LAW 5112 Capital and Financing

LAW 5112LAW 5112Corporate Law and GovernanceMBA

04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 1

CAPITAL AND CAPITAL AND FINANCING OF A FINANCING OF A

COMPANY COMPANY

Public Company Limited by Shares Perspectives


Capital and Financing of A Capital and Financing of A companycompany In modern company law the term capital is

used to cover;

Share capital-Funds subscribed by members

Loan capital-funds provided by commercial finance providers and investors holding debentures or debenture stocks.

All funds whether provided by members creditors or retention of profits plus the assets in which funds has been invested.


Share: What is it?Share: What is it?The interests of a share holder in

a company The interest is what is owned

and gives a share holder certain rights as defined by the articles.

Thus a share is what is used by the company in determining the rights in the first place and in the second place the liabilities of a member in the company


continuationcontinuationTraditionally, however, the capital

of the company can still be in a different unit that shares that is stocks.

A stock is one unit of the company capital comprising several number of shares put together.

Example a company may wish that every 100 shares be bound to form one Unit of stock.


Share and stock Share and stock distinguisheddistinguished A share is a distinct

individual unit of a capital in a company and

shares can be bought and sold in a whole units

Shares are required to be distinguished

A company can issue shares directly

Stock is not divided into equal parts/denomination

Subject to the articles Stocks may be bought or sold in any convenient multiples or sub division

Stocks bears no distinguishing numbers as shares do

Companies can not issue stocks directly it can only convert its fully paid up shares into stock


Terminologies applied in this Terminologies applied in this topictopicNominal authorized or Registered

Capital

Is the sum mentioned in the capital clause of Memorandum and articles of Association of a company.

It is a maximum amount which the company raises by issuing shares and on which the registration fee is paid.


Issued CapitalIssued CapitalThis refers to the nominal value

of shares which are offered to the public for subscription

This is because the co. in most cases does not issue all capital at once

In all circumstance it can not exceed he authorized capital


Subscribed capitalSubscribed capitalThis is the part of the issued

capital which has been subscribed or taken by purchasers of the shares and allotted to them.

This may be less than issued capital and can not exceed registered Capital.


Called up capitalCalled up capitalIs the part of the issued capital

which have been called upon the shares.

The tendency is that the company does not require the members to pay full for their shares.

Thus the amount required to be paid is what is termed as the called up capital


Paid up capitalPaid up capitalIs the amount of called up shares

capital which is actually paid to the company by the members.

At the time when a member of a company have failed to pay steps like forfeiture or surrender of shares can be done by the company and the party respectively.


Categories of shares in a company Categories of shares in a company

The categorization can lead into four main classes of shares, these includes;

Equity shares/ ordinary sharesPreference sharesDeferred or founders SharesCorporate shares


Equity shares/ ordinary Equity shares/ ordinary sharessharesMembers holding them are said to have

equity in the company. Ordinary shares have a right to return of

capital and payment of dividend ranking after preference shares,

Ordinary shares claim the pool of surplus assets in the solvent winding up after the return of capital to all other shareholders.

Ordinary shares usually carry one vote per share


Preference sharesPreference sharesIt carries preferential rights in

respects of dividend at a fixed amount or at a fixed rate.

It also carries preferential rights in regard to payment of capital on winding up or otherwise


Classes of preference Classes of preference sharessharesCumulative or Non Cumulative Redeemable and Non

redeemable preference shares, see section 61 of the Companies Actand section 58 of the Companies Decree

Participating or non participating preference shares.


Deferred or founders Deferred or founders SharesSharesAre issued to the founders of the

company as a reward to heir services.

They get a portion of the profit if the dividend on ordinary shares exceeds a certain fixed amount.

Their rights are determined by the memorandum or articles.


Corporate sharesCorporate sharesAre the shares created by a company

for issue to its employees. They are given to the managing staff

and employees of the company

The company pays for them to the employees as fully paid up shares

The company’s trustee will look after these shares in the event of an employee leaving the company


The capital Clause of the The capital Clause of the memorandum of Association of a memorandum of Association of a companycompanyThe capital Clause of a company

states the amount of the capital with which it is registered, divided into shares of fixed amount.

The capital is called authorized, nominal or registered capital

A company at any time can alter its capital clause as it wishes


Alteration of the capital clause section Alteration of the capital clause section 64/61 of the co Act& Decree respectively64/61 of the co Act& Decree respectivelySuch powers may only be exercised

by the company in general meeting and that must be authorized by the articles of association.

A company can alter its capital clause in any of the following manners/ ways:

a) Increase its share capital by new shares

b) Consolidate and divide all or any of its share


CONTINUATIONCONTINUATIONc) Convert all or any of its paid up

shares into stock d) subdivide its shares, or any of

them, into shares of smaller amount e) Cancel shares which have not been

agreed to be takenTake note that alteration may be in

terms of increasing or reducing or even restructuring the capital clause of the company


Reduction of share Capital s 69/ 66 of the Reduction of share Capital s 69/ 66 of the Co. Act & Decree respectivelyCo. Act & Decree respectivelyA company can do either of the

following:Extinguish or reduce the liability on

any of its shares in respect of share capital not paid up; or

Either with or without extinguishing or reducing liability on any of its shares;◦ cancel any paid up share capital which

is lost; 04/07/23

By Ombella J.S: Contacts: [email protected] or 0713227298 21

ContinuationContinuationpay off any paid up share capital

which is in excess of the requirements of the company,

alter its memorandum by reducing the amount of its share capital and of its shares accordingly


continuationcontinuationUnder the companies Act as opposed

to the Decree there should be a lapse of about 35 days from the date of passing of a special resolution to the date of it coming into effect,

The same alteration need be registered to the registrar of companies for it to be effective see section 69 (3).


continuationcontinuationThis approach under the act has

made a less intervention of the court in the process of reduction of the share capital of the company

That requirement seem to have been substituted by the requirement of the declaration of solvency by the Director's accompanied by the Auditors Report


continuationcontinuationAlso the reduction need be gazzetted

see section 69(4) of the Act

Creditors whose interest seemed to be jeopardized have a right to object in court in 28 days after the resolution has been gazzeted, see section 71 of the Act

Formerly the resolution were to be filed in court for confirmation if the creditors will not object see section 67 of the Decree.


Stages for reduction in Stages for reduction in summarysummarySpecial resolution

Directors certificate of solvencySpecial resolution for reduction be

gazzeted and announced in local news paper.

Elapse a period of 35 daysRegistration to the registrars’

office04/07/23


Effects for non Compliance of Effects for non Compliance of the procedures:the procedures:Read section 71 (2) (b) and (3)Read Section 72 (2) of the

Companies Act


Other modes of Reduction of share Other modes of Reduction of share capital of a companycapital of a companyA company may alternatively

reduce its share capital in the following ways:◦Forfeiture of shares,◦Surrender of shares, and ◦Redemption of shares.


Why reducing the capital Why reducing the capital of a companyof a companyGenerally the capital of the company

need to remain as registered

Returning surplus capital; Releasing a liability to pay up capital,

thus reducing the nominal value of the shares;

Eliminating losses, which may be preventing the payment of dividends;


Cont..Cont..Redemption of shares where there

are insufficient distributable reserves;

As part of a scheme of arrangement where there is a merger of two large companies of similar size; and

Distribution of dividends to shareholders.


Increase of the share capital of the Increase of the share capital of the companycompanyRegarding the increase of the share

capital, the company whenever so wishes is required to give a notice of the increase to the registrar within 30 days after the passing of the resolution authorizing the increase see section 66(1) of the Act

The decree seem silent on this aspect


Debt financing of a Debt financing of a corporationcorporationDebt capital is a common way of

financing business enterprises and for successful companies,

Debt capital represents the obligation of a company to repay the loan made by the debt holder.

That is making payments of principal sum and interest on a fixed schedule


DebenturesDebenturesThe most usual form of borrowing

by a company is by issue of debentures

The term debenture means; a document which either creates a debt or acknowledges it, or;

an acknowledgment of debt and obligation or covenant to pay. This obligation is in most cases accompanied by charges.


continuationcontinuationDebentures are therefore, a form of

security which may be bought and sold in such a way as shares.

In order to give lenders some security against non payment of their loans a charge is often made against the assets of the company.

Commonly are issued through prospectus


continuationcontinuationAs a general matter debts do not

have the participation, voting, conversion and redemption rights that constitute the fundamental ingredients of equity securities.

The debenture holders are regarded as and are the creditors of the company and not members


Classes of debenturesClasses of debenturesAccording to negotiability

◦a) Bearer debentures◦b) Registered debenture

According To Security:◦a) Secured debenture, ◦b) Unsecured debenture


continuationcontinuationAccording to Permanence:

◦a) Redeemable debentures; ◦b)Irredeemable debentures see

section 68/88 of the Act & decree respectively


Coverage so farCoverage so far::Meaning of capital of a companyShare capital

◦Maintenance of the capitalDebt capital

◦Meaning and types


CHARGES ON THE ASSETS OF THE CHARGES ON THE ASSETS OF THE COMPANYCOMPANYWhenever a company has power to

borrow, it has also powers to security for the debt by a charge on all or any of its properties.

Charge means an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt.


Fixed charge Fixed charge Is a charge which is against a specific,

clearly and well defined property of the company.

The property under charge is defined at the time of creation of charge.

The nature and identity of the property does not change during the existence of the charge.

The company cannot transfer the property so charged before paying the creditor whose interest is protected under it


Floating charge Floating charge ◦ It is a charge on the classes of assets of

the company both now and future ◦ That class of assets is one which, in the

ordinary course of business of the company, is changing from time to time.

◦ It is contemplated by the charge that, until some steps are taken by or on behalf of those interested in the charge, the company may carry on business in ordinary way.


Consequences of a Floating ChargeConsequences of a Floating Charge The company can;

Deal with the property on which a floating charge is created, till the charge crystallizes.

Not withstanding the floating charge, create specific mortgage of its property having priority over the floating charge.

Sell the whole of the undertaking if that is one of its objects specified in the memorandum, in spite of the floating charge on undertaking. See Re Foster v Borax Co. [1901] 1 Ch 326


CRISTALIZATION OF A CRISTALIZATION OF A FLOATING CHARGEFLOATING CHARGE

When a charge holder takes some steps to enforce his charge, a floating charge becomes a fixed charge on the assets covered by that charge.

At this time the company can not dispose off the cared assets without first paying off the charge holder


When does a floating charge When does a floating charge become fixedbecome fixedA floating charge will become fixed

upon the following conditions:◦Cessation of the business of the

company. ◦Upon the commencement of winding

up of the company.◦If a debenture holder, having become

entitled to realize the securities by the reasons of the fact that the principal money has become payable (due).


REGISTRATION OF REGISTRATION OF CHARGESCHARGESEvery company must keep a

register of charges affecting its assets

The registrar must contain short description of the property charged, the amount of the charge the name of the person entitled to the charge

See part iv of the companies Act for details, especially section 96/97 and 100/ 92 of Act & decree)


Duty to registerDuty to registerIt is the duty of the company to

register the charges.Read section 100 of the CAHowever the interested person may

register it on his own cost and claim for compensation from the company

Read section 102 on the content of the charge register at the registrars office


Effects of Registration:Effects of Registration:It acts as a notice to the public at

large that the charge holder has an interest in the charged property.

Once a certificate of charge is issued by the registrar, it is conclusive evidence that, the document creating the charge is properly registered.


CONSEQUENSES OF NON-CONSEQUENSES OF NON-REGISTRATIONREGISTRATIONA charge which is compulsory

registerable but which is not registered is void

See section 96 of CA

Omission to register the particulars of charge as required is punishable with fine.

See section 101 (2) of the Companies Act


Memorandum of Memorandum of satisfactionsatisfactionUnder section 104 of the companies

act it is provided that, the registrar may, on evidence being given to his satisfaction that the debt for which any registered charge was given has been paid or satisfied , may order that a memorandum of satisfaction be entered on the register, and shall if required furnish the company with the copy there of


DIRECTORSDIRECTORSMANAGEMENT OF A COMPANY


IntroductionIntroductionA company is not a natural person so

it works through people called Directors.

These are officers who constitute the board of directors.

A company therefore can not work on its own although it is a person

Thus it relies much to the natural person for it to operate.


Question: Who is a Question: Who is a director?director?The companies Act defines a

Director to mean, "Any person occupying the position

of director by whatever name called."

Such a definition is not exhaustive, thus does not provide a clear picture of who directors are?

See section 2 of the Act


continuationcontinuation In Abadin Railway Co. v. Black Bros

(1854) stated that;

Directors are a body to whom is delegated a duty of managing general affairs of a Co.

"A corporate body can only act through agents and it of course the duty of those agents so to act as best to promote the interest of corporation whose affairs they are conducting…"


continuationcontinuationIn determining whether a person is a

director or not it does not depend on the name but on the nature of the office has.

That is the activities he performs and duties and liabilities that binds such a person in relation to the company.

That he must have control, over direction, conduct, management and superintendent of the affairs of the Company.


ContinuationContinuationAccording to Lord Denin, directors

are the directing mind of the company since the company

His lordship gave a clear position regarding the directors of the company as the directing mind of the company since it is as such not a natural person.


Lord Denins’ positionLord Denins’ position“A company may in many ways

be likened to a human body.

It has a brain and a nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre.


ContinuationContinuationSome of the people in the company

are mere servants and agents who are nothing more than the hands to do the work and cannot be said to represent the mind or will.

Others are directors and managers who represent the directing mind and will of the company and control what it does.

04/07/23


ContinuationContinuationThe state of mind of these

managers is the state of mind of the company and is treated by the law as such.”

See Bolton (Engineering) Co Ltd v TJ Graham & Co Ltd, HL, [1957] 1 QB 159. At page 172


Minimum number of Minimum number of Directors Directors For every company the minimum number

of directs in each and every company must be two except for One man company.

The law sets the minimum of two directors it is advisable however that one of theme must be a natural person.

See section 3 and 186 of the Company Act.See also section 25 of the Business

law(Miscellaneous Amendment )Act


QUALIFICATION OF QUALIFICATION OF DIRECTORSDIRECTORSThe provisions of the Act provides for

the qualifications that a director should posses these qualifications include.

Age; a director should be of age of majority i.e. not below 21 years and should not be of an age above 70 years.

What did the rule intend to bring in the aspect of company management?


ContinuationContinuationThe rule intends to fill in the lacuna

that was left with the Companies Ordinance.

It also bring in the aspect of maturity in decision making as it directs on the minimum and maximum age limit.

Of important to note is that the Act does not prohibit having directors of lower age than 21 but not than 18.


continuationcontinuationIt also allows a life time director

in as much as he was so appointed before the Act come into force.

Directors must also be of sound mind

Directors must not be disqualified by any other laws


ContinuationContinuationDirector must not be disqualified

by any other order of the court as per section 196 Companies' Act

Directors must have share qualifications, where the articles of Association of the company so direct.

See, section 142 (1) of Companies Act.


Types of DirectorsTypes of DirectorsThere are four types of directors

in a company:◦Shadow Director◦Alternate Directors◦De Facto Directors◦Executive Directors


Shadow DirectorsShadow DirectorsIs any person, other than a

professional adviser, with whose instructions the Directors of the company normally comply (a person in accordance with whose directions or instructions the Directors of a company are accustomed to act).

He is a person who is not a directors but on his influence to the directors, they rely much


ContinuationContinuationAnd implement his advice and they

are accustomed as such so to act.This should be distinguished from

a professional adviser who does his advice openly and when required.

A shadow director hides behind the directors and does not claim to be a director

In Re Hydrodam (Corby) Ltd, [1994] 2 BCLC 180


Cont..Cont..Shadow directors are bound by

the terms of the companies Act in the same way as it applies to the directors of the company

Read:Bourne N. (1994) Business Law and Practice, Cavendish Publishing Ltd London, UK pp 113


ContinuationContinuationThe court stated that in order for

someone to be a shadow Director four things must be shown:◦ (a) there should be those who are the

proper or de factor Directors of the company

◦ (b) that the person directed those Directors on how to act in relation to the company,

◦ (c) that those Directors acted in accordance with those directions and


continuationcontinuation◦ (d) that they were accustomed so to

act. As such this class of directors differ

from a de facto director in the sense that they do not pose and claim to be as directors

After they have given the advice they do not go father to show as if they are directors


Alternate Directors Alternate Directors The articles of association may

provide for the appointment of alternate Directors.

They are persons, who are nominated by Directors to act in their absence.


Cont….Cont….They can only be appointed with

the agreement of the majority of the Directors and he is entitled generally to perform all the functions of his appointer in his absence.


De Facto DirectorsDe Facto DirectorsIs a person who has not been validly

appointed or who is disqualified but whom, in effect, occupies the position of, and acts as if he was a director. He is a person :◦ who assumes to act as a Director and◦ who is held out as a Director by the

company and◦ he claims and purports to be a Director

though he has never actually or validly been appointed as such


ContinuationContinuationOne need to undertake the

functions that are to be carried out by a director for him to be referred as a de facto director.

In Re Richborough Furniture Ltd, Lloyd J. [1996] 1BCLC 507. stated his opinion, also in Secretary of State for Trade and Industry v. Tjolle [1998]1BCLC


Test for de facto DirectorTest for de facto DirectorFor someone to be made liable as

a de facto Director, the court would have to have clear evidence that :◦he had either been the sole person

directing the affairs of the company or, ◦ if there were others who were true

Directors, that he was acting on an equal footing with the others in directing the affairs of the company.


ContinuationContinuation If it is unclear whether the acts of the person

in question are referable to an assumed Directorship, or to some other capacity such as a shareholder or, as here, a consultant, the person in question must be entitled to the benefit of doubt.

Read the following cases on De-Facto Director and Shadow directors: ◦ NSW v Drysdale [1978] 22 ALR 161,◦ Mistnorm P/L v Yasseen [1996] 14 ACLC 1387


Executive DirectorsExecutive DirectorsAre directors concerned with the

actual management of the company, They are involved in the day to day

management of the Company. They are engaged by the company

to work on full time basis.Generally, he must have a contract

with the company that gives him the position as such


Cont…Cont…He have extensive management

powers delegated to him by the articles and may, in practice, have specific titles within the company, for example, Managing Director

Read:◦Bourne N. (1994) Business Law and Practice, Cavendish Publishing Ltd London, UK pp 113

◦Dine Janet (5th Ed) (2005) Company Law, Palgrave Macimillan Hampshire UK page 165


A managing directorA managing directorIs a director who by virtue of :

◦an agreement with the company (employment contract say for example) or

◦of a resolution passed in the general meeting or by its board of directors or

◦by virtue of its memorandum or articles of association,


ContinuationContinuationIs entrusted with substantial powers of

management, which would not be otherwise exercisable by him.

It thus include a director occupying the position of the managing director regardless of the name called.


POSITION OF A DIRECTOR POSITION OF A DIRECTOR Question: What is the relationship

between the directors and the company?

Directors as Agents or trustees of the Company; ◦a Company being an artificial person acts

through directors who are elected representatives of shareholders.

◦They are in eyes of law agents of a Company for which they act on its behalf.


ContinuationContinuation◦ The law of Agency regulates their

relationship.They are more than agents because

they have some independent powers.

They are not bound to consult the shareholders in most matters and the articles of Association gave them power to exercise such things without necessary consulting shareholder.


Continuation:Continuation:It is even much true currently

where the directors are not bound by any thing in the Memorandum of association of the company◦Eastern Railway Co. v Itein it was

stated that; (1872) LR & CH APP 149◦are mere trustees or agents of the Co;

that the trustees of Cos' money and properly and agent in the transaction they enter on to on behalf of Co.


Trusteeship and directorsTrusteeship and directorsThey must account for all the

Companies' money and property which they exercise control on.

They are trustees of the power entrusted into them in the sense that they must exercise them honestly in the interest of the Company and shareholders and not on their own interest.


Fiduciary positionFiduciary positionDirectors position is that of

fiduciary in nature.They stand to work for the benefit

of the other who is a company. As such they should not consider

their interest first but that of the company.

In Re Forest Dean Coal mining Co., (1879) 10ChD 450


ContinuationContinuationDirectors have been called:

◦ trustees or commercial trustees and ◦sometimes they have been called

managing partners, ◦It is immaterial how they are called

but the role they play.◦They stand in a fiduciary position

towards the company in respect of their powers and capital under their control.


DUTIES OF DUTIES OF DIRECTORSDIRECTORS

DIRECTORS OF A COMPANY


IntroductionIntroduction“We should remind ourselves that being

a company director is a wonderful thing for the person who is a company director.

But it is a position of great responsibility which involves running the affairs of a company for the benefit of other people.

It is a heavy responsibility we should not water down”. Godsmith-UK 2006 Hansards


continuationcontinuationDirectors duties have been spread

out over numerous statutes and case decisions making it difficult for directors to know when they may have breached their duties to the company.

The statutory l duties of directors replace those previously decided and set by case law.


ContinuationContinuationIt is important that any director

whether of a big or small company is familiar and complies with their duties.

Ignorance is no defense and; the consequences can be severe both for the company and personally.

As a director you must always act in the best interests of the company.


Duties of DirectorsDuties of DirectorsDuty of care and Skills: section 185Duty to act in good faith: section

182 Duty to disclose interest: section.

209 Duty in relation to employees:

section 183 Duty to exercise Powers for

proper purposes: section 184 Contractual Duty.


Duty of care and SkillsDuty of care and Skills::There are no minimum skill that a

director is expected by the law to demonstrate

They are expected to demonstrate the reasonable care and skill of any other director of his knowledge and skill would have done.

They are as such allowed to entrust their duties to any other delegated individuals


ContinuationContinuationDirectors remain liable for the final

decision.◦“ The duty does not prevent a director

from relying on the advice or work of others,◦ but the final judgment must be his

responsibility.◦ He clearly cannot be expected to do

everything himself. ◦ in certain circumstances directors may be in

breach of duty if they fail to take appropriate advice – for example, legal advice…” Goldsmith,


Duty to act in good FaithDuty to act in good FaithDirectors have a duty to act

bonafide and in good faith in the interest of the Company

It is thus not in the interest of the company if the act is aimed at benefiting their own desires or rather the interest of a third party instead of that of a company. See an answer at; Keith Abott, etal (2007) (8th Edition) Business law pg 429


ContinuationContinuationAs such the directors must promote

the successes of the Company.As a Director one must act in good

faith for the success of the company and benefit of the shareholders having regard to the likely consequences of any decision long term. This will include considering the interests of:◦ employees, business relationships

with suppliers, 04/07/23


ContinuationContinuation-Customers and others,

the impact on the community and environment,

maintaining the reputation of the company for having high standards of business conduct,

acting fairly between members of the company and;

subject to the legal requirements, to consider and act in the interests of creditors.

Read: People’s Department Stores Inc vs Wise [2004] 244 DLR (4th) 564


Duty to disclose interest.Duty to disclose interest.See section.See section.This is sometimes referred to as

a non-conflict rule, it imposed a duty upon a director not to place himself in a position where his duty to the company and his personal interests conflicts.◦Avoidance of personal Profits: ◦Disclosure of interests


Duty in relation to Duty in relation to employeesemployeesDirectors are required to have regard

to the interest of the employees and the members as well.

This duty is enforceable like any other duties director owe to the company.

This may feature much during mergers where caution need to be taken to reduce loss of jobs by employees


Duty to exercise Powers for Duty to exercise Powers for proper purposesproper purposesThis is the duty that arises itself

from the roots of the fiduciary position of the directors to the company. In the case of Bristol &West Building Society v Mothew (1998) Ch. 1


ContinuationContinuationMillett L.J.: stated that, “A fiduciary is someone who has

undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

A fiduciary must act in good faith, ◦ must not make profit out of his trust, ◦ he must not place himself in a position where his

duty and his interest conflict,


continuationcontinuation◦ he may not act for his own benefit or the benefit of a

third person without the informed consent of the principal.”

Mills v Mills where Dixon J said: "Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power“


How to determine proper How to determine proper purposespurposesIt must be shown that the

substantial purpose of the directors was not improper nor in breach of their duties as a director.

Honest or altruistic behaviour does not prevent a finding of improper conduct. Whether acts were performed for the benefit of the company is objectively determined


ContinuationContinuationThe courts must determine

whether, but for the improper or collateral purpose, the directors' powers would not have been exercised


Examples of improper Examples of improper conductsconductsExercising the Board's power to

issue shares with the substantial motive of defeating the voting power of existing shareholders by creating a new majority

Failing to give proper full information in a notice of a general meeting;

Using company funds to seek their re-election to the Board of directors;


ContinuationContinuationRead the case of Permanent

Building Society v Wheeler [1994] 12 ACLC 674

See section 184 of the Companies Act


Contractual Duty.Contractual Duty.

In addition to the above duties, a director should remember his/her contractual duties under employment contract.

Also beware of your rights and responsibilities as both an employee and a director


Coverage so far:Coverage so far:Types of Directors

Position of directors

Duties of Directors


MEETINGS OF THE MEETINGS OF THE COMPANYCOMPANY

COMPANY MANAGAEMENT


IntroductionIntroductionA company is an association of

several persons. Decisions are made according to

the view of the majority. These dicissions take place at the

various meetings, which take place between members and between the directors


Types of meetings in a Types of meetings in a companycompanyGenerally, meetings in a

company are of the following types:◦Class meetings◦Meetings of members◦Meeting of the Board of directors◦Other meetings

Meetings of the creditors


Class MeetingsClass MeetingsAre meeting which are held by

holders of a particular class of shares, e.g. preference shareholders.

Such meetings are normally called when it is proposed to vary the rights of that particular class of shares.

At such meeting, these members discuss the pros and cons of the proposal and vote accordingly.


continuationcontinuation(See provisions on variations of

shareholder’s rights s. 73 of Companies Act.

Class meetings are held to pass resolution which will bind only members of the class concerned, and only members of that class can attend and vote.

Procedures for calling are the same as AGM unless otherwise stated in Articles of Association


Meetings of the Board of Meetings of the Board of Directors:Directors:

◦Meeting of the Board of Directors as and when the Board so decide

◦Meeting of a Committee of the Board depending on the number of comettee that may be established in a company


Meeting of creditors:Meeting of creditors:A company, either as a running

concern or in the event of winding up, has to make certain arrangements with its creditors.

Meetings of creditors are called for purposes of 261 & 262, a co. may enter into:◦ arrangements with creditors with the

sanction of the Court for reconstruction or

◦any arrangement with its creditors.


Members MeetingsMembers MeetingsThese are meetings where the

members/shareholders of the company meet and discuss various matters.

Member’s meetings are of the following types


Annual general meeting see Annual general meeting see section 133section 133This is kind of meeting required

to be held every company in each year.

The company may however hold its 1st AGM within 18 months after the date of its incorporation and, no more that 15 months must elapse between two AGM.

04/07/23


ContinuationContinuationThe notice calling the meeting

must state the time, date and place of the meeting must be mentioned in the notice.

It must be accompanied by :◦a copy of the annual accounts of the

company,◦ director’s report on the position of

the company for the year and ◦auditor’s report on the accounts.


ContinuationContinuationCompanies having share capital should also

state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence.

The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated


Legal effects of not Legal effects of not conducting the Annual conducting the Annual General MeetingGeneral MeetingIn case of default in holding an

annual general meeting, the consequences are provided under section 133(4) & (7).


Usually Business of an AGMUsually Business of an AGMDirectors lay by the Co. annual

accounts and reports for the most recent financial period.

Auditors term of office ends at AGM, so they must be re-appointed or new auditors must be appointed.

Declaration of dividends to be paid to the shareholders

Re-appointment of appointment of new directed to replace the retiring ones.


continuationcontinuationA notice of not less than 21 days

is required 64 the AGM as per s. 135 of Co. Act 2002.


EGM section 134 for Co. Act EGM section 134 for Co. Act 20022002Extraordinary general meeting is

any meeting which is not AGM. Such meeting are called by board of directors for some reasons


continuationcontinuationAn explanatory statement of the

special business must also accompany the notice calling the meeting.

The notice must/should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person.


Who can call for EGMWho can call for EGMS. 134 (2) provided that the directors

must call an EGM if requisitioned by holds of 10% of paid up capital of the co.

Also the provision of section 137 of Act the court can, on its own motion or on application by any member who entitled to vote in any type of meeting in the Co; order the holding of any type of such meetings to be conducted (whether AGM or EGM).


Convening meetings:Convening meetings:In convening the meeting the

following must be taken in account.

Notice of the meeting to be issued not less than 21 days.◦Authority to call the meeting, that is

the meeting should be convened by required authority that is directors.

◦Thus, if a person without authority issued a notice of meeting this void.


Conditions of a valid Conditions of a valid meeting:meeting:

◦Must be properly convened◦Parties calling the meeting must be

properly authority to do so◦There must be a proper and an adequate

notice◦The meeting must be legally constituted

(i.e. Chairperson & quorum)◦Business at the meeting must be validly

conducted in accordance with the regulations governing the meeting.

04/07/23


Voting rights of the members Voting rights of the members of a companyof a companyThe member of a company has a

right to vote for any motion posed in a company.

The voting right is mainly exercised by way of shares.

The more number of shares one have the more the voting rights a person has.

However, voting may also be done by way of show of hands.


Proxy s. 138 Co. Act 2002:Proxy s. 138 Co. Act 2002:A member may appoint another

person to attend and vote at the meeting on his behalf.

A member may appoint different proxies for the different shares he holds in the Co.

Also he can appoint different proxies in the sense that if one fails then the other may do so.◦ Is this same to Company representative in

meetings see section 141 of the Companies Act


Under what conditions doe a Under what conditions doe a proxy voteproxy voteConditions:Company be a Company having

share capitalNot to appoint two proxies to

attend or one occasion.Proxy not to work/vote except on

poll.


continuationcontinuationHowever, a poll is allowed if a

prescribed no of members demand a poll as stated in the MEMAT section 139(1)(b).

A Co. cannot refuse a demand for a poll made by:◦At least 5 members having the right to

vote◦Any members representing one tenth

or more of the total voting rights04/07/23


Revocation of a proxyRevocation of a proxyA proxy can be revoked by a

member at any time and is automatically revoked by death or insolvency of a member.

A member may revoke his proxy by himself before the proxy have voted, once a proxy has exercised the right to vote, a member can not retract his vote


Quorum:Quorum:Means the minimum no of persons

who must be present for the meeting to be valid.

A meeting which invalid quorum is void same as the decision there too.

The articles of Association of a Co. shall provide for a quorum without which a meeting shall not constitute a quorum. See section 136 of the companies Act


MINORITY MINORITY PROTECTIONPROTECTION

MAJORITY RULE IN COMPANY LAW &


Meaning of Majority RuleMeaning of Majority RuleMajority rule is a principle that

derives itself from the fact that only the majority of the votes in the company can determine the fate of the company.

That is as log as the majority has passed the resolution then the it is immaterial that few members of the company did not vote for it


ContinuationContinuationThe court will not therefore

intervene the resolution passed by the majority since by agreeing to be a member in such a company, the shareholders agreed to submit to the will of majority of the members.

Therefore the decision of the majority is the decision of the company


CONTINUATIONCONTINUATIONMajority rule has its root in the

famous case of Foss v HarbottleIn this case the court ruled out as follows:◦The wrong done to the company was one

which could be ratified by the majority of members.

◦The company was the proper plaintiff for wrongs done to the company, and the company can act only through its majority shareholders.


ContinuationContinuation◦The majority of members should be

left to decide whether to commence proceedings against the directors.

Therefore, the court will not interfere with the company as long as all its decisions are covered under the articles and memorandum of association of a company.


ContinuationContinuationIn an Indian case Rajahmundry Electric Supply Co v Nageshwara Rao the court had the following to say:

◦ The court will not in general, intervene at the instance of shareholders in matters of internal administration, and will not interfere with management of the company by its directors so long as they are acting within the powers conferred on them under the articles of association.


Importance's of the ruleImportance's of the ruleThat a company is a separate

legal person different from its members.

The wrong done to the company should therefore be pursued by the company itself and no one else (Say its shareholders).

It also helps to limit the possibility of multiplicity of suit


Minority shareholders Minority shareholders ProtectionProtectionMinority shareholders refer to the

members of the company who hold less than fifty percent of the shares in a company in an ordinary resolution.

This means therefore that these members in a company may not determine the fate of the company but the majority who can ordinarily pass a resolution in their favour


ContinuationContinuationWith the growing trend of private

companies where the possibility of a lot of shares being concentrated into the hands of a single shareholder the rule that the majority shall determine the fate of the company may be misused to the detriments of the minority.

Thus the law need to protect them against this possible abuse by the majority


Minority protection in Minority protection in TanzaniaTanzaniaWhere the act complained of is

ultra vires or illegal;Where a shareholder's personal

rights are infringed;Where the act complained of

requires more than an ordinary resolution (e.g. a special resolution)

Where there is 'fraud on the minority'.


ContinuationContinuationWinding up on the 'just and

equitable' ground. CA 2002, under section 233

under Chapter ten of the Act - the statutory remedy for 'unfairly prejudicial conduct'.

Rules of conducting a meeting


-END--END-Thanks for being attentive

Presented byOmbella J.S

HoD Research and Outreach ServicesDirectorate of Quality Assurance

&LL.M Programme Coordinator

Faculty of LawMzumbe University


Documents

LAW 5112 Capital and Financing