contract , including the right up of various rights contained in the contract including the right to sum of money of more or less amount

Does this definition serve its purpose ?

• It all depends on the angle in which it may be applied , we should note that the above definition serves to satisfy the juridical nature as attributed by the Good Justice .

• It is more so inclined to the rights of an individual rather than the amount of capital he owns as a share of the company. Hence the legal effect it imposes.

• What is a stake ?

What is the legal status of a shareholder?

• Such individuals automatically became subjected to the obligations imposed by the Companies Act, more so the company’s memorandum of association and the company’s articles of association. He/ she also becomes entitled to the rights

• What are the rights and privileges that a shareholder experiences ?

Shareholders’ rights

• 1. the right to object on a proposed change of company’s object section 8(2)

• 2. to make an application to the court for cancellation of a proposed variation of the rights attached to a particular class of shares 74(1)

• 3.to inspect the without a fee the holders of debentures of the company

• 4.to inspect freely copies of the instruments creating charges and the company’s register of charges 106(1)

• 5.to inspect without a fee the register of members of a company 115(1)

• 6.to demand for an extraordinary meeting 132(1)

• 7.to convene an extraordinary meeting of the companies if the directors fail to do so 132(3)

• 8.they have the right to appoint a proxy who is a proxy?. 136(1)• 9.the right to receive a copy of every

balance sheet together with a copy of the auditor’s report 158(1)• 10.to apply for a court order in cases of

oppression what is oppression in this context ?

• 11.to apply to the court for winding up of the company

• The MEMRATs previous outlined confer certain rights and privileges to shareholders. Such rights are concerned with,

• (a) dividends• (b) return of capital on a winding up or authorized

reduction of capital hence capital right • (c) attendance of meetings and voting • N.B the rights conferred by the C.A cannot be

altered but the rights presumed by the MEMERATS can be altered, this takes place in company meetings

CLASSES OF SHARES

CLASSES OF SHARES

• The classes or types of shares which can be created and issued by a company are NOT prescribed by the Companies Act.

• They depend on the provisions of the company’s constitution, usually the articles of association.

General Classes of Shares Issued

• Ordinary Shares• Preference Shares• Participating Preference Shares• Redeemable Preference Shares• Deferred Shares

A. Ordinary Shares

• A share which has no special rights attached to it• They are also known colloquially in business circles as

‘equity shares’• Income Rights

• The holders of the ordinary shares are the owners of the company who are entitled to share the company’s profits

• Dividends paid on the ordinary shares are not limited but vary according to the size of the company’s profits

• Capital Rights• If a company is wound up and there is a surplus, the holders of

ordinary shares would usually be entitled to share the surplus assets ratably.

‘A’ ‘B’ or ‘C’ Ordinary Shares

• A company’s articles may authorize it to issue ordinary shares with different rights (usually voting rights).

• If such shares are non-voting, control of the company would be vested in the holders of the ordinary shares which have voting rights.

B. Preference Shares

• ‘preference’ - usually arises from a right expressly given in the company’s articles of association or in the terms of issue of the shares

• The right is to receive an annual dividend of a fixed amount before any dividend may be paid on ordinary shares or other classes of shares

• ‘preference’ may also relate to the repayment of capital on a winding up

Preference Shares - Rights• 1. All shares are deemed to confer equal rights

and impose equal liabilities• Birch v Cropper• A class of shares can only have less rights if the

holders expressly renounced those rights on their admission to membership of the company

• 2. The fact that a company’s divided into separate classes of shares does not create any implied differences between the different classes.• In the absence of any express provisions to the

contrary, each class has the same rights as the other classes.

Preference Shares - Rights• 3. If any preferential right is expressly stated, the

statement is presumed to be exhaustive so far as the right is concerned.• If preference shares are given a cumulative preferential dividend

i.e. the whole of what the holders are to look to from the company• Will v United Lankat Plantations Co.

• If preference shares are given a preferential right to a return of capital on winding up they are assumed to be non-participating in surplus assets• Scottish Insurance Corporation v Wilsons & Clyde Coal Co.

• 4. If preference shares are not given a preferential right to a return of capital, they may participate in surplus assets with ordinary shares to the extent provided by the articles• Dimbula Valley (Ceylon) Tea Co. Ltd. V Laurie

Preference Shares - Rights• 5. If a preferential dividend is provided for, it is

presumed to be cumulative• Webb v Clarke• The presumption will not apply if:

• The shares are expressly declared to be non-cumulative; or

• The preferential dividend is stated to be payable out of the ‘net profits of each year• Staples v Eastman Photogenic Materials Co,

• 6. Preferential dividends are only payable ONLY if previously declared, unless the articles or terms of issue provide otherwise

7. Preferential dividends are not payable in a winding up unless previously declared unless the terms of issue provide otherwise

Re: Crichton’s Oil CoWhen arrears are payable, they are payable only if surplus assets are available

Re: E.W. Savoy Ltd – arrears were made payable only up to the day of winding up

C. Participating Preference Shares

• They would have a right to participate with the ordinary shares in a further dividend after the company has paid an equal rate of dividend on the ordinary shares.

• Additionally, the terms of issue may provide that in a winding up, the preference shares shall ‘participate’ in surplus assets available after the repayment of the capital paid up on all the company’s shares.• In the absence of the above provision, the preference

shares are not entitled to share in the surplus assets

D. Redeemable Preference Shares

• S 60(1) of the Companies Act• Provides that a company limited by

shares may, if so authorized by the articles, issue preference shares which are or at the option of the company, are to be liable to be redeemed.

E. Deferred Shares

• Rarely issued by companies registered in Kenya

• When issued, they usually confer the same rights as ‘founder’s shares’ which are issued to the founders of the company on whom they confer special (usually disproportionate) voting rights and rights to share in surplus on winding up.

F. Unclassified Shares

• Denotes the unissued shares of a company• Occurs when the whole of the authorized share

capital is not issued• The unclassified shares are typified according to

the rights attached to them at the time of issue.• Table A, Article 2 – ‘any share in the company

may be issued with such preferred, deferred or other rights…as the company may from time to time by ordinary resolution determine.

END *for now…