Nicco-Law: CORPORATE GOVERNANCE : COMPANIES

This is governed by the Companies Act 2015 and its subsequent amendments.

Why do people form Companies?

(a) Enable owners to limit their liability-Liability is limited to the Share capital contributed or the amount guaranteed in case of insolvency

(b) Perpetual Succession- it is not affected by the existence of its members and can therefore exist forever. For example, the IBEA Company still exists 200 years after it was formed

(c) Company structure –The members need not be engaged in day/day activities. Managers must act in the best interests of members as members will check them. Members cannot make decisions for individual gains but rather benefit the entire company. It allows members to employ expert managers

(d) A Company potentially has a wider source of capital. A large number of shareholders subscribe to the capital unlike the situation in sole proprietorship and partnership

(e) Transferability of shares especially in public companies

Disadvantages

(a) Registration and compliance involve a substantial amount of time and effort. Especially in filing tax returns.

(b) Management and control complex than any other form of business association.

(c) Inefficient- Adequate Notice has to be given. Anything done by the directors should be subject to consultation between them and the shareholders.

(d) Agency Problem arises- At times, tension may arise between members and directors. The members may feel and think directors are not performing well in the management of the Company.

(e) Frequent tax filing obligations.

Who is a member of a company?

These are the persons that have subscribed to the share capital of the company, they have subscribed to the Articles of the company and/or given a guarantee. A member can also be any other person who the Articles provides is a member

A stakeholder of a company is any person whose well-being will be affected by the well-being of co-members, directors, employees, suppliers, contractors, government

The Companies Act defines a beneficial owner as “the natural person who ultimately owns or controls a legal person or arrangements or a natural person on whose behalf transactions are conducted, and include persons who exercise ultimate effective control over a legal person or arrangement.”

Under the Companies Regulations, a beneficial owner is a natural person who directly or indirectly:

a. holds at least ten percent (10%) of the issued shares of the company;

b. exercises at least ten percent (10%) of the voting rights in the company;

c. holds the right to appoint or remove a director of a company; or exercises significant influence or control over a company.

· A Shareholder is a person who has subscribed to the share capital of the company

Types of Companies:

· Private Companies (Private Limited)

This is a company whose articles provide that the members of the public cannot subscribe to the share capital.

· Public Companies

This is a company whose membership is open to members of the public. Members of the public can subscribe to the share capital. Its Certificate of incorporation provides it is a public limited company. There is also no limit as to the capacity of members.

· Unlimited Company

In this type of company, there is no limit on what members will contribute during insolvency. There is no limit on the liability of members and the Certificate of incorporation states the liability of members is unlimited.

· Limited Liability Company

This is a company whose liability is limited to shares subscribed.

· Company Limited by guarantee

This is a company whose liability is guaranteed by the members of the company vide legal instruments

· Foreign Companies

According to Section 974 of the Companies Act, it is mandatory for all foreign companies carrying on business in Kenya to be registered. Carrying on business does not include buying shares. Anything that involves the provision of goods and services for monetary consideration.

Consequences of Registration

Companies Act reaffirms the principle under Salomon -vs- Salomon. That a company is a separate legal entity, with perpetual succession and be sued, own property, enter contracts in its name and all other juridical persons are allowed to do.

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