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LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (LAW 650)
PREPARED BY:
Hilary Lubengo LL.B (Hons) Dar, LL.M (International Bu...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
INTRODUCTION AND BASIC CONCEPTS
The word 'Company' is an amalgamation of the ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
A company as an entity has several distinct features which together
make it a...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
property of a shareholder cannot be attached for the debts of the
company if ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Capacity to sue and being sued: A company can sue or be sued in its
own name ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
This theory is a by-product of the English House of Lords decision in
Salomon...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
The human ingenuity however, started using this veil of corporate
personality...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
management is, and that place will determine the residence of the
company.
Pr...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
carrying business. The company was described in a judgment as “a
device, a st...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Mr. Kagya trading as Nshomi Trading Company. If a supplier or buyer of
diamon...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
transferred without the permission of the other members, in absence of
any pr...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
TYPES OF COMPANIES
There are various ways by which companies may be classifie...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
c. Prohibits any invitation to the public to subscribe to any shares in
or th...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
b) Company limited by the guarantee. S. 3(2)(b) of Cap 212
A company limited ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
3. Subsidiary of another subsidiary. Where the company is a
subsidiary of ano...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
(2) Registered: - these are Companies formed and registered under
Companies A...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
(ii) to represent the company as its permanent representative
for the place o...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
PROMOTION AND FORMATION OF A COMPANY
Promotion: refers to the entire process ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
1. He must not make any secret profit out of the promotion of the
company. Se...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
2. The promoter may make profits on transactions entered by him
with the comp...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
• Company cannot ratify a contract entered into by the promoters
on its behal...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
d. Section 40 (1) of the companies Act states that the promoter is personally...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
(a) the person or persons being the first director or
directors of the compan...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
MEMORANDUM AND ARTICLES OF ASSOCIATION
MEMORANDUM OF ASSOCIATION
A: Meaning a...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
contemplate to enter with the company is within the objects
of the company15
...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
end with the words “Public Limited Company” and for private company
with the ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Clause III: The objects of the company
The objects clause defines the sphere ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
 The company shall immediately give notice of that fact to the
Registrar
 W...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Clause IV: Liability Clause [s.4 (2) & (3) of Cap.212]
(a) Whether the liabil...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
The alteration of the capital of the company in any of the manner
specified a...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Reduction of capital in any other form apart from the ways stated above
must ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
2. Advertise in the gazette, and in case of a public company, one
national ne...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
only that the plaintiff can never get the control of the company but
deprive ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
According to section 2(2) of Cap.212, “articles” means the articles
of associ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
(2) They contained covenants by the company and each member
to observe all th...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
inter se. Such rights can only be enforced by or
against a member through the...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
any dealings whatever with the company and those
who so deal with them must b...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
(3) Negligence on the Part of the Outsider
If an individual is put upon enqui...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
MEMBERSHIP OF A COMPANY (S.24 OF CAP 212)
One can become a member of a compan...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
his name to be on the register of members or otherwise holds
himself or allow...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Register of members (ss 115 – 127 of Cap 212)
Every company must keep a regis...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
h. By the official assignee disclaiming his shares on his adjudication
as an ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Liability of a member depends upon the nature of the company. (See
types of c...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
PROSPECTUS
After obtaining a certificate of Incorporation the promoters will ...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
‘for private circulation only’ it also contained a statement that a copy of i...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
(4) Where an offer is made in connection with a bona fide invitation to
a per...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
only 10 shares each it was held that, the subscriber could rescind
the contra...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
CONCEPT OF CAPITAL AND THE FINANCING OF COMPANIES
As Latham CJ said in the Au...
LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
Share Capital
This means the capital raised by a company by the issue of shar...
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
Corporate law  manual mzumbe university
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  1. 1. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (LAW 650) PREPARED BY: Hilary Lubengo LL.B (Hons) Dar, LL.M (International Business Law) Wales, UK Joel Laurent LL.B (Hons) Dar, LL.M (Corporate Law and Finance) Widener, USA
  2. 2. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW INTRODUCTION AND BASIC CONCEPTS The word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or together" and ‘Pains’ meaning, "bread". Originally, it referred to a group of persons who took their meals together. Section 2 of the Companies Act, 2002 (Cap 212) defines Company as “…a company formed and registered under this Act or an existing company”. A company is nothing but a group of persons who have come together or who have contributed money for some common purpose and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose. Lindley L.J defines a company as “an association of many persons who contribute money or money’s worth to a common stock, and to employ it in some common trade or business, and who share the profit or loss arising therefrom”1 Lord Justice Marshall defines a corporation as “an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only properties which the charter of its creation confers upon it either expressly or as incidental to its very existence” Under Halsbury’s Laws of England, the term "company" has been defined as a collection of many individuals united into one body under special domination, having perpetual succession under an artificial form and vested by law with the capacity of acting in several respect as an individual, particularly for taking and granting of property, for contracting obligation and for suing and being sued, for enjoying privileges and immunities in common and exercising a variety of political rights, more or less extensive, according to the design of its institution or the powers upon it, either at the time of its creation or at any subsequent period of its existence. Normally, in the world of commerce the word “company” is used to denote an association of people so associated for an economic purpose e.g. business. Please note that companies can be formed for other purposes as well – for example – for charity. A company is also define to mean a group of persons associated together for the attainment of a common end, social or economic or a voluntary association of persons or individuals formed for some common purpose (Smith v Anderson 1880 Ch. D. 247). 1 Taken from Saleemi N.A & Opiyo, A.G, Company Law Simplified (1997) at p.1 2
  3. 3. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW A company as an entity has several distinct features which together make it a unique organization. The following are the defining characteristics of a company: Separate Legal Entity: On incorporation under the law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt and borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. The legal personality or separate entity was recognized in Oakes v Turquant (1867) L.R. 2 H.L. 325, but the importance was firmly established in Salomon v Salomon (1897) A.C 22. In this case, Salomon sold his boots business to a newly formed company for ₤ 30000. His wife, one daughter and four sons took up one share of ₤ 1 each. Salomon took 23000 shares of ₤ 1 each and ₤ 10,000 debentures in the company. The debentures gave Salomon a charge over the assets of the company as the consideration of the transfer of business. Subsequently, when the company was wound up, its assets were found to be worth ₤ 6,000 and its liabilities amounted to ₤ 17,000 of which ₤ 10000 was due to Salomon (secured by debentures) and ₤ 7000 due to unsecured creditors. The unsecured creditors claimed that Salomon and the company were one and the same person and that the company was merely agent for Salomon and hence they should be paid in priority to Salomon. It was held that the company was, in the eyes of law, a separate person independent from Salomon and was not his agent though initially the holder of all shares of the company was also a secured creditor, and was entitled to repayment in priority to unsecured creditors. Lord Macnaghten observed: “The company is at law a different person altogether from the subscribers to the memorandum, and though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee of them. Nor are subscribers liable, in any shape or form except to the extent and in a manner provided by the Act” Limited Liability: The liability of the members of the company is limited to contribution to the assets of the company up to the face value of shares held by them. A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets. The personal 3
  4. 4. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW property of a shareholder cannot be attached for the debts of the company if he/she holds fully paid up share. A company may be limited by shares or by guarantee (s. 3(2) of the Companies Act, 2002). In a company limited by shares the liability of members is limited to the unpaid value of shares. In a company limited by guarantee, the liability of a member is limited to such amount, as the members may undertake to contribute to the assets of a company, in the events of its being wound up. The importance of limited liability was expressed in Senkin v Pharmaceutical Society of GB (1921) 1 Ch. 392. Limited liability is the offspring of a proved necessity that, men should be entitled to engage in commercial pursuit without involving the whole of their fortune in that particular pursuit in which they are engaged. Perpetual Succession: A company is a Juristic person with perpetual succession. A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of members does not affect the existence of the company. It is created by the process of the law and can only be put to an end by the process of law. Separate Property: A company is a distinct legal entity. The company’s property is its own. A member cannot claim to be owner of the company's property during the existence of the company. A shareholder doesn’t even have insurable interest in the property of the Company. Macaura v Northern Ins. Co. (1925) AC 619 M was holder of nearly all shares of a timber company. He was also a substantial creditor of the company. He insured the Company’s timber in his own name. The timber was destroyed by fire. It was held that the insurance company was not liable. Transferability of Shares: S. 74 of the Companies Act states that “the shares or any other interests of any member in a company shall be transferable in a manner provided by the articles of the company.” Shares in a public company are freely transferable, subject to certain conditions, such that no shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. Section 27 of the Companies Act restricts the right of the members of a private company to transfer shares. 4
  5. 5. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW Capacity to sue and being sued: A company can sue or be sued in its own name as distinct from its members. It may also inflict or suffer wrongs. It can in fact do or have done to it most of the things which may be done by or to a human being. The company is only able to sue or be sued in its own name when it has been registered. If the company has not acquired legal personality (not fully registered) it cannot institute a suit2 . In the case of Fort Hall Bakery Supply co. v. Federic Muigai Wangoe (1959) E.A. 474 a suit was instituted by an unregistered firm of over twenty members whose existence as body was not recognized in law. The high Court of Kenya stated at page 475. “It is not registered as a company under Companies Ordinance or formed in pursuance of some other Ordinances or Act of parliament or letters of patent. It cannot therefore be recognized as having any legal existence. In the words of Bankes, L.J. in Banque Internationale de Commerce de Petrograd vs. Goankassaow (1923) 2. K.B. 682 at 688 “ The party seeking to maintain the action is in the eye of law no party at all but a mere name only, with no legal existence…A non- existence person cannot sue, and once the court is made aware that the plaintiff is non- existence, and therefore incapable of maintaining the action, it cannot allow the action to proceed Separate Management: A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company. The Meaning and Nature of Corporate Personality Corporate personality is the fundamental principle or doctrine that goes to the root of company law that a company, being a legal person, is entirely distinct from its members who formed it. After being incorporated, a company becomes an independent legal entity vested with a personality separate from that of its shareholders. The personality gives a company an artificial life, perpetual succession, the right to own and dispose property, and limited liability. Thus, a company has full legal personality and is, so far as possible, to be treated analogous to an individual. 2 The proper procedure for seeking legal remedy in a court by a body of persons who have no corporate existence, is by way of a representative suit as provided under Order 1 rule 8 of the Civil Procedure Code 5
  6. 6. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW This theory is a by-product of the English House of Lords decision in Salomon v. Salomon& Co. Ltd 3 . In that landmark case Aron Solomon, a successful leather merchant, decided to incorporate his business in 1892, with himself, his wife and five children as the only shareholders. The business assets were transferred into the corporate name for the somewhat ambitious value of 39,000 pounds. Each of the other members of the family took one share; Salomon himself took 20,001 shares. A 10,000-pound debenture was created charging the assets of the company. Less than a year later the corporation encountered financial difficulties and, after paying off the debenture holder, the company’s assets were insufficient to pay off the unsecured creditors. These creditors then attempted to fix financial liability on Aron Salomon. Both trial judge and the Court of Appeal held that Mr. Salomon was liable for the company’s debts, on the ground that the company was either an agent, a trustee or a nominee of the true owner. The House of Lords rejected this view on corporations. Lord Halsbury said4 : “Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and no thing to be an agent at all”. Corporate law, therefore, erects an imaginary wall between a company and its shareholders from liability for a company’s actions. Once shareholders have made their promised capital contributions to the company, they have no further financial liability. All these mean that contracts of a company are not contracts of the shareholders, and debts of a company are not debts of its shareholders5 . Lifting/Piercing the Cooperate Veil From juristic point of view a company is a legal person different from its members Salomon v Salomon & Co Ltd. (1897) A.C. 22.The principle may be referred to as the ‘Veil of incorporation”. The courts in general consider themselves bound by this principle. The effect of this principle is that there is a fictional veil (and not a wall) between the company and its members. That is, the company has a corporate personality which is distinct from its members. 3 [1897] A.C. 22 (Eng., H.L.) 4 See Salomon v. Salomon., op. cit., at p. 31 5 See MALLOR J. et al., Business Law and the Regulatory Environment. Concepts and Cases: 10th Edn: Boston: Mc Graw-Hill Companies, Inc., 1998, at p. 826. 6
  7. 7. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW The human ingenuity however, started using this veil of corporate personality blatantly as a crack for fraud or improper conduct, thus it became necessary for the courts to break through or lift the corporate veil or crack the shell of corporate personality and look at the persons behind the company who are the real beneficiaries of the corporate fiction. In United States v. Milwaukee Refrigerator Co.6 , the court observed “A corporation will be looked upon as a legal entity as a general rule… but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons”. In Littlewoods Mail Order Stores Ltd. V. Inland Revenue7 , Denning MR. Observed: “The doctrine laid down in Solomon v. Solomon & Co. Ltd. has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can and often do draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind”. The power to pierce the corporate veil, though, is to be exercised “reluctantly” and “cautiously” and the burden of establishing a basis for disregard of corporate fiction rests on the party asserting such claim. The circumstances which have been considered significant by the courts in actions to disregard the corporate fiction have been “rarely articulated with any clarity”. This is true because the circumstances necessary vary according to the circumstances of each case and every case where the issue is raised is to be regarded as sui generic (to be decided in accordance with its own underlying facts.) Various Cases in which corporate veil can be lifted. Protection of Revenue The court may ignore the corporate entity where company is used for tax evasion. Tax planning may be legitimate as it is within the framework of the law. Where it is desired to determine for tax purposes the residence of a company the court will lift the veil and find out where its central 6 (1905) 142 Fed 247 7 (1969) WLR 1241 7
  8. 8. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW management is, and that place will determine the residence of the company. Prevention of fraud or improper conducts The legal personality of a company may also be disregarded in the interest of justice where the machinery of incorporation has been used for some fraudulent purpose. In Jones v Lipman (1962) All ER 442. L agreed to sell certain land to J. He subsequently changed is mind and to avoid the specific performance of the contract, he sold it to a company which was formed specifically for that purpose. L and a clerk of his solicitors were the only members. J brought action for specific performance against L & and the company. The court looked at the reality of the situation, ignored transfer and ordered that the company should convey the land to J. Determination of character of a company whether it is enemy. A company may assume an enemy character where persons in de facto control of its affairs are residents in an enemy country. In Daimler Co. v Continental Tyre & Rubber Co. Ltd (1916) a company was incorporated in England for the purpose of selling in England tires made in Germany by a German Company which held bulk of shares in the English company. The holders of remaining shares except one, and all the directors were Germans, resident in German. During the First World War, the English company commenced an action for recovery of a trade debt. Held: The Company was an alien company and the payment of the debt to it would amount to trading with enemy, and therefore the company was not allowed to proceed with the action. Where the Company is a sham or is formed to avoid legal obligations Where the use of an incorporated company is being made to avoid legal obligations the court may disregard the legal personality. Nicole & Sandra partners, sell their business to Benja and undertake not to start a similar business and not to compete with Charles for certain number of years. After some time they form a private company, become the principal shareholders and directors and start a similar business. The court may restrain the company from carrying business. In the case of Gilford Co. Ltd v Horne (1933) Ch. 935 C.A. Horne a former employee of a company was subject to a covenant not to solicit its customers. He formed a company to carry on a business which, if he had done so personally, would have been a breach of the covenant. An injunction was granted against him and the company to restrain from 8
  9. 9. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW carrying business. The company was described in a judgment as “a device, a stratagem” and a as a mere crack or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation.” Protecting public policy The courts invariably lift the corporate veil to protect public policy and prevent transactions contrary to public policy. In the case of Connors v. Connors Ltd (1940) 4 All ER 174 it was held that where there is a conflict with public policy, the court will lift the veil of incorporation. Statutory lifting Apart from judicial considerations, the exercise may also be carried out statutorily under the provisions of Companies Act e.g. where the number of members is reduced bellow the statutory minimum Enlightenment to Business associations One must also not confuse a business with a company. For that purpose it is important to appreciate distinction between Sole Proprietorship, a Partnership & a Company: Sole Proprietorship: This is an individual carrying on business either in his own name or in an assumed name which is usually referred to as the Trade Name. For example: Mr.Kagya buys diamonds from Kenya and sells it to Malawi. He does so in his own name. The law permits Mr. Kagya to make his purchases of diamonds and to sell it to any person whether in Tanzania or elsewhere. As with any business he will have a capital, some assets, liabilities from time to time and profits or losses. As with all business, if need be, he is required to register his business under the Business Names Registration Ordinance and any other relevant law. He is required to file tax returns and he is taxed on his profits. He merely has to satisfy the Tanzania Revenue Authority of the extent of his profit or loss from his own balance sheet which need not be audited. The TRA may require him to audit his balance sheet if there is suspicion as to his income or expenses. As the business grows Mr. Kagya may hire employees, consultants, and establish branch offices. In all respects Mr.Kagya is running a business but is not a company. Mr. Kagya may at the beginning adopt a trading name or register a trading name later. For example he may call is business “Nshomi Trading Company”. As far as the General Public is concerned they will be dealing with a business called Nshomi Trading Company. However the legal position is that it is 9
  10. 10. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW Mr. Kagya trading as Nshomi Trading Company. If a supplier or buyer of diamonds wishes to institute proceedings against the business he would do so against “Mr. Kagya trading as Nshomi Trading Company. The liability of Mr. Kagya is personal. If there is a judgment against Mr. Kagya he is personally responsible to satisfy the judgment. In the event of a judgment being entered against him he will have to pay up the damages that are assessed against him personally. If he cannot satisfy the judgment he runs the risk of being declared bankrupt by the judgment creditor. It is important to remember that a sole proprietor is personally responsible for his liabilities. So too, he is the only person entitled to profits. He need not share his profits. When two or more people join together for a common purpose, usually the purpose of doing business for profit, such an association is called a Partnership. Partners do business under a trade name for instance Mr. Kagya of the Sole Proprietorship can bring in his friend Mr. Lau as a partner and can trade under the name of Nshomi Trading Company. For purposes of the law it really means Kagya and Lau trading in partnership under the name and style of Nshomi Trading Company. The Partnership has an existence of its own to the extent that it can sue and be sued in its own name. However, the consequences of a liability against the partnership are that each of the partners is fully liable to the entire extent of the debt.In law, each partner is the agent for the other. The act of one partner binds the firm and the other partners. Distinction between Company and Partnership 1. A Partnership firm is sum total of persons who have come together to share the profits of the business carried on by them or any of them. It does not have a separate legal entity. A Company is association of persons who have come together for a specific purpose. The company has a separate legal entity as soon as it is incorporated under law. 2. Liability of the partners is unlimited. However, the liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder. 3. Property of the firm belongs to the partners and they are collectively entitled to it. In case of a company, the property belongs to the company and not to its members. 4. A partner cannot transfer his shares in the partnership firm without the consent of all other partners. In case of a company, shares may be 10
  11. 11. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW transferred without the permission of the other members, in absence of any provision to the contrary in the articles of association of the company. 5. There must be at least 2 members in order to form a partnership firm. The minimum number of members necessary for a public company is seven and two for a private company. 6. On the death of any partner, the partnership is dissolved unless there is provision to the contrary. On the death of the shareholder, the company' existence does not get terminated. 11
  12. 12. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW TYPES OF COMPANIES There are various ways by which companies may be classified. Companies may be classified on the basis of ownership or members, on the basis of liability, on the basis of control and on the basis of incorporation On basis of ownership/members: Public and Private Companies 1.) Public Company means a company, which is not a private company. Basic Characteristics a. The general public is allowed to subscribe for membership on fulfilling of few general conditions. The minimum number of members is seven. b. It can not commence business unless it obtains a certificate of commencement of business] c. The memorandum of public company shall state that it is a public company d. Transfer of shares is free Under the Companies Act a public company is the company limited by shares or guarantee and having a share capital, being a company the memorandum of which states that it is to be a public company. 2.) Private Company This is normally what Americans call a close corporation. A private company (sometimes refereed as to quasi- partnership company) is in nature of a partnership of persons with mutual confidence in each other and its articles place positive restrictions on absolute transfer of shares. See S. 27 of Cap 212. Basic characteristics a. Restricted membership. Section 27(1) (b) of Cap 212 limits the number of its members to fifty. In determining this number of 50, employee-members and ex-employee members are not to be considered. b. Restricts the right of members to transfer its shares S. 27(1) (a) of Cap 212 12
  13. 13. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW c. Prohibits any invitation to the public to subscribe to any shares in or the debentures of the company. S. 27(1) (c) of Cap 212. The Companies Act, 2002 creates an offence for a private company which is not a private company limited by guarantee and not having a share capital to offer to the public (whether for cash or otherwise) any shares in or debentures of a company. S 28 of the Act states that if a private company alters its articles such that they no longer include the provisions required for a private company (s.27), the company shall on the date of the alteration, cease to be a private company and shall amend its memorandum to state that it is a public company. The company should, within 14 days send notification to the registrar who shall issue a certificate to the effect that the company is the public company. On the basis of liability: Limited and Unlimited companies Companies may be limited or unlimited companies. Company may be limited by shares or limited by guarantee. "Limited Liability" - this refers to the liability of the members, not the liability of the company. The company will always be liable to the full extent of its debts. (a) Company limited by shares (s.3(2)(a) of Cap 212 (i) The most common kind of registered company. (ii)Members of the company take shares issued by the company. Each share is assigned a nominal value - the amount that must be paid to the company for the share. (iii)When the company is registered, its memorandum must state the total nominal value of all the shares it is going to issue (called the registered capital, or nominal capital or authorised share capital). The memorandum also states the number of shares to be issued: e.g. 10,000 shares of Tshs. 100 each = registered capital of Tshs. 1,000,000. (iv) Liability of a member (shareholder), when the company is wound up is limited to the amount, if any, on the nominal value of his shares which has not been paid. No member of company limited by shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid. (v) Shares are normally partly or fully paid for when issued, so company will have a contributed capital. 13
  14. 14. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW b) Company limited by the guarantee. S. 3(2)(b) of Cap 212 A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. Members agree to contribute a specified amount to the company’s assets in the event of the company being wound up. (Total amount payable by all members is called the "guarantee fund"). Companies limited by guarantee are not usually formed for business ventures The liability of members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. Members, therefore, do not have to pay anything as long as company is a going concern - so company has no contributed capital. C. Unlimited Company: S.3(2)(c) The liability of members of an unlimited company is unlimited. Therefore their liability is similar to that of the liability of the partners of a partnership firm. The following are basic characteristics of unlimited companies I. Members have unlimited liability (If company is being wound up, members can be made to contribute to the company’s assets without limit to enable it to pay its debts.) II. Cannot be public companies. III. Can be set up with or without a share capital. IV. Not subject to the same restrictions on alteration of capital as other types of company, and do not normally have to file annual accounts. On the basis of control (Holding and Subsidiary companies) When a company has control over another company it is known as a holding company. The company so controlled is known as a subsidiary company. A company shall be deemed to be subsidiary of another company if: - 1. That other company controls the composition of its board of directors; or 2. That other company holds more than half in face value of its equity share capital 14
  15. 15. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW 3. Subsidiary of another subsidiary. Where the company is a subsidiary of another company which is itself a subsidiary of the controlling company, the former becomes the subsidiary of the controlling company e.g. Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A. The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion to appoint or remove majority of directors of the subsidiary company without consent or concurrence of any other person. In determination whether one company is subsidiary of another, shares held or powers exercisable in the following cases shall not be taken into account. a) Any shares held or power exercisable by the other company in fiduciary capacity b) Where shares are held or power is exercisable by any person by virtue of the provisions of any debenture or of a trust deed for securing any issue of such debentures; and c) Where shares are held or power is exercisable by lending company by way of security only for the purpose of a transaction entered into in the ordinary course of that business You may also refer to section 487 of the Companies Act. On the basis of incorporation (1) Statutory: - these are companies created by special Act of the legislature. Such companies are generally formed to carry out some special undertakings. These companies are owned by the government and the main objectives of these companies are to provide some necessary services for the benefit of the entire country. The provisions of companies Act may apply if not inconsistent with the special Act. S.2 of the Companies Act defines Statutory Corporation as the meaning given in the public corporations Act: ''public corporation'' means any corporation established under the Public Corporation Act or any other law and in which the Government or its agent owns fifty one percent or more of the shares but does not include an institution of learning, a district development corporation, a research institution or a sports institution; 15
  16. 16. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (2) Registered: - these are Companies formed and registered under Companies Act 2002, Cap 212. Such companies come into operation only when they are registered under the Act and the certificate of incorporation has been issued by the registrar. Such companies derive their powers from the Companies Act, memorandum and articles of associations. (3) Unregistered Companies – S.425 of Companies Act, 2002 (4) Foreign Companies means a company incorporated in a country other than Tanzania under the law of that other country and has established the place of business in Tanzania. According to S.433 of the Companies Act, foreign companies are companies incorporated outside Tanzania, which, after the appointed day, establish a place of business within Tanzania and companies incorporated outside Tanzania which have, before the appointed day, established a place of business within Tanzania and continue to have a-place of business within Tanzania on and after the appointed day. A foreign company shall not be deemed to have a place of business in Tanzania solely on account of its doing business through an agent in Tanzania at the place of business of the agent. According to section 434 of the Companies Act, Foreign companies which, after the appointed day, establish a place of business within Tanzania shall, within thirty days of the establishment of the place of business, deliver to the Registrar for registration - (a) a certified copy of the charter, statutes or memorandum and articles of the company or other instrument constituting or defining the constitution of the company, and, if the instrument is not written in the English language, a certified translation thereof, (b) a list of the directors and Secretary of the company containing the following particulars; his present name and surname and any former name or surname, his usual address, his nationality and his business occupation, if any; Provided that, where all the partners in a firm are joint secretaries of the company, the name and principal office of the firm may be stated instead of the particulars mentioned (c) a statement of all subsisting charges created by the company, being charges of the kinds set out in section 99 and not being charges comprising solely property situate outside Tanzania; (d) The names and addresses of one or more persons resident in Tanzania authorised - (i) to accept on behalf of the company service of process and any notices required to be served on the company, and 16
  17. 17. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (ii) to represent the company as its permanent representative for the place of business, including a statement as to the extent of the authority of the permanent representative, including whether he is authorised to act alone or jointly. (e) the full address of the registered or principal office of the company, and the full address of the place of business in Tanzania; (f) a statutory declaration made by a director or Secretary of the company stating the date on which the company's place of business on Tanzania was established, the business that is to be carried on and, if different from the registered name of the company, the name under which that business is to be carried on; (g) a copy of the most recent accounts and related reports of the company including, where such are not in English, a translation of the same. On the registration of the documents specified above, the Registrar shall certify under his hand that the company has complied with the provisions of that section and such certificate shall be conclusive evidence that the company is registered as a foreign company. This certificate is commonly known as “Certificate of Compliance”. 17
  18. 18. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW PROMOTION AND FORMATION OF A COMPANY Promotion: refers to the entire process by which a company is brought into existence. It starts with the conceptualization of the birth a company and determination of the purpose for which it is to be formed. The persons who conceive the idea of forming a company and invest the initial funds are known as the promoters of the company. These are persons who do the necessary preliminary work incidental to the formation of a company. Chronologically, the first persons who control Company’s affairs are its promoters. Promoter not a term of law, but of business, usually summing up in a single word a number of business operations familiar to the commercial world, by which a company is generally brought into existence. Whaley Bridge Calico printing Co. v Green & Smith (1880) 5 QBD. The promoters enter into preliminary contracts with vendors and make arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital. However, a person who merely acts in his professional capacity on behalf of the promoter (e.g. lawyer, Accountants, etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and who is paid by the promoter is not a promoter. Legal Status As to exact legal status of a promoter, the statutory provisions are silent. His legal status is incapable of precise statement but Lindely L.J describe his position in Lydeny & Wigpool Iron Co vs. Bird (1886) 33 Ch.D as follows “Although not an agent for the company nor trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very popularly extended to meet such cases.” Thus, it appears that promoter is neither agent nor trustee of the company under incorporation but fiduciary duties have been imposed in him Erlanger v New Simbrero Phosphate (1878) 3 AC 1218. From the moment the promoter acts with the company in mind, a promoter stands in the fiduciary position towards the company. The promoters’ fiduciary duties may be summed up as follows 18
  19. 19. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW 1. He must not make any secret profit out of the promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sells the property to the company at a profit without making disclosure of the profit to the company or its members. The promoter can make profits in his dealings with the company provided he discloses these profits to the company and its members. What is not permitted is making secret profits i.e. making profits without disclosing them to the company and its members8 . He must also make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company. 2. He must not make unfair use of position and must take care to avoid anything which has appearance of undue influence or fraud 3. The promoter, once he has begun to act in the promotion of the company, must give the benefit of any negotiations or contracts into which he enters in respect of the company. Thus where he purchases some property he cannot rightfully sell the property to the company at a price higher than he gave for it. If he does so the company may upon discovering it, rescind the contract and recover purchase price. Remedies available to a company against the promoters: - 1. Rescind or cancel the contract made and if he has made profit on any related transaction, that profit may also be recovered 2. Retain the property and paying no more for it than what the promoter has paid for. 3. If these are not appropriate (e.g. cases where the property has altered in such a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue him to for breach of trust. Damages up to the difference between the market value of the property and the contract price can be recovered from him. A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are: - 1. The company may decide to pay some remuneration for the services rendered. 8 disclosure may be made to either an independent board of directors or the existing and intended shareholders e.g. by making disclosure in the prospectus 19
  20. 20. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW 2. The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members. 3. The promoter may sell his property for fully paid shares in the company after making full disclosures. 4. The promoter may be given an option to buy further shares in the company. 5. The promoter may be given commission on shares sold. 6. The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back. If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement. Pre-Incorporation Contracts The legal position is that two consenting parties are necessary to a contract, whereas company, before incorporation, is not an entity. Kelmer v Baxter (1866) L.R. 174). The promoters cannot therefore, act as agent for a company which has not yet come into existence. As such the company is not liable for the acts of the promoters done before incorporation. A pre-incorporation contract purported to be made by a company which does not exist is a nullity. As such the company when it comes into existence can neither sue nor be sued on that contract. Position of promoters: • Company is not bound by pre-incorporation contracts • Company cannot enforce pre-incorporation contract • Promoters remain personally liable. Can a company ratify/adopt a pre-incorporation contact after it comes into existence? 20
  21. 21. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW • Company cannot ratify a contract entered into by the promoters on its behalf before incorporation. The doctrine of ratification applies only if an agent contracts for a principal who is in existence and who is competent to contract at the time of contract by agent. • It cannot by adoption or ratification obtain the benefit of the contract purported to have been made on its behalf before it came into existence. Pre-incorporation contract - solutions to personal liability The following methods may be used to ensure that the company becomes, after incorporation, an effective party to a pre – incorporation contract: a. A draft agreement may be settled with the other party so that when the company is formed it enters into the draft agreement thus giving it contractual force when signed also by the other party. In order to ensure that the company does enter into the contract, the memorandum or articles of a new company can be drafted to include a provision binding the directors to adopt it. It will be noted here that the promoter here is not liable because there is no contract with him. b. The promoter can make the contract himself and be bound by it, provided the other party agrees that the promoter shall be released from his obligations under the contract if and when the company enters into a new, but as regards terms, identical contract with the other party after incorporation. This is really recommended for those cases – which are many – where the promoter(s) will be in effective control of the company after incorporation and can ensure the making of a new contract9 . c. Where the promoter is anxious that the company should acquire property which he does not himself own, he may take an option to purchase for, say three months. If the company later wishes to take the property, the promoter may assign the benefit of the option to the company or enforce it for the benefit of the company. If the company does not take over the property, the promoter is not liable to do so but he may loose any money which he paid for option. 9 Simply making the contract with the third party and allowing the promoter to assign the benefit of it to the company when it is formed is not recommended because the law does not allow a person to assign the burden of a contract. Therefore the promoter remains personally liable for the performance of the agreement even after the assignment to the contract. 21
  22. 22. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW d. Section 40 (1) of the companies Act states that the promoter is personally liable ‘subject to any agreement to the contrary’. Thus the promoter could agree when making of a contract that he should not be personally liable on it, even if the company after incorporation do not make a new contract. e. Formation of companies Currently in Tanzania companies are formed under the companies Act 2002, Cap 212. Those forming companies are called promoters. The main tasks of the promoters are to prepare various documents, and lodge these, with the necessary fees, with the Registrar of Companies. Forming a company under Cap 212 one is expected to follow the following steps: • Name: The first thing the promoter should do is to think of a name in light of section 30(2) of the Cap 212. The promoter can make a written application to the Registrar for reservation of a name. Such reservation will remain in force for a period of thirty days or such longer period not exceeding sixty days, as the Registrar may, for special reasons allow. (s. 30(1) of Cap 212 • If the proposed name of the company is approved then the following document duly stamped together with the necessary fees are to be filed with the registrar: 1) The memorandum of association duly signed by subscribers. This in effect, defines the company and what it can do. It is the requirement under section 5 (1) of the Act that there should be at least one witness who must attest the signature by subscribers to the memorandum. 2) The articles of Association, if any, signed by the subscribers to the memorandum of Association. These usually regulate the internal management, and the rights and duties of shareholders vis-à-vis the company and each other. They deal with matters such as transfer of shares, meetings, voting and other rights of shareholders, dividends, and directors’ powers of management. A public or private limited company by shares need not, in fact, submit any articles. If it does so, it will be taken to have adopted Table A, a model articles in regulations made under the companies Act. 3) A statement in prescribed form containing the names and address (or registered office) of:- 22
  23. 23. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (a) the person or persons being the first director or directors of the company (b) the person or persons being the first secretary or joint secretaries of the company; and in the case of a first director or directors, the particulars of any other directorship held during the five years preceding the date on which the statement is delivered to the Registrar. 4) A statement specifying the intended address of the company’s registered office on incorporation. 5) A statutory declaration, in pursuant to section 16(2) of Cap 212 by the advocate of the High Court or by the person named in the articles as a director or the company secretary declaring that the requirements of the ordinance have been complied with, and the registrar may accept such declaration as sufficient evidence of compliance. If all the requirements in respect to registration and matters incidental to it have been satisfied, the registrar issues a certificate of incorporation which is the company’s birth certificate10 . 10 It is very important to take not that the registrar has absolute discretion to register the memorandum and articles of association. The registrar is not bound to give reasons. However, where the registrar refuses to register the Memorandum and articles delivered to him, he shall return the same to the person who tendered them for registration and shall advise the applicant in writing that in exercise of the power or, as the case may be, he refuses to register the memorandum and articles of association. 23
  24. 24. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW MEMORANDUM AND ARTICLES OF ASSOCIATION MEMORANDUM OF ASSOCIATION A: Meaning and Importance Memorandum means the memorandum of association of a company, as originally framed or as altered from time to time11 . This definition is neither exhaustive nor explanatory. The memorandum of association is a document of great importance in relation to proposed company12 . It contains fundamental conditions upon which alone the company is allowed to be incorporated. It is a charter of the company and defines its reason for existence. It also regulates the external affairs of the company in relation to outsiders13 . Its purpose is to enable shareholders and those who deal with the company to know what its permitted range of enterprise is. It does not only show the object of the formation of a company but also the utmost possible scope of it. The memorandum defines the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulation for their own governance as they think fit14 . The importance of the memorandum of a company can be gauged by the fact that it contains rules regarding the capital structure of the company, the liability of its members, and scope of activities. The following facts indicate the importance of the memorandum:- (1) It provides the basis of incorporation (2) It determines the areas of operation of the company. (3) It defines the relationship of the company with the outsiders. (4) It is unalterable charter of the company. Although it can be altered under some special circumstances. B: Purposes of Memorandum The purposes of memorandum of are two-fold:- (i) The prospective shareholders shall know the field in or the purpose for which their money is going to be used by the company and what risks they are undertaking in making investment. (ii) The outsiders dealing with the company shall know with certainty as to what objects of the company are and as to whether the contractual relation into which they 11 S.2 of the Companies Act, Cap.212 12 Kapoor N.D. Elements of Company Law (1991) at pg.67. 13 Saleemi NA & Opiyo, A.G. Company Law simplified (1997) at pg.57 14 Ashbury Rly carriage & Iron Co. Ltd. V. Riche (1875) LR7 HL.653 24
  25. 25. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW contemplate to enter with the company is within the objects of the company15 . C: Preparation of Memorandum of Association (s. 12 of cap 212) The promoters must prepare the memorandum of association in accordance with the requirements of the Law, which relate to the formats and content of the memorandum of association. Examples of various forms of memoranda; depending on the nature of companies are given in various tables in schedule 1 of the Companies Act, Cap.212. Table B for memorandum of Company Limited by shares Table C for memorandum of Company Limited by guarantee and not having share capital. Table D for memorandum of company Limited by guarantee and having a share capital. Table E for memorandum of unlimited company having a share capital Section 4(1) of the Companies Act 2002 states that the memorandum of every company shall be printed in English language. Section 5 of the same Act states that the memorandum shall be dated and shall be signed by each subscriber in the presence of at least one attesting witness. Opposite the signature of every subscriber and attesting witness there shall be written in legible characters his full names, his occupation and postal address. D: Contents of Memorandum and the procedure to alter them. Clause I: The Name The name of the company establishes the identity and is a symbol of the company. The promoters have to choose the name with which the company is to be registered. They should avoid undesirable names16 , names which are misleading or too similar. No company is to be registered with a name that is similar with the existing company. This is due to the fact that the name of a company is part of its business reputation. Every company is required to paint or affix its name on the outside of every office or place in which its business is carried on, in conspicuous position, in letters easily legible17 . The name of Public Company must 15 Cotman v Brougham (1918) AC 514 16 s.30 (2) of cap.212 e.g names which suggest a criminal or immoral intent, or names which are misleading. 17 s.112 of Cap.212 25
  26. 26. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW end with the words “Public Limited Company” and for private company with the word “Limited”18 . Section 34 (1) makes it an offence for a person who is not dully incorporated with limited liability, to trade or carry on any business or profession under a name or title of which “limited” or any contractions or imitation of the word is the last word. Alteration The company can change its name by passing a special resolution in a general meeting to that effect. After passing a special resolution the registrar need to approve the changes in writing for the alteration to be effective19 . If the Registrar refuses to approve the changes, he is required to give reasons for such refusal (s.31) The minister responsible for trade may direct the company to change its name if, in his opinion the name by which a company is registered gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public (s.33(1) The direction must be complied with within six weeks unless there is an application to the court to set aside. Such an application to the court must be made within three weeks from the date of the direction (s. 33(2) & (3) Clause II: Registered Office (ss. 14(3), 110 &111) A company shall at all times have a registered office which all communications and notices may be addressed. On incorporation, the situation of the company’s registered office is that specified in the statement sent to the Registrar under s. 14 of the Companies Act. The company may change the situation of its registered office from time to time by giving notice in the prescribed form to the Registrar within fourteen days after the date of change. 18 s.4(1)(a) of Cap.212 19 s.31(1) of Cap.212 26
  27. 27. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW Clause III: The objects of the company The objects clause defines the sphere of the company’s activities, the aims that its formation seeks to achieve and the kind of activities or business that it proposes to undertake. A company cannot conduct any business foreign to its objects clause. If anything which is not authorized by the object clause is undertaken, it is considered ultra vires and hence not biding on the company20 . The objects clause gives protection to shareholders who learn from it the purposes for which their money can be applied. It ensures them that their money will not be risked in any business other than that for which they have been asked to invest. Similarly, it protects individuals who deal with the company and who can infer from it the extent of the company’s powers. The subscribers to the memorandum may choose any object or objects for the proposed company. However the objects should not; (i) Include anything illegal (ii) Be in contravention of the Companies Act (iii) Include anything which is against public policy Alteration (s. 8)  By special resolution  Application for confirmation – who can apply? – s.8(2)  Holder of not less in the aggregate than 10% in nominal value of the company’s issued share capital or any class thereof or, if the company is not limited by shares, not less than 10% of the company’s members or  Holders of not less than 15% of the company’s debentures entitling the holders to object the alterations of its memorandum  Application should be made within 30 days after the date on which the resolution altering the company’s memorandum was passed.  If no application is made the company shall within fourteen days from the end of the period for making such application deliver to the registrar a printed copy of its memorandum as altered [s.8(9) (a)].s,  If application is made – s.8(9)(b). 20 Saleem et al., op.cit. at p.61 27
  28. 28. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW  The company shall immediately give notice of that fact to the Registrar  Within fourteen days from the date of the order canceling or confirming the alteration wholly or in part, deliver to the Registrar a certified copy of the order, and in case an order confirming the alteration wholly or in part, a printed copy of the memorandum as altered The doctrine of ultra vires The company has the power to do all such things are: (a) Authorized to be done by the Companies Act, Cap.212. (b) Essential to the attainment of its objects specified in the memorandum. (c) Reasonably and fairly incidental to its objects. Anything else is ultra vires the company. Ultra vires act is void, as such it can not create any legal relationship. Such an act being void cannot be ratified even by the whole body of shareholders. The leading case on this point is Ashbury Rly carriage and Iron Co. Ltd. V. Riche (1878) Lt 7 HL 653. In this case a company was incorporated with the following objects (a) to make, sell or lend on hire, railway carriages and wagons; (b) to carry on the business of mechanical engineers and general contractors; (c) to purchase, lease, work and sell mines, minerals, land and buildings. The company entered into a contract with Riche for financing of the construction of railway line in Belgium. The question raised was whether that contract was covered within the meaning of “general contractors”. The House of Lords held that the contract was ultra vires the company and void so that not even the subsequent assent of the whole body of shareholders could ratify it. To overcome the obstacles imposed by the ultra vires doctrine, experts have come up with three ways/methods of drafting the objects clause: 1. The inflicted object clause – state any imaginable business 2. The Independent object clause – each of the clauses shall stand as if it severally formed an object clause of an independent company. 3. Subjective objects clause – The company can engage in any business which in the opinion of the directors, the company can advantageously engage in. 28
  29. 29. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW Clause IV: Liability Clause [s.4 (2) & (3) of Cap.212] (a) Whether the liability of the company is limited or unlimited. (b) If limited, is it by shares or by guarantee. Clause V: The capital clause The capital clause of a company states the amount of capital with which it is registered, divided into shares of fixed amount. The amount of such capital is determined by the cost of starting the business and there is no statutory limitation regarding minimum or maximum. The capital is called authorized, nominal or registered. Alteration of Share Capital The power of a limited liability company to alter share capital is provided under s.64 (1) of Cap.212. Such powers can only be exercised by the company in general meeting. And it must be authorized to do so by its articles of association. A company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alteration is authorized by the articles of association of the company: - 1. Increase its share capital by new shares of such amount as it thinks expedient. 2. Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. 3. Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination. 4. Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived. 5. Cancel shares which have been not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so cancelled. 29
  30. 30. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW The alteration of the capital of the company in any of the manner specified above can be done by passing a resolution at the general meeting of the company and does not require any confirmation by the court. A: Reduction of share Capital21 The law relating to the capital of a company has something sacred. The general principles of law founded on principles of public policy and rigidly enforced by courts is that no action resulting in a reduction of capital should be permitted unless reduction is effected a. Under statutory authority or forfeiture b. In strict according to procedure, if any, laid down in that behalf in the articles of Association. Any reduction contrary to this principle is illegal and ultra vires. A reduction of capital may be effected in different ways a. Reduction of capital without sanction of the court 1. Forfeiture of shares. The company may, if authorized by its articles, forfeit shares for non payment of calls. This result in forfeiture of shares if the forfeited shares are not re- issued. 2. Surrender of shares. The company may accept surrender of shares partly paid to save it from going through the formalities of forfeiture. 3. Cancellation of shares. The company may if so authorized by its articles, cancel shares which have not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so canceled. 4. Redemption of redeemable preference shares. The company may redeem preference shares in accordance of the provision of the ordinance. b. Reduction of capital with the consent of the court. 21 Under the new Companies Act reduction of share capital do not apply to an open – ended investment company whose establishment has been duly authorized under the Capital Markets and Securities Act. See Section 68. Open-ended investment companies (OEIC) is a company that is able to redeem its own shares for cash and manages a portfolio of investments on behalf of its members. 30
  31. 31. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW Reduction of capital in any other form apart from the ways stated above must be carried out in conformity with the provision of sections 68 – 72 of Cap 212. According to these sections, a company limited by shares or guarantee can reduce its capital if a. Authorized by the articles b. A special resolution has been passed to this effect c. It has been confirmed by the court Section 69 gives the company the power to reduce its share capital in any way but specifically mentioning the following ways in which the reduction of capital may be effected. a. It may extinguish or reduce the liability of member in respect of uncalled or unpaid capital. For example, where shares are of Tsh 1000 each with Tsh. 600 paid up, the company may reduce them to Tsh. 600 fully paid and thus release the shareholder from the liability on uncalled capital of Tsh. 400/-. b. Pay off or return part of the unpaid capital not wanted for the purpose of the company. For example, where the shares are fully paid of Tsh1000 they may be reduced Tsh. 400 each and Tsh. 600 may be paid back to the shareholders. c. Cancel paid up capital which is lost or unrepresented by the available assets either with or without extinguishing or reducing the liability on any shares. Due to heavy trading losses, C Company reduces its equity share of Tsh 100 each fully paid up to Tsh. 20 per share. If the company extinguishes liability on these shares the Tsh 100 shares will become shares of Tsh. 20 fully paid up. If it does not extinguish liability on these shares the Tsh 100 shares will continue to be shares of Tsh. 100 each, Tsh. 20 paid up. The procedure to follow in order to reduce share capital 1. Special resolution  Notice calling a meeting to propose a resolution must be accompanied i. Director’s certificate of solvency ii. Auditors report Any director of a company giving a certificate of solvency without reasonable ground shall be liable to imprisonment or fine or both. 31
  32. 32. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW 2. Advertise in the gazette, and in case of a public company, one national news paper, in each case within five working days of the resolution being passed 3. Application to the court by any creditor to object to the reduction within twenty eight days from the advertisement of the resolution. 4. File a resolution to the Registrar thirty five days from the date when a resolution was passed. B: Increase in share capital ss. 64 -67 The nominal share capital of a company can be increased, even though it has not yet issued all its authorized capital, by ordinary resolution of the company in general meeting. The company’s articles usually contain the authority to allow the company to increase its capital but in case the articles does not allow they must be altered by special resolution to this effect. The law requires that where the company has increased its share capital beyond the registered capital, notice must be given to the registrar within thirty days from the date of passing the resolution by which the increase is affected The increase must not be done with ill motive. In the case of Clemens v. Clemens Bros. Ltd (1976) 2 All E.R 268 resolutions to increase the capital and issue of new shares in such a way as to deprive the plaintiff, a shareholder her “negative control” of the defendant company were set aside as having been passed by an inequitable use of defendant’s rights. In this case the plaintiff owned 45% of the issued share capital of the defendant company and her aunt owned the remaining 55%. Although at one time both the plaintiff and her aunt had been directors of the defendant company, at the relevant time the plaintiff was no longer a director, the aunt and her fellow directors proposed to increase the company’s share capital by the creation and issue of further shares. The plaintiff concerned was that the proposed share issue would dilute her holding and voting power from 45% to 25%. She commenced proceedings against the company and the aunt seeking a declaration that the resolutions were oppressive, and an order setting them aside. It was held that resolutions were specifically and carefully designed to ensure not 32
  33. 33. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW only that the plaintiff can never get the control of the company but deprive her of what has been called her negative control i.e. powers to prevent the passage of any special resolution of which she disapproved. In the case of Tanzania Knitwear Ltd. v. Shamsu Esmail (1989) 1 T.L.R 48 resolution was passed by directors of the company to issue 800 shares. It was also resolved that each shareholder be offered to purchase the said shares according to individual shareholding. It was held that where shareholders are offered to purchase new shares on a pro-rata basis, the applicant cannot be heard to complain that the resolution was oppressive to him. However the resolution was declared illegal because it was passed by directors contrary to the requirement of section 51(2) of the Companies Ordinance which required such resolution to be passed by a company in general meeting. Clause VI: Association Clause In this clause, the subscribers declare that they desire to be formed into a company and agree to take the shares stated against their names. 2. ARTICLES OF ASSOCIATION A: Meaning The articles of association are the rules and regulations of a company formed for the purpose of internal management. The articles regulate the manner in which the company’s affairs will be managed. While the memorandum lays down the objects and purposes for which the company is formed, the articles lay down rules and regulations for the attainment of these objects. Lord Cairns defined articles of association as: “The articles play a part subsidiary to the memorandum of association. They accept the memorandum as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and form in which business of the company is carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made”22 . 22 Taken from Saleemi & Opiyo, op cit., at p.71 33
  34. 34. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW According to section 2(2) of Cap.212, “articles” means the articles of association of a company, as originally framed or as altered by special resolution, including, so far as they apply to the company, the regulations contained in Table A in the first schedule to either the repealed Ordinances or in Table A in the first schedule to the Act. In framing the articles of a company, care must be taken to see that regulations framed do not go beyond the powers of the company itself as stipulated in the memorandum. They should not violate any provisions of the Act. If they do, they would be ultra vires the memorandum or the Act, and will be null and void. The company may adopt all or part of the regulations contained in Table A to be its articles of association [s.11 of cap.212]. B: Contents of Articles of Association (a) Share capital, rights of shareholders, variation of these rights, payment of commissions, share certificates (b) Lien on shares (c) Calls on shares (d) Transfer and transmition of shares (e) Forfeiture of shares (f) Conversion of shares into stock (g) Alteration of capital (h) General meeting and proceedings thereat (i) Voting rights of members; voting & poll; proxies (j) Directors, their appointment, remuneration; qualification; powers and proceedings of Board of directors. (k) Manager (l) Dividends & reserves (m) Accounts, Audit and borrowing powers. (n) Winding up. C: Alteration of Articles of Association The company can alter articles by special resolution. (s. 13(1) & (2) 3: LEGAL EFFECTS OF MEMORANDUM & ARTICLES The memorandum and articles when registered bind the company and the members thereof to the same extent as if; (1) They had been signed and sealed by each member; 34
  35. 35. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (2) They contained covenants by the company and each member to observe all the provisions of the memorandum and of the articles [s.18 (1)]. The effect of s.18 is to constitute through the memorandum and articles of a company, a contract between each member and the company. The legal implication can be discussed under four headings on how the documents bind different groups. (1) Members to the company The memorandum and articles constitute a binding contract between the members and the company. Each member is bound as if he/she actually signed the memorandum and articles. In Borland’s Trustee v Steel Bros & Co. Ltd.23 the article of a company as altered provided that the shares of any member who become bankrupt should be sold to certain persons at a fair price. B. a shareholder became bankrupt and his trustee in bankruptcy claimed that he was not bound by the altered articles. It was held that the articles were a personal contract between B and the rest of the members and B and his trustee were bound. (2) A company to members A company is bound to the members in the same manner as are the members bound to the company. The company can exercise its rights as against any member, only in accordance with the provisions in the memorandum and the articles. (3) Members Inter se As between members themselves the memorandum and articles constitute a contract between them and are also binding on each member against the other or others. However, such a contract can be enforced through the medium of the company. This was elaborated by Lord Horschell in Welton v. Saffery24 where he observed. “It is true that the articles constitute a contract between each member and the company and there is no contract in terms between the individual members of the company but the articles do not, any the less, regulate their rights 23 (1901)1 Ch.279 24 (1897) AC.299 35
  36. 36. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW inter se. Such rights can only be enforced by or against a member through the company or through the liquidator; representing the company but…. No member has as between himself and other members any right beyond that which the contract of the company gives”. In some cases, the articles seek to regulate the rights of shareholders in their capacity as members. In such a case they constitute a contract between the members ‘qua’ members. Such contracts can be directly enforced by a member against another without joining the company as a party. (4) Company to the Outsiders. The articles do not constitute any binding contract as between a company and an outsider. An outsider cannot take advantage of articles to found a claim against a company. This is based on a general rule of law that a stranger to a contract cannot acquire any right under such contract. 4: CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES On registration, the memorandum and articles of association of a company become public documents. These documents are available for public inspection in the Registrar’s office on payment of such fees as may be prescribed. Every outsider dealing with the company is deemed to have notice of the contents of the memorandum and articles of association. This is known as “Doctrine of constructive Notice” or “Constructive Notice of Memorandum and Articles”. It is presumed that persons dealing with the company have not only read these documents but that they have also understood their proper meaning. The documents are open and accessible to all. It is the duty of every person dealing with a company to inspect these documents and see that it is within the powers of the company to enter into the proposed contract. The presumption that an outsider has read and understood the memorandum and articles was elaborated by Lord Hatherley in Mahoney v East Holyford Mining Co.25 as follows: “But whether he actually reads them or not it will be presumed he has read them. Every Joint Stock Company has its memorandum and articles of association… open to all who are minded to have 25 (1875) LR7 HL 869 36
  37. 37. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW any dealings whatever with the company and those who so deal with them must be affected with notice of all that is contained in these two documents”. Thus, anyone dealing with a company is presumed to know the contents of the memorandum and articles. 5. DOCTRINE OF INDOOR MANAGEMENT This doctrine imposes an important limitation on the doctrine of constructive notice. The persons dealing with the company are presumed to have read the memorandum and articles. Once they are satisfied that the company has powers to enter into the proposed transaction, they are required to do no more. They are entitled to assume that as far as internal proceedings of the company are concerned, everything has been regularly done. The outsider is presumed to know the constitution of a company but not what may or may not have taken place within the doors that are closed to him. This doctrine is also known as the rule in Royal British Bank v. Turquand or just Turquand Rule. Royal British Bank v Turquand26 The directors of a company had issued bond to Turquand. They had the powers under the articles to issue such bond provided they were authorised by a resolution passed by the shareholders at a general meeting of the company. No such required resolution was passed by the company. It was held that Turquand could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution had been passed. Exceptions to the doctrine of Indoor Management. The doctrine is subject to the following limitation: (1) Knowledge of irregularity. A person dealing with the company will not be entitled to protection under this rule if he has notice, actual or constructive, that the prescribed procedure has not been complied with by the company. (2) Forgery The doctrine does not protect a person where forgery is involved. A company cannot be held liable for forgeries committed by its officers. 26 (1856) 6E & B 327 37
  38. 38. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (3) Negligence on the Part of the Outsider If an individual is put upon enquiry he cannot claim the benefit under the doctrine in the circumstances under which he would have discovered irregularity if he had made proper enquiry. 38
  39. 39. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW MEMBERSHIP OF A COMPANY (S.24 OF CAP 212) One can become a member of a company by any one of the following ways: -. 1. By subscribing to the memorandum of association: A subscriber to the memorandum of association becomes a member on incorporation of the company in respect of the shares subscribed by him without any further act by him. He will be liable for whatever number of shares he has subscribed for up to the unpaid amount on those shares. A Subscriber to the memorandum cannot have canceled his membership on the ground that he was induced to become a subscriber by the promoters of the company. 2. By a director undertaking to take and pay for his qualification shares. [s. 191] 3. By agreeing in writing to become a member in any of the following ways provided the name is entered in the Register of Members of the Company. • By application and allotment • By taking a transfer of shares • By transmission of shares Membership may be acquired from an existing member by purchase of the shares of the transferor and lodging with the company a transfer deed duly executed by both the transferor and the transferee together with the share certificate. When the transfer is registered by the company, the name of the transferee is entered in the register of members of the company in place of the transferor. In the case of transmission, a person can become a share holder in consequence or by reason of the death or bankruptcy of a member or any other event constituting transmission. But that person will become a member only when he applies in writing requesting the company to make him a member and the company puts his name on the register of members. 4. By allowing his name to be on the register of members or otherwise holding himself out as a member or allowing himself to be held out as a member. A person will be deemed to be a member if he allows 39
  40. 40. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW his name to be on the register of members or otherwise holds himself or allows himself to be held out as a member. Any person competent to enter into a contract can become a member of the company. (Read s. 121 on remedy for a person whose name is entered erroneously or retained) Who can become a member? Any person competent to enter into a contract can become a member of a company. There is no prohibition on minors being shareholders or members although a company may refuse to accept a minor as a shareholder. However an infant can become a member of a company but he or she must act through parent or guardian. When minor applies for and receives allotment of shares, the same rules prevails as when he subscribes to the memorandum. Applying ordinary contract law rules, a contract to purchase shares is voidable by the minor within a reasonable time of attaining the age of majority. If the minor repudiate the contract, he will not be liable for future calls but cannot recover the purchase price unless there has been a total failure of consideration Steiberg v. Scala (Leeds) Ltd. (1923) 2 Ch 452, which is likely to be the case. Until minor repudiates, the minor has full rights of membership. Partnership firm A firm cannot be registered as a member because it is not a legal person and partners may not remain constant. A firm however may purchase share in a company in the individual names of its partners as joint shareholders. Insolvents A bankrupt person May be a member of a company although the beneficial interest in his shares is vested in the trustee in bankruptcy as from time to time when is adjudged bankrupt. Unless the articles provides to the contrary, a shareholder does not cease to be a member of a company on becoming bankrupt. Companies A registered company cannot become a member of another company unless authorized by its memorandum to hold such shares. A company cannot hold its own shares. Cannot be a member of itself. A subsidiary company cannot hold shares in its holding company, except where the subsidiary company is acting as personal representative or trustee and the holding company has no beneficial interest under the trust. 40
  41. 41. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW Register of members (ss 115 – 127 of Cap 212) Every company must keep a register of its members at its registered office stating the names, addresses and occupation, if any, and number of shares held by each member and the date which each person became ( ceased) to be a member. If there more than 50 members there must be an index (s.116). The register is to be open for inspection by members and the public during business hours and copies must be sent on request within ten days on paying prescribed fee. Rectification of the register The court may order rectification of the register if any one is improperly omitted or included in it (s. 121). This is in fact the procedure where by title to shares is established. Cessation of membership A person ceases to be a member of the company in any of the following ways: - a. By transferring his shares to another person. However, the transferor will continue to be a member until the shares are registered in the name of the transferee. b. By forfeiture of his shares on non-payment of calls due c. By a valid surrender of shares to the company d. By death but until the shares are transmitted to his legal heirs, his estate will be liable for any money due on the shares; e. By the company selling his shares in exercise of its right under the articles of association of the company (e.g. right to lien) f. By the Court or any other competent authority attaching and selling the share in satisfaction of decree or claim g. By redemption of the preference shares; 41
  42. 42. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW h. By the official assignee disclaiming his shares on his adjudication as an insolvent i. By rescission of contract of membership on the ground of misrepresentation or mistake. j. By the company buying back the shares Rights of members The members of a company enjoy various rights in relation to the company. These rights are conferred on members of the company by Companies Act or by the memorandum and articles of association of the company or by the general law. These rights are such as right to vote, right to demand a poll or join in the demand for poll, right to transfer shares, rights to participate in appointing directors and auditors in the annual general meeting, rights to receive dividend when declared. Voting Rights of the Members Every member of a company limited by shares holding equity shares with voting rights will have votes in proportion to his share in paid up equity capital of the company. In respect of equity shares with differential rights, voting rights shall depend on the prescribed rules. Generally, preference shareholders like debenture holders do not have any voting rights. The rights to vote at meetings are usually restricted by providing that they shall have no rights to attend such meetings. However, they can vote on matters directly relating to the rights attached to the preference share capital. Any resolution for winding up of the company or for the reduction or repayment of the share capital shall be deemed to affect directly the rights attached to preference shares. Whenever preference shares are, however, authorized to vote by poll, their shares are weighted more than other classes. Weighting here means so many votes will be allocated to each share a member holds so that when such member votes, his votes are calculated by multiplying each share by the number of votes attached to each share. Every equity shareholder with voting rights has a right to vote at a general meeting. However, a member’s voting rights can be revoked if that member does not make payment of calls or other sums due against him or where the company has exercised the right of lien on his shares. Liability of members 42
  43. 43. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW Liability of a member depends upon the nature of the company. (See types of companies on the basis of liability) No Notice of Trust The company is not allowed to enter any notice of trust on the register – thus the registered owner is treated as the beneficial owner so far as the company is concerned even if he is a trustee for someone else. Sometimes the shares of a company belonging to a person may be registered in the name of other person. The person in whose name the shares are registered is the trustee and the person to whom the shares belong is the beneficiary of the shares. For all practical purposes, a trustee is the shareholder and is liable for calls, even though the calls exceed the value of the trust property in his hands (Phoenix Life Ass. Co. Re.(1862) 31 L.J. Ch. 749). The trustee, however, is entitled to be indemnified by the beneficiary who is ultimately liable for calls [Hardoon v. Belilios (1901) A.C. 118. Section 122 clearly states that no notice of any trust, express, implied or constructive, shall be entered on the register of members. The object of S. 122 is • To relieve the company from any obligation to take notice of the rights of third parties in respect of shares registered in the names of any members, and • To preclude any person claiming an equitable interest in shares from treating the company as trustee in respect thereof. 43
  44. 44. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW PROSPECTUS After obtaining a certificate of Incorporation the promoters will take steps to raise the necessary capital for the company. A public Company may invite the general public to subscribe to the capital of the company and for this purpose a prospectus has to be issued. The basic objective of issuing a prospectus is to arouse public interest in the proposed company and induce the general public to buy its shares and debentures. If the promoters are confident of raising the required capital privately they need not issue prospectus. In such a case a statement in lieu of prospectus must be filed with the registrar of companies. The word prospectus is not used under Companies Act and instead the term offer document is used to mean any document, prospectus, notice, circular, advertisement or other invitation, offering to the public for subscription or purchase any share or debentures of a company. Private companies are not required to issue prospectus see s. 27 of cap 212. The central theme of a prospectus from money raising point of view, is that it sets out the prospects of the company and the purpose for which the capital is required. The prospectus is the basis in which the prospective investors form their opinion and take decision as to the worthiness of the company. From legal point of view prospectus is not an offer but a mere invitation to treat. When a person makes an application for shares on the basis of the prospectus that application is the offer. Offer document is defined by S.2 of Cap 212 but in simple words it is any document inviting deposits from the public or inviting offers from the public for subscription of shares or debentures of a company (subscription in the definition of prospectus means taking or agreeing to take shares for cash. Prospectus must be in writing; oral invitation advertisements in TV or film are not treated as prospectus. Invitation to Public The document will be treated as prospectus only when it invites general public to subscribe to it. The public is of course general word. But if the document satisfies the condition of invitation to the public, it is a prospectus even though it is issued to a defined class of the public. In Nash v. Lynde (1929) A.C. 158.it was stated that If however, the invitation is made to a small circle of friends of the directors or the existing shareholders, It is not an offer to the general public. Whether the shares have been offered to the public is a matter of fact and will depend on the circumstances of each case. In South of England Natural Gas & petroleum Co. Ltd Re (1911) I Ch. 573. A prospectus was issued marked 44
  45. 45. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW ‘for private circulation only’ it also contained a statement that a copy of it has been filed with the registrar. It was not publicly advertised and was stated to have been distributed by the promoters only to shareholders in certain gas companies in which they were interested. 3000 copies were sent out. It was held that it was offer of shares to the public. An offer will not be treated as made to the public (1) If it is not calculated to result directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation. (2) It is domestic concern of the persons making and receiving the offer or invitation. Thus an offer to one’s kid cannot be considered to be an invitation to public; Sherevell V Combined Incandescent Mantle’s Syndicate (1907) 2.3 T.L.R 482. FORM AND CONTENTS OF A PROSPECTUS. Prospectus is the window through which an investor can look into the soundness of a company’s venture. The investor must, therefore be given a complete picture of the company’s intended activities and its position. This is done through prospectus which must secure the fullest disclosure of all materials and essential particulars and lay the same in full view of all intending purchasers of shares or debentures. S. 46 provided that every prospectus issued by or on behalf of a company must be filed, and the date, unless the contrary is proved, is taken to be the date of publication of the prospectus. S.47 (1) States that offer document issued before on behalf of the company or, by or on behalf of any person who was engaged or interested in the formation of a company must state the matters specified and contains in the reports required to be included from time to time in regulations made by the Minister for the time being responsible for finance or by the Capital Markets and Security Authority or such other authority as may be designated by that minister for the purpose. Prospectus is not required to be issued in the following cases. (1) Where shares are not issued to the public. (2) Where shares or debentures are offered to existing members or debentures holders. (3) Where shares/debentures offered are uniform in all respects with previously issued shares/debentures. 45
  46. 46. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (4) Where an offer is made in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to the shares/debentures. Registration of offer document (s. 49) No offer document shall be issued by or on behalf of the company or in relation to intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof approved by the Capital Markets and Securities Authority. Misstatements in Prospectus If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact, there may arise 1) Civil liability – s. 50 2) Criminal liability- s. 51 & 472 A person who has been induced to subscribe for shares (or debentures) on the faith of a misleading prospectus has remedies against the Company, and the directors, promoters and experts. Remedies against the Company 1) Rescission of the Contract Any person, who takes shares on faith of statements of fact contained in a prospectus, can apply to the court for rescission of the contract if those statements are false or fraudulent or if some material information has been withheld. He must however, apply for the rescission with a reasonable time and before he will have to surrender to the Company the shares allotted to him. His name is then removed from the register of members and he gets back the money paid by him for the Company along with interest. Conditions for rescinding a) The statement must be a material misrepresentation of fact. The misrepresentation is material when it is likely to influence a reasonable man in his judgment whether or not to apply for shares. In Henderson V Lacon (1867) L.R. 5 Eq. 249. A prospectus stated that the directors and their friends have subscribed a large portion of the capital and they now offer to the public remaining shares, where as the fact was that the directors had subscribed 46
  47. 47. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW only 10 shares each it was held that, the subscriber could rescind the contract. A statement of fact must be distinguished from a statement of opinion. statement that property of a company is worth a certain sum of money or that due to hard work and efficiency of directors the profits are expected to reach a certain figure are only opinions and will give no ground for an action for rescission. The statement that “the surplus assets, as appear by the last balance sheets, are more than Tshs. 10,000/= is a statement of fact. b) Statement must have induced the shareholder to take the shares. This in fact is a question of fact depending on circumstance of each case if a statement would influence a reasonable man, the court will readily infer that it influenced the applicant. In the case of Smith V Chadwick (1087) A.C 187 it was stated that if the applicant’s acts show that he did not rely on the statements, he is not entitled to rescind. c) It must be untrue A statement is deemed to be untrue if it is misleading in the form and context in which it is included. Where an omission is calculated to mislead, the prospectus is deemed in respect to such omission, to be a prospectus in which untrue statement is included. But a mere non-disclosure does not amount to misrepresentation unless the concealment has prevented an adequate appreciation of what was stated. 47
  48. 48. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW CONCEPT OF CAPITAL AND THE FINANCING OF COMPANIES As Latham CJ said in the Australian Case of Incorporated Interest Pty Ltd V Federal commissioner of Taxation (1943) 67 CLR 508 at 515:’ it is impossible to say that capital has a single technical meaning which prima facie should be attributed to the word in any statutory provision’ The legal concept of capital crops up in the law of trusts and revenue law as well as company law. In trust law it describes the original trust fund and any assets which replace the items in the original fund. A distinction is drawn between capital and income. In revenue law, there is the same capital and income distinction. In modern company law capital is used to cover: a. Share capital – the funds subscribed by members; b. Loan capital – the fund provided by commercial finance providers and investors holding debentures or debenture stocks; c. All funds whether provided by members, creditors or by retention of profits and d. The assets in which funds have been invested. Share Share is the interest of a shareholder in a company. The interest is what is owned and it gives a shareholder certain rights as defined by the articles of association and has a nominal value. Share Certificate The ownership of interest is evidenced by a document called share certificate. When a share has been allotted to a member the company is required to issue certificate within six days. Where shares are transferred from one member to another, the company must send a share certificate to the new member within two months (s.82). [This does not apply to shares transferred within the membership of the Stock Exchange] A share certificate is merely a prima facie evidence of the fact that the person stated as being the owner of the shares is the owner and that the shares are paid up to the amount so stated (s. 83(1). On the other hand the company cannot deny the truth of these statements against anyone who relied on the certificate to his detriment unless the share certificate is a forgery. (See Re Bahia and San Fransico Rly Co. (1868) LR 3 QB 584 and Reuben v. Great Fingall Consolidated (1906) AC 439) 48
  49. 49. LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW Share Capital This means the capital raised by a company by the issue of shares. The capital clause in Memorandum of Association must state the amount of capital with which company is registered giving details of number of shares and the type of shares of the company. A company cannot issue share capital in excess of the limit specified in the Capital clause without altering the capital clause of the memorandum of association. The following different terms are used to denote different aspects of share capital: - Nominal authorized or registered capital means the sum mentioned in the capital clause of Memorandum of Association. It is the maximum amount, which the company raises by issuing the shares and on which the registration fee is paid. This limit cannot be exceeded unless the Memorandum of Association is altered. Issued capital means the nominal value of the shares which are offered to the public for subscription. A company does not normally issue capital at once, so that issued capital in such case is less than the authorized capital. The issued capital can never exceed the authorized capital, it can at most be equal to the authorized capital which is the case when all shares have been issued to the public. Subscribed capital means that part of the issued capital at nominal or face value which has been subscribed or taken up by purchaser of shares in the company and which has been allotted. The subscribed capital may be less than the issued capital. Called-up capital this is that part of the issued capital which have been called up on the shares. It is the total amount called upon the shares issued and which the shareholders continue to be liable to pay as and when called. I.e. if the face value of a share is Tsh. 500/- but the company requires only Tsh 200/- at present, it may call only Tsh. 200/- now and the balance Tsh 300/- at a later date. Tsh. 200/- is the called up share capital and Tsh. 300/- is the uncalled share capital. Paid-up capital means the total amount of called up share capital, which is actually paid to the company by the members. Often some shareholders fail to pay the calls made on them and the amount thus owing is known as “calls in arrears” or “calls unpaid” 49
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