Riara Law School Students Scrutinize Membership and Securities in Company Law,Kenya,Law of Business Associations 2

1. MEMBERSHIP &
SECURITIES
Beverly Akinyi -------Wambui Wangui
Pauline Atiika ------Wangui Mbugua

2. Company Membership

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

4. 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.

5. 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:

6. • 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.

7. 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.

8. • 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

9. • Repudiation by an infant : Steinberg v. Scala
• Liquidation: liquidation terminates the membership
of all former members from the moment it becomes
effective.

10. Capacity to be a Member
GEN 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.

11. • 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?

12. THE REGISTER OF MEMBERS

13. 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

14. Contents of Register
i. Names and postal address of members
ii. The statement of shares held by each of the
members
iii. The amount paid or agreed to be so done by each
member
iv. Date each member was entered in the registry
v. Date any person ceased to be a member

15. 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

16. 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)

17. 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)

18. Def:
Co. is to strike out the name of a member issued with a share
warrant from the register and shall enter
i. Fact of the warrant issue
ii. Statement of shares included in the warrant
iii. Date of issue of the warrant
Subject 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

19. • 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

20. • 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 by
a) Aggrieved person
b) Any member
c) The company
• On application court may ;
a) Refuse application
b) Order rectification
Rectification of the register

21. 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.

22. 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

23. Notice contd.
The company is not a trustee for persons
claiming shares under equitable titles
Societe Generale de Paris v Walker
However, the owner of an equitable interest may
protect his interest by serving the company a
stop notice/ notice in lieu of distringas.

24. 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

25. 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.

26. • 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

27. 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.

28. 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 employees
The certificate is only made where members are more than 50

29. COMPANY SHARES

30. 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.

31. 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

32. • 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

33. 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 ?

34. 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 ?

35. 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

36. • 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)

37. • 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 ?

38. • 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

39. CLASSES OF SHARES

40. 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.

41. General Classes of Shares Issued
• Ordinary Shares
• Preference Shares
• Participating Preference Shares
• Redeemable Preference Shares
• Deferred Shares

42. 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.

43. ‘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.

44. 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

45. 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.

46. 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

47. 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

48. 7. Preferential dividends are not payable in a winding up unless
previously declared unless the terms of issue provide otherwise
Re: Crichton’s Oil Co
When 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

49. 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

50. 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.

51. 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.

52. 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.

53. END *for now…