COMPANY LAW NOTESBBA350

UNIT ONE

INTRODUCTION

COMPANY INCORPORATION OR REGISTRATION

According to Chief Justice Marshall of USA, “A company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of law, it possesses only those properties which the character of its creation confers upon it either expressly or as incidental to its very existence”. Another comprehensive and clear definition of a company is given by Lord Justice Lindley, “A company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss (as the case may be) arising there from. The common stock contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted”. According to Haney, “Limited Company is a voluntary association of individuals for profit, having a capital divided into transferable shares. The ownership of which is the condition of membership”. From the above definitions, it can be concluded that a company is a registered association which is an artificial legal person, having an independent legal, entity with a perpetual succession, a common seal for its signatures, a common capital and carrying limited liability.

CHARACTERISTICS OF A COMPANY

The main characteristics of a company are :

1. Incorporated association. A company is created when it is registered under the Companies Act. It comes into being from the date mentioned in the certificate of incorporation.

2. Artificial legal person. A company is an artificial person. It is not a natural person. It exists in the eyes of the law and cannot act on its own. It has to act through a board of directors elected by members. It was rightly pointed out in Bates V Standard Land Co. that “The board of directors are the brains and the only brains of the company, which is the body and the company can and does act only through them”. But for many purposes, a company is a legal person like a natural person. It has the right to acquire

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and dispose of property, to enter into contract with third parties in its own name, and can sue and be sued in its own name.

3. Separate Legal Entity:

A company has a legal distinct entity and is independent of its members. The creditors of the company can recover their money only from the company and the property of the company. They cannot sue individual members. Similarly, the company is not in any way liable for the individual debts of its members. The property of the company is to be used for the benefit of the company and nor for the personal benefit of the shareholders. In the same manner, a member cannot claim any ownership rights in the assets of the company either individually or jointly during the existence of the company or in its winding up stage. At the same time the members of the company can enter into contracts with the company in the same manner as any other individual can.

The principal of separate of legal entity was explained and emphasized in the landmark case of Salomon v Salomon & Co. Ltd. The facts of the case are as follows : Mr. Saloman, who operated as a sole proprietor of a very prosperous shoe business, sold his business for the sum of £ 39,000 to Saloman and Co. Ltd, a newly incorporated company which consisted of Mr. Saloman himself, his wife, his daughter and his four sons. The purchase consideration for Mr. Saloman’s prosperous shoe business was paid by the company by way of:

1. Allotment of 20,000 shares 2. Creation of £ 10,000 debentures in favour of Mr. Saloman (as secured

creditor); and 3. The balance paid to Mr. Saloman in cash.

The debentures carried a floating charge on the assets of the company. One share of £ 1 each was taken–up by the remaining six members of his family. Saloman and his two sons became the directors of this company. Saloman was the Managing Director. After a short duration, the company went into liquidation. At that time the statement of affairs’ was like this:

Assets Liabilities£ 6000 £ 10,000 - Saloman as Debenture holder

£ 7,000 - Unsecured creditors

The companies’ assets were running short of its liabilities of £11,000. The unsecured creditors claimed a priority over the debenture holder on the ground that company and Saloman were one and the same person. But the House of Lords held that the existence of a company is independent

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and distinct from its members and that the assets of the company must be utilized in payment of the debentures first, in priority to unsecured creditors. Saloman’s case established beyond doubt that in law a registered company is an entity distinct from its members. The principle established in Saloman’s case also been applied in the case below.

In the case Lee V. Lee’s Airforming Ltd. (1961) A.C. 12., Lee held 2999 shares of the 3000 shares in Lee’s Air Forming Ltd. He voted himself the Managing Director and also became Chief Pilot of the company on a salary. He died in an aircrash while working for the company. His wife was granted compensation for the husband in the course of employment. The Court held that Lee was a separate person from the company he formed, and compensation was due to the widow. Thus, the rule of corporate personality enabled Lee to be the master and servant at the same time. The principle of separate corporate personality of a company was also emphasized in the case Trustees of Darmouth College v Woodward (1819) by Chief Justice Marshall of USA when he defined a company “as a person, artificial, invisible, intangible and existing only in the eyes of the law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as accident to its very existence”.

4. Perpetual Existence. A company is a stable form of business association. Its existence is not affected by the death, insolvency or retirement of any or all members (shareholders) or director (s). The Law creates it and only the law alone can dissolve it. Members may come and go but the company can go on forever.

5. Common Seal. A company being an artificial person cannot sign documents for itself. It acts through natural person who are called directors. But having a legal personality, it can be bound by only those documents which bear its signature. Therefore, the law has provided for the use of common seal, with the name of the company engraved on it, as a substitute for its signature. Any document bearing the common seal of the company will be legally binding on the company. A company may have its own regulations in its Articles of Association for the manner of affixing the common seal to a document. If the Articles are silent the model set of articles appended to the Companies Act will apply.

6. Limited Liability: A company may be company limited by shares or a company limited by guarantee. In company limited by shares, the liability of members is limited to the unpaid value of the shares. For example, if the face value of a share in a company is K100 and a member has already paid K70 per share, he can be called upon to pay not more than K30 per

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share during the lifetime of the company. In a company limited by guarantee the liability of members is limited to such amount as the member may undertake to contribute to the assets of the company in the event of its being wound up.

7. Transferable Shares. In a company, the shares are freely transferable. However, in the case of a private company, the articles may restrict the right of shareholders to transfer their shares.

8. Separate Property: As a company is a legal person distinct from its members, it is capable of owning, enjoying and disposing of property in its own name. Although its capital and assets are contributed by its members, they are not the private and joint owners of its property. The company is the person in which all its property is vested and by which it is controlled, managed and disposed of.

9. Delegated Management: A company is an autonomous, self-governing and self-controlling organization. Actual control and management is delegated by the members (shareholders) to their elected representatives or agents, known as directors. The directors look after the day-to-day workings or affairs of the company.

ADVANTAGES AND DISADVANTAGES OF INCORPORATION; ADVANTAGES 1. Limited Liability for members;2. BorrowingIf the company borrows money from a bank, the bank will automatically require the directors of the company to give personal guarantees (i.e. to contract that they will pay back the bank if the company fails to do so). The bank may also require security over the company's assets.The floating charge is a factor in the choice of business format because only registered companies can create floating charges. A sole trader or partnership, with exactly the same assets, cannot give this type of mortgage3. Trade suppliersTrade suppliers may also require personal guarantees. This tends to happen only with major suppliers of the business, e.g. breweries to pubs/winebars, petrol companies to garages, franchisors to franchisees.4. ContinuityOne of the advantages of a registered company is that, being a separate legal entity, it keeps going indefinitely, regardless of who owns or directs

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it. This can be an advantage where ownership or control is going to change.5. Outside InvestmentCompanies are designed as investment vehicles. It is also often the case that it will be easier to acquire further investment for the business if it is a limited company again mainly due to the benefit of limited liability. The company structure is ideal for offering outside investment in the business as appropriate amounts and types of shares can be set up. Investment in a partnership is legally risky as someone who shares the profits of a partnership may be regarded as a partner and may incur unlimited liability for all the debts

DISADVANTAGES

1. Formalities Registering a limited company and the continuing registration requirements are additional formalities which do not apply to sole traders or partners. Keeping the registered information up to date, both at Companies Registry and on the company's own registers. Information to Companies Registry must be sent on the right statutory forms. There is also the submission of annual returns and accounts. Accounts must be audited. Holding board and General meetings and keeping of minutes.

It also appears to be an inappropriately complex organizational form for small businesses, where the Board of Directors and the shareholders are often the same people (we discuss this further below). A sole trader or partnership is not involved with any of these.

2. Flexibility and complexityA sole trader/partnership structure is very flexible provided the ownership and control patterns are simple, i.e. a small number of people owning and contributing to the business in a very straightforward way.Further, the company structure, with the possibility of creating different classes of shares and having directors who may, but need not be, shareholders, allows much more complex patterns to created.

ARTICLES OF ASSOCIATIONA document that specifies the regulations of a company's internal operations. They can be said to be the company's constitution. They define the responsibilities of the directors, the kind of business to be undertaken, how meeting are held and the means by which the shareholders exert control over the board of directors.

MEMORANDUM OF ASSOCIATION

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This is a document that governs the relationship between the company and the outside. It is no longer in use in Zambia.

DISTINCTION BETWEEN COMPANY AND PARTNERSHIP The difference between a company and a partnership is as follows:

COMPANY PARTNERSHIPMode of creation By Registration By Agreement Legal Status Distinct Legal Entity Firm and partners

are not separate from members,; no perpetual succession. separate entity;uncertain life

Liability Limited liability of members Unlimited joint and several liability of partners

Transfer of ownership

Free transfer of interest by way of shares

No free transfer of interest or ownership

Legal formalities Statutory books, No legal formalities Duration and dissolution

Must comply with the procedures under the Companies Act. A company still exists even if when shareholders die.

 May be dissolved by agreement between the partners. A partnership “dies” when the partners die.

Authority Divorce between ownership and management,

‘Partners have a right to share the management and ownership

Death of an “owner”

No effect Dissolves the partnership

TYPES OF COMPANIES: A limited company can be of various types. The following are the important types of companies:

1. Classification of Companies;

Under the Companies Act, there are two types of Companies;

i. Public Limited Companyii. Private limited Company

Under Private Limited, we have three sub categories;a) Private limited by Sharesb) Private limited by Guaranteec) Unlimited Company by Shares

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COMPANY NAMES AND TRADEMARKS

A company's name is an important asset. When starting a new business or changing a company's name the name has to be chosen carefully to avoid infringing the rights of established businesses, and to ensure that it complies with the requirements of the Companies Acts. It may also be important to have the name registered as a trade mark. Having the name registered as a trade mark will give it much greater protection.PICKING A COMPANY NAME Great care must be taken when setting up a company to ensure that it has a name which meets all the statutory requirements, does not infringe the rights of others (who may bring legal proceedings involving both cost and disruption to the new business) and which is adequately protected against others who may seek to use the name in the future. A good company name must have three elements; distinctive element, descriptive element and a legal ending. GUIDELINES FOR NAME APPROVALA proposed company name must:

1. End in 'Limited' or 'PLC' (etc.),2. not be the same as one already registered,3. Not suggest any connection with the government4. must not be offensive.5. Must not be prefixed with the word “Zambia” unless the

Government has an interest. Care must also be taken to see that the name is not too like one already registered because of the risk of being sued for passing off.

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COMPANY LAW NOTESBBA350

UNIT TWO

DUTIES OF PROMOTERS A Promoter is not an Agent of the Company which he is forming as it does not exist. Upon incorporation he however stands in a fiduciary position towards the company. The duties of a promoter are of good faith, fair dealing and full disclosure. These are basically categorised into 3 namely: 1. A duty not to make a secret profit at the expense of the company

A profit is not secret if it is disclosed which must be full and frank to either (a) An Independent Board of Director [ see Erlanger v new Sombrero phosphate Co. (1878) 3 APD Gluckstein v Barnes (1900) Ac

(b) The existing and Intended shareholders [This was acceptable in the case of Salomon v A Salomon & Co (1897) Ac

2. When promotion has started the promoter must account to the Company for the benefit of any subsequent contract for the acquisition of property which he intends to sell to the Company since this belongs in equity to the Company which can insist on taking in on cost (see Re Leads & Harley Theatres varieties Ltd (1906), Re cape Breton Co (1885) no disclosure renders it liable to rescission. 3. A promoter must not exercise under influence or fraud and must not hide his interest.

REMEDIES OF THE COMPANY The Company has an option of any or all of the following redresses against an erring promoter:1. Rescission as been in Erlanger case which remedy will however not be available if; the per (i) The parties have bona fide acquired rights for value [See Re Leeds & Hanley Theatres of varieties Ltd. [(1902)] 2.Recovery of Secret Profit The Company may affirm the contract but still proceed with an action against the promoter for recovery of the secret profit See Gluckstein v Barnes 3 Damages for breach of fiduciary duty and a deceit damages may be awarded together or in lieu of rescission

REMUNERATION OF PROMOTERS

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Unless the contract is under seal a promoter cannot claim for remuneration for work done upon incorporation as same will be past consideration even if provided for in the articles.

 PROMOTION AND PRE-INCORPORATION CONTRACTS

PromotersPromotion is a term referring to the process leading to the formation of a registered Company. Promoters are the leading lights or “Mid wife” of the Company. Every company is formed or “promoted” by someone, known as a promoter, whose role was defined in Twycross v Grant [1877]  “One who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose”. This classic definition includes anyone who either: 

1. authorises the drafting of legal documents such as articles and forms for incorporation

2. One who nominates first directors, first company secretaries,3. One who purchases or rents property for the proposed company4. Sets up the company’s business (including entering into pre-

incorporation contracts);5. But does not include those who act merely in a professional capacity

acting on the instructions of a promoter, for example a solicitor or an accountant.

What is the issue in company law with regard to Promoters? In the 19th century, it was very common for promoters to sell their own property to a newly formed company at an inflated price, or to acquire assets for the company and receive a commission from the seller. This saw some notorious company flotations in which unscrupulous promoters benefited themselves at the expense of the investors.  The Courts then began to impose a fiduciary duty on promoters similar to that imposed on agents. The general rule that emerged was that in order to keep any profits made from property acquired while acting as a promoter and which is then sold to the newly formed company, a promoter must disclose any profit or potential conflict of interest to:

a) An independent board of directors, or

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b) Existing or intended shareholders. Erlanger v New Sombrero Phosphate Co [1878]: Erlanger, while acting as a promoter, acquired on his own account but in the name of another (a “nominee”) the lease of a phosphate mine in the West Indies for £55,000. He then proceeded to sell the mining rights to the newly formed company for £110,000. The purchase was approved by the board of directors of the company, who had been appointed by Erlanger and were either under his influence or simply did not have time to give to the enterprise. The prospectus that offered the company’s shares to the public did not disclose the promoter’s profit. When the original board of directors was replaced, the new directors, on discovering the swindle, sued Erlanger to have the contract for the sale of the mining rights rescinded.

It was held that the contract should be rescinded because the profit made by Erlanger had not been properly disclosed (in this case to an independent board) and therefore could not be kept by him. Significance of Erlanger [1878]

The above case illustrates the fiduciary nature of the promoter’s role, which puts him very much in the same position of quasi-trusteeship as a company director. A key feature of this status is that such a fiduciary must not make a secret profit. The rule which emerged from the case is that persons who purchase property and then create a company to purchase from them the property they possess, stand in a fiduciary position towards that company and must faithfully state to the company the facts which apply to the property, and would influence the company in deciding on the reasonableness of acquiring it. The promoter can avoid contravening this requirement by making a proper disclosure of any profit made (thus removing any element of secrecy) to either an independent board of directors or to the existing or prospective members of the company.  

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Where such a disclosure is made, then the promoter may be permitted to keep any profit made. What rights does the company have in circumstances such as existed in the Erlanger case? If the disclosure is not made, the company has two remedies:

a) It may elect to rescind the contract concerned (as was the case with Erlanger); or

b) It may, where the right to rescind is not available, ask the promoter to account for his profit (i.e. return it to the company), as another promoter was required to do in Gluckstein v Barnes [1900]. In this case a syndicate bought property intending to sell it to a company they were forming.  The cost of the property was £140,000 but it was sold to them at a discount, so that it cost them £120,000.  In turn, the promoters then sold the property to the newly formed company, of which they had become directors, for £180,000. A prospectus issuing to the public disclosed a profit of £40,000, but not the £20,000 discount.  The company later failed and the liquidator claimed repayment of the £20,000. The House of Lords upheld the liquidator’s claim.

 Where, however, the promoter sells property to the company at a profit to himself, and he acquired that property without any view to company promotion (that is, the property was owned or acquired by him some years before), then the company’s only remedy is rescission. In Robinson v. Randfontein Estates Gold Mining Co. Ltd. [1921] the court noted that “In any question as to the remedies available against a promoter who has sold his own property to the company, regard must be had to the relationship in which the promoter stood to the company when he acquired the property.  If he was under no obligation at the time to acquire the property for the company instead for of for himself, then  his non-disclosure of the fact that the property was his own, would entitle the company to repudiate the sale and restore the original position, but would not entitle it to retain the property at a price, reduced by a deduction of the promoter’s profits. 

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…When however, the promoter’s defaults extends further than non-disclosure, when a breach of duty attended the original acquisition, the company may, if it chooses, retain the property purchased, and also demand a refund of profits.” In this case, Robinson, the chairman of the board, purchased a farm in his own name after his company, which was anxious to acquire the farm, could not reach finality with the sellers. He purchased the farm through an agent and thereafter sold it to the company at a substantial profit. The South African Appellate Division held that Robinson was not justified in making a profit from his office nor placing himself in a position where his personal interests conflicted with the duties arising out of his fiduciary position. He was consequently ordered to repay to the company the profit which he had made.In reality, however, unless the flotation of a public company is involved, the question of whether the promoter has made a profit out of the promotion is irrelevant as the promoter is very often not only the first (and maybe even sole) director, but may also be the major shareholder as well (the Salomon model). The legitimate transactions of promotion Apart entirely from the issue of secret profits, the promoter may still incur expenses and liabilities which he will wish to pass on to the newly formed company. In the promotion of a private company, for example, the promoter will incur registration costs and may incur legal expenses, printing costs for stationery, the cost of leasing of new premises, advertising copy and so on.  How then can the promoter recover these costs? PRE-INCORPORATION CONTRACTS: A pre-incorporation contract is any contract entered into by the promoter for the business of the company that he is forming.  The main legal problem here is that the company on whose account the contract has been made does not exist until the promotion procedure is completed on registration. Therefore, the promoter cannot be treated at law as an agent because no principal exists.  Given that at the time the

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contract is made the company is not in existence, the doctrine of privity renders the company a stranger to that arrangement and therefore problems of enforcement arise (on the part of the company, on the part of the promoter and on the part of third parties). Why lack of privity? The Company as a legal person in its own right did not enter into the arrangement or authorized it.  The company was not in existence at the time the arrangement was entered into.  The general rule then, is that contracts which are expressed to be made on behalf of the assumed company are not binding on the company and the company cannot enforce them against a third party.  This rule applies even where the company purports to adopt or ratify the contract, after it has been incorporated.  At common law, an act can only be ratified by a principal in existence at the time the transaction was performed. In the case Kelner v. Baxter (1866), Kelner agreed with the promoters of an unformed company to sell wine. The hotel business was already being carried on, and the wine was delivered and in due course consumed. On 1 February, 1866 the proposed directors held a meeting at which they purported to ratify the purchase. The incorporation of the company was completed on 20 February, 1866. The company failed before Kelner had been paid and so he brought this action against the promoters personally. The promoters were held liable. LJ Erle stated: “I agree that if the Gravesend Royal Alexandra Hotel Company had been an existing company at this time, the persons who signed the agreement would have signed as agents of the company. But, as there was no company in existence at the time, the agreement would be wholly inoperative unless it was held to be binding on the defendants personally. When the company came afterwards into existence it was a totally new

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creature, having rights and obligations from that time, but no rights or obligations by reason of anything which might have been done before”. The result of case law is that the promoters themselves are personally liable on the contract. 

Likewise, a company cannot by adoption or ratification obtain the benefit of a contract purportedly made on its behalf before it comes into existence. A new contract can however be made after its incorporation on the same terms as the old one.   Ways in which the Promoter can avoid personal liability 1. The company affirms the old contract or makes a new contract with the third party after incorporation (known as novation): The only way for the promoters to escape liability is once the company has been incorporated, have the company and the third party enter into and substitute a fresh contract for the pre-incorporation contract.  This new arrangement is called a novation.   In the case of Re Northumberland Avenue Hotel Company (1886) a written agreement was entered into between W. of the one part and D., as trustee for an intended company, to be called the N. Company, of the other part.  It was agreed that W., who was entitled to an agreement for a building lease from the Metropolitan Board of Works, should grant an underlease to the company, and that the company should erect the buildings. The company was registered on the following day. The memorandum did not mention the agreement, but the articles adopted it, and provided that the company should carry it into effect. No fresh agreement with W. was signed or sealed on behalf of the company after incorporation, but the company took possession of the land, expended money in building, and acted on the agreement, which they considered to be binding on them. The company failed to complete the buildings, and the Metropolitan Board re-entered. The company being in course of winding up, the trustee in bankruptcy of W. took out a summons to be allowed to prove for damages against the company for their breach of the agreement:- 

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It was held that the agreement having been entered into before the company was in existence, was incapable of confirmation, and that the acts of the company, having evidently been done under the erroneous belief that the agreement between W. and D. was binding on the company, were not evidence of a fresh agreement having been entered into between W. and the company on the same terms as the written agreement.  Accordingly, there was no agreement between W. and the company, and that the summons must be dismissed. In Howard v. Patent Ivory Manufacturing Company Limited (1886) however J. entered into an agreement with W., who purported to act on behalf of a company about to be formed, to sell certain property to the company.

The company was formed shortly afterwards with a memorandum and articles of association containing provisions for the adoption of the agreement by the directors on behalf of the company with or without modification. At meetings of the directors at which J. was present, resolutions were passed adopting the agreement, accepting an offer of J. to take payment of part of the purchase-money in debentures instead of in cash, and directing that the seal of the company should be affixed to an assignment by J. to the company of leasehold property comprised in the agreement, and to debentures to be issued to J. The assignment was executed by J. and sealed by the company; the debentures were issued to him, and the company took possession of the leaseholds and carried on their business thereon. The company was afterwards wound up, and the liquidator took from J. an assignment of other property comprised in the agreement:- Held, that there was evidence that a contract was entered into by the company with J. to the effect of the previous agreement as subsequently modified by the acceptance of debentures instead of cash, and that there was, therefore, at the time when the debentures were issued, an existing debt due from the company.  2.  Express exclusion of liability of the promoter

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 Section 28 of the Companies Act provides a means for the promoters to escape liability.  The section provides that the pre-incorporation contract is binding on the promoter, “provided that the company may, not more than 15 months, by ordinary resolution, adopt the contract.” Any agreement entered into by the promoter either “on behalf of” or “as” the company (e.g. XYZ Ltd, countersigned by Promoter) will impose personal contractual liability, and presumably also correlative rights of enforcement, on the promoter only, unless there is some agreement with the third party, to the contrary. Thus, if the agreement states that the promoter should not be held liable, his liability will be excluded. This was Lord Denning’s view in Phonogram v. Lane (1982): A rock group intended to perform under the name “Cheap Mean and Nasty” and to form a company for the purpose to be called “Fragile Management Ltd”. Mr Lane accepted a cheque from Phonogram for £6,000, signing his name “for and on behalf of Fragile Management Ltd”. The money was to be used to finance production of an album and was repayable if this was not achieved. When the album was not produced, Phonogram sought to recover the money from Lane. Lane argued that his signature “for and on behalf of” the company amounted to an agreement that he was not to be personally liable on it.  The court held that there should be a clear and express exclusion of liability. Where a person purports to contract on behalf of a company not yet formed, then, however he expresses his signature, he will himself be personally liable on the contract. Phonogram v Lane also established that it is not relevant that the third party knows that the company is not formed.

Remuneration of PromotersA company cannot enter into a contract before it is formed. Accordingly, a promoter who expects to obtain a reward for his services has to take the risk that the company will not pay him when it does come into existence. 

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   About these ads

UNIVERSITY OF LUSAKASCHOOL OF BUSINESS

BBA350UNIT 3 SHARES

Many people own shares in public or private companies, and have a general understanding of what owning a share entails. Company law has developed in extremely flexible system for company shares for the ownership of limited companies. Any class or type of share can be issued, with such rights as are set out for those shares in the company's articles of association or the terms of issue of the shares. Most shares are ordinary shares but recent times have seen a proliferation of different classes of shares for all sorts of purposes.

Legal definitionThe most commonly cited legal definition is:'A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders.' Farwell J. in Borland’s Trustee v. Steel brothers [1901] The Companies Act does not give a definition.

An exampleA company set up to run a business will usually have money (and perhaps other assets) put into it by the shareholders in return for shares. E.g. A, B and C set up a company and decide that they will each put in K1,000 as share capital. The simplest way for this to be represented is for the company to issue 1,000 K1 ordinary shares to each of the three shareholders. The company's issued share capital will then be K3,000 divided into 3000 shares of K1 each.

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Share capitalThe capital of a company limited by shares must be divided into shares of a fixed amount (usually K1, but they can be any amount and in any currency). Because the company is a separate legal entity the company is regarded as selling its shares to the (prospective) shareholders, who pay for them in cash or other assets. Because the creditors of the company can usually only look to the company's assets for payment, share capital is locked into the company and can be returned to the members only subject to the strict rules of a shares buy back or reduction of capital. The shareholders are the members of the company and are the owners of it. Nature of sharesShareholding is a complex system of joint ownership. The shareholders jointly own the company. At the same time a share is itself an item of property which (subject to the company's articles) can be transferred by sale or gift.In return for investing in a company a shareholder gets a bundle of rights in the company which may vary according to the type of shares acquired. Most companies only have one class of shares (ordinary shares) but the law in the UK is extremely flexible and allows any classes of shares to be created. This is done by setting out the different rights attached to the various classes (usually in the company's articles). What rights are attached to the different classes of shares is essentially a matter for the company to determine. The main rights which usually attach to shares are:1. To attend general meeting and vote

Typically shares carry one vote each at general meetings but there may be non-voting shares or shares with multiple votes. Some shares may carry the right to vote only in particular circumstances where the company has different classes of shares.

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2. To a share of the company's profits (DIVIDENDS)The distribution of profits is paid by means of a dividend of a certain amount paid on each share. A dividend may be paid only if the company has made profits and to the extent that it decides to distribute them. If the company so provides in its articles, different dividends may be paid on different classes of shares.

3. To a final distribution on winding up If the company is wound up and all the creditors are paid the remaining assets are available for division among the members. This may be in two stages: (1) a return of capital; (2) distribution of surplus capital. Some shares may be given a priority as to one or both of these.

4. That the company be run lawfullyi.e. in accordance with the Companies Acts, the general law and the company's constitution.In most circumstances only the members of the company will have the legal right to sue to make the company act lawfully, and even they may be restricted in their ability to sue under the common law rule in Foss v Harbottle. This is a complex area beyond the scope of this database.

Classes of sharesCompanies may have different classes of shares, and this is done for many different reasons.

Share certificatesA share certificate is a certificate issued by a company certifying that on the date the certificate is issued a certain person is the registered owner of shares in the company.The key information contained in the share certificate is: the name and address of the shareholder the number of shares held the class of shares the amount paid (or treated as paid) on those shares

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Unless the terms of issue or the articles provide to the contrary, the company must issue a share certificate within two months of the issue or transfer of any shares. A share certificate is sufficient evidence, unless the contrary is shown, of the member's title to the shares. At common law a company may be stopped from denying statements in a share certificate against someone who has relied on the statement. Full consideration of this area is beyond the scope of this database. Most companies will require the share certificate to be produced when a request is made to transfer shares. Duplicate certificates may be made available, but usually on receipt of a statement of the facts and an indemnity against any liability incurred by the company.The usual practice is for a company to issue just one certificate in respect of all the shares issued or transferred at a particular time, but a shareholder may request split certificates.

The provisions of the Companies Act 388 relating to share certificates are:Share certificates are containes in sections;66. Issue of share certificates - (1) A company shall, within two months after the allotment of any of its shares or after the registration of the transfer of any shares, deliver to the registered holder thereof a certificate under the common seal of the company stating-

(a) the number and classes of shares held by him, and the distinguishing numbers thereof (if any);

(b) the amount paid on such shares and the amount (if any) remaining unpaid; and

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(c) the full name and address of the registered holder and whether the holder is an individual, a body corporate or an unincorporated association.

(2) If a share certificate is defaced, lost or destroyed, the company, at the request of the registered holder of the shares, shall renew the same on payment of a fee not exceeding one monetary unit and on such terms as to evidence and indemnity and the payment of the company's expenses of investigation evidence as the company may reasonably require.

(3) If a company fails to comply with this section, the company, and each officer in default, shall be guilty of an offence, and shall be liable on conviction to a fine not exceeding three monetary units for each day that the failure continues.

67. Endorsement of transfer - (1) If the holder of any shares wishes to transfer to any person part only of the shares represented by one or more certificates, the instrument of transfer together with the relevant certificates may be delivered to the company with a request to endorse the instrument of transfer.

(2) If a company endorses on an instrument of transfer the words "certificate lodged", or words to the like effect, this shall be a representation to anyone acting on the faith of the endorsement that there has been produced to and retained by the company such certificates as show a prima facie title to the shares in the transferor named in the instrument of transfer, but not a representation that the certificates are genuine or that the transferor has any title to the shares.

(3) If a person acts on the faith of a false representation made by the company under subsection (2), the company shall be liable to compensate the person for any loss suffered as a result of so acting.

(4) For the purposes of this section, an endorsement under this section shall be deemed to be made by a company if it is made or signed by the secretary or any other person apparently authorised to endorse instruments of transfer on the company's behalf.

68. Share certificates as evidence - A share certificate shall be prima facie evidence of the title to the shares of the person named therein as the registered holder and of the amounts paid and payable thereon.

DividendsIntroduction to dividends

Paying a dividend is the usual way for a company to distribute a share of its profits among the shareholders. A companies may be prohibit from making distributions (including dividends) except out of profits.

In a public company, the usual practice is for the directors to declare and pay an interim dividend based on the accounts for the first six months of the company's financial year. The directors will then recommend a final

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dividend to the Annual General Meeting based on the profits made in the full year, and the AGM then passes a resolution declaring that dividend.

In private companies the practice varies widely. If the company is making profits there are essentially two ways in which those profits can be paid over to the people who own and run the company. One is for the directors (or others, e.g. family members) to be paid salaries or fees for the work they have done for the company. Such salaries or fees will be employment income for the recipient and must usually be taxed under the PAYE system, with the company deducting tax at source. Both the company and the director will also be liable to make National Insurance contributions. The other way of taking money out of the company is for the company to pay dividends. These are paid to shareholders (rather than directors) and (unless the company has special articles) must be paid in accordance with the rights of the respective shareholders. Dividends are taxable as investment income in the shareholders' hands. The tax rates for dividends are generally lower than for other sources of income.

Voting rights of sharesGenerally, the voting rights attached to any particular shares depend on the articles of the company and any terms of issue imposed when the shares were created. The vast majority of shares are ordinary shares which carry a right to one vote per share. There may, however, be different classes of shares which may have no voting rights or restricted rights (e.g. can only vote in certain circumstances) or may have additional voting rights (e.g. 10 votes per share) or enhanced voting rights in particular circumstances.

The voting rights attached to shares are voting rights at general meetings of the company, i.e. at meetings of the shareholders rather than the

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directors. Voting at general meetings can be done in two different ways. Many resolutions are decided by a show of hands. This will give each shareholder one vote, regardless of the number of shares held. It is a useful practice for the passing of routine resolutions where there is no (or very little) opposition, but does not reflect the actual voting strength of individual shareholders. For this to be done, there must be a poll, by which the actual votes owned by each shareholder voting are counted. .Proxies have the same rights as members.

Acquisition of shares from the company

When shares are created by a company they are "allotted" or "issued" to those people or other companies who then become the company's members (shareholders). (The terms "allot" and "issue" are often used interchangeably.

Shares are issued by the directors, but there are various statutory rules and procedures which must be complied with, as well as any provisions in the company's articles.

In private companies the allotment will be a private arrangement between the company and those who invest in it. A public company may make the issue through the Stock Exchange or on the Alternative Investment Market.

Acquisition of shares from an existing shareholder

Subject to such restrictions as appear in the company's memorandum or articles, a shareholder may sell his or her shares to another person or give them away. A sale or gift will be a transfer of the shares.

Death of a Shareholder

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If a shareholder dies, there is said to be a "transmission" of the shares.

Authorised capital

A company's authorised or nominal capital had to be stated in its incorporation forms and articles of association. It is the maximum amount of share capital the company may issue (unless it went through a procedure to increase the figure). Authorised capital has to be stated as a sum of money divided into shares of a fixed amount, e.g. 'The company's share capital is K50,000 divided into 50,000 shares of K1 each.'

The higher the capital, the higher is the statutory fee payable.

Issuing sharesAllotment and issue of sharesThe terms "allotting shares" and "issuing shares" are often used interchangeably. Share allotment, strictly, is the allocation of the right to certain shares to particular applicants for them.

Pre-emptive rights for existing membersPre-emptive rights are where existing shareholders have a right to take up any shares being issued in proportion to their existing shareholdings. Such rights can be an important protection to shareholders, particularly minority shareholders, to prevent their holdings (and particularly their voting and dividend rights) from being diluted.

Surrender of sharesA shareholder who is not able to pay the call money may surrender its shares to the company. The company cancels such surrender shares. Surrender is a voluntary act on the part of the shareholder, whereas Forfeiture is a compulsory act on part of the company. The effect of both surrender & Forfeiture is the same, i.e. cancellation of the shares. The

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company can accept surrender of shares if permitted by its Articles of Association. The accounting treatment in respect of surrender of shares is same as that of Forfeiture of shares Forfeiture of sharesSometimes some shareholders fail to pay the called up amount in full i.e. they do not pay in one or more instalments after the allotment of the shares to them. In such a case either the company can go to the court and file a suit against the defaulting shareholders for recovery of the due amount or can cancel the membership of the defaulting shareholders. In case the membership is cancelled, the amount paid by the defaulting members towards share capital stands forfeited, is called “Forfeiture of Shares”.

Classes of sharesMost companies have only one class of shares, ordinary shares, but it is increasingly common for even very small private companies to have different share classes. This may be done for various reasons, such as to be able to vary the dividends paid to different shareholders, to create non-voting shares, shares for employees or family members, etc. A company can have what classes of shares it prefers and can call any class of shares by whatever name it chooses. Apart from ordinary shares, common types are preference shares, non-voting shares, A shares, B shares, or Gold, Silver, Bronze shares .The share class system is infinitely flexible. Different classes of shares, and the rights attached to them, should be set out in the company's articles of association. The new classes can then be allotted. Existing shares can be converted to different classes (conversion of shares).

Different classes of shares within a company can carry identical rights, but very often have different voting, dividend and/or capital rights. This is done for different reasons. Sometimes it is

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to attract a particular investor, e.g. by giving him or her preference shares.

Ordinary sharesMost companies have just ordinary shares. They carry one vote per share, are entitled to participate equally in dividends and, if the company is wound up, share in the proceeds of the company's assets after all the debts have been paid.

Non-voting sharesNon-voting shares carry no rights to vote and usually no right to attend general meetings either. Such shares are widely used to issue to employees so that some of their remuneration can be paid as dividends, which can be more tax-efficient for the company and the employee. Preference shares are often non-voting.

Redeemable sharesThese are shares issued on terms that the company will, or may, buy them back at some future date. The date may be fixed (e.g. that the shares will be redeemed five years after they are issued) or at the directors' discretion. The redemption price is often the same as the issue price, but need not be. This can be a way of making a clear arrangement with an outside investor. They may also be redeemable at any time at the company's option. Preference shares are often redeemable

Preference sharesThese will usually have a preferential right to a fixed amount of dividend, expressed as a percentage of the nominal (par) value of the share, e.g. for every a K1, preference share will carry a dividend of 7ngwee each year. It is, however, still a dividend and payable only out of profits. The dividend may be cumulative (i.e. if not paid one year then accumulates to the next year) or non-cumulative. Preference share are often non-voting (or non-

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voting except when their dividend is in arrears). They are sometimes redeemable.They may be given a priority on return of capital on a winding up.

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