Group 4
KABARAK UNIVERSITY SCHOOL OF LAW
KLAW 324: Law of Business Associations II
Facilitatd by: Kemunto Matoke, LL.M (ND), LLB (Kabarak) PGDL (KSL)
1 Kirui Ryan Cheruiyot LAW/M/1330/09/21
2 Stephanie Saina LAW/MG/2445/09/21
3 Sharon Kemunto LAW/MG/1748/09/20
4 Suzzy Vallary LAW/MG/2566/09/21
5 Mutua Janet Mueni LAW/M/2308/09/21
Page 1 of 12
CONTENTS
Preface
Table of cases
Table of Statutes and statutory materials
Abbreviations
1 Introduction: Equity Finance
Share capital
Debt capital
2 Classification of Shares
Types of preference shares
3 Allotment of Shares.
Requirements of Allotment
Power To Allot Shares
Irregular Allotment
4 Transferability of Shares
Process of Transfer of Shares
5 Public Offer of Shares
6 Continuing obligations and disclosure of information to the market
7 Maintenance of capital
8 Variation of share capital
Page 2 of 12
PREFACE
Corporate finance plays a pivotal role in the functioning and growth of companies,
particularly in how they raise and manage capital in Kenya. One of the primary mechanisms
through which companies secure funding is equity finance, which involves issuing shares to
investors. This article delves into the complexities of corporate finance with a specific focus on
equity, providing a comprehensive overview of the key processes and obligations surrounding
share capital.
The article begins with a brief introduction to equity finance, followed by an examination of
the concept of share capital, which forms the foundation of a company’s financial structure. This
is followed by a discussion on the classification of shares, exploring the various types of shares
companies issue to meet different financial needs and investor preferences. Next, the process of
allotment of sharesb is outlined, explaining the steps a company takes to allocate shares to
shareholders, followed by an analysis of the transferability of shares, which addresses how
shareholders can transfer ownership and the legal frameworks governing such transactions.
Further, the article will explore public offers of shares, detailing how companies raise capital
through public markets, and the responsibilities that arise thereafter, including the continuing
obligations and disclosure of information to the market. This section emphasises the importance
of transparency in corporate operations to maintain inve bestor confidence and market integrity.
The article also touches on the maintenance of capital, which ensures that companies preserve
their financial health and protect creditors, before concluding with a discussion on the variation
of share capital, outlining the procedures for altering a company’s share capital structure.
In exploring these themes, this article aims to provide a clear understanding of the legal and
practical aspects of equity finance, equipping readers with key insights into how companies
navigate their financial and regulatory obligations in the corporate world.
Page 3 of 12
TABLE OF CASES
Birch v Cooper 1889 14 AC 525
Dunlop v Higgins 1849
Pamsgate Victoria Hotel Co. Vs Montefoire 186
In re Estate of Johnson Njogu Gichohi (Deceased) [2018] eKLR
TABLE OF STATUSES AND STATUTORY MATERIALS
Company Act, 2015
Law of Succession Act Cap 160
ABBREVIATIONS
Capital Markets Authority (CMA)
Initial Public Offering (IPO)
Page 4 of 12
1. INTRODUCTION: EQUITY FINANCE
A company as a separate person is capable of owning property, conducting a business and
employing people.1 But how does it obtain the funds to purchase property, manage its operations,
and pay its staff? Two principal sources of corporate finance are (a) capital contributed for shares
and (b) borrowings.2 In this article, we will focus only on the first source; however, for general
knowledge, both sources will be defined in the following subheadings.
a. Share capital
Share capital (shareholders’ capital, equity capital, contributed capital, or paid-in capital)
is the amount invested by a company’s shareholders for use in the business.3
b. Debt capital
Debt capital refers to funds that a business acquires by borrowing. It involves a loan
provided to the company, usually intended for growth, which is typically repaid at a later
date. This concept shall be discussed in the subsequent chapters.
2. CLASSIFICATION OF SHARES
Share: an interest over share holder in a definite portion of the capital. A person who
acquires a share in a company automatically become subject to the obligation impossed by the
company act. Classes of shares that can be created or issued by a company or not prescribed by
the company act, they depend on the provisions of the companies constitution, usually the article
of association. Legally a company may create any type or class of shares each of but in practice
their two classes of shares usually issued by companies:
1.Ordinary shares.
2.Preference shares.
1
Mayson, S. et al (2006). Mayson, French & Ryan on Company Law, 25th ed., Oxford University Press, at 4
2
Mayson, S. et al (2006). Mayson, French & Ryan on Company Law, 25th ed., Oxford University Press, at 4
3
Corporate Finance Institute, ‘Share Capital’ CFI —
https://corporatefinanceinstitute.com/resources/management/price-fixing/ in 2015.
Page 5 of 12
Ordinary shares.
It refers to shares that has no special rights attached to it. It entitles the holder to an equal
division of profit without preference. Ordinary shareholders have residual rights of the company.
Preference shares.
For a share to be termed as preference shares It must satisfy two conditions:
1. It shall carry a preferential right as to the payment of the dividend or the fixed rate.
2. In the event of winding up ,there must be a preferential right to the repayment of the paid up
capital.
TYPES OF PREFERENCE SHARES.
1.cumulative and non- cumulative preference shares.
2.Participating and non participating preference shares.
3.convertible and non- convertible preference shares.
4.Reedemable and non redeemable preference shares.
Birch v Cooper 1889.4
In this particular case, the company was winding up voluntarily. The company discharged all its
liabilities and some money remained for distribution among the members. A question arose of
whether the surplus was to be distributed among the ordinary or preference shareholders. It was
held that once the capital has returned to the shareholders, they thereafter become equal and the
distribution should therefore be made equally.
3. ALLOTMENT OF SHARES.
This is the companies acceptance of an offer to buy its shares. It is governed by the
following rules of the common law relating to contract:
1. When a company issues a prospectus, the issue is an invitation to treat but not an offer.
If it was regarded as an offer, every replication would constitute an acceptance and the company
will be contractually bound to allot all shares applied for. When application is made, the
constitute offers and hence the company cannot be sued because there’s no contract between
them and the company.
2. The companies acceptance must be unconditional.
If the application was made for 10 shares and five were allotted, allotment will be a counter offer
which the allotee could reject. Companies invariably prepare application forms which contain a
close to the effect that the applicant agrees to accept such a number of shares as the company in
its absolute discretion may allot to him.
3. Acceptance must be communicated to the applicant.
The allotee must actually receive the letter of allotment so that he is aware of the allotment. If the
letter of allotment is lost in transit there will be no binding contract.
4
Birch v Cooper 1889 14 AC 525
Page 6 of 12
Dunlop vs Higgins (1849)5
This is a case law that shows acceptance by post. The plaintiff applied for the shares of a
company, the company accepted the offer. The allotment letter was displayed in a post. The court
held that the contract was complete when the allotment letter was posted.
4. Allotment must be made within reasonable time .
If there is undo delay in the allotment then the offer lapses.
Pamsgate Victoria Hotel Co. V Montefiore (1866).6
The defendant applied for shares on June 28 th and the shares were alloted or November 23 rd. The
defendant refused to the shares and to sued. The court held that the offer had lapsed and the
defendant was not liable.
i. REQUIREMENTS OF ALLOTMENT
1.Registration of allotment. ( Sec 332).7
A public company must file a prospectus or a statement in Lieu of prospectus before making the
faster allotment.
2.Minimum subscription.
No shares which are offered to the public can be allotted until the minimum subscription stated
in the prospectus has been subscribed and the amount payable on application received in cash.
3.Application money.
The amount payable when application for each share shall not be less than 5% of the normal
value of the shares if the minimum subscription is not subscribe in 60 days after issue of
prospectors or the money received from applications must be returned.
ii. POWER TO ALLOT SHARES.
Section 3278: state that directors should not exercise a power or the company to a lot shares in
the company or to Grant rights to subscribe for or to convert any security into shares in the
company, accepted accordance with section 3289 and 329.10
Section 32811:the director may exercise any powers of the company to allocate shares of the
class or to Grant rights to subscribe for or to convert any securities into shares, except to the
extent prohibited from doing so by the company articles.
Section 32912: directors may exercise power of the company to a lot shares the of the company,
or to Grant rights to subscribe for or to convert any security into shares in the company only if
they are authorized to do so by the companies articles.
5
Dunlop v Higgins 1849
6
Pamsgate Victoria Hotel Co. Vs Montefoire 186
7
Section 332 of the Companies Act of 2015.
8
Section 327 of the Companies Act of 2015.
9
Section 328 of the Companies Act of 2015.
10
Section 329 of the Companies Act of 2015.
11
Section 328 of the Companies Act of 2015.
12
Section 329 of the Companies Act of 2015.
Page 7 of 12
Allotment of issue not fully subscribed.
Section 35413: a public company should not a lot shares for public subscription unless the issue is
subscribed for in full or the offer is made on terms that they shares subscribed for maybe alloted
in any event or if specified conditions are made and are satisfied.
iii. IRREGULAR ALLOTMENT.
Section 35514: if an allotment of shares contravene section 354, the applicant has a right to avoid
the allotment.
4. TRANSFERABILITY OF SHARES
A share is a single unit of ownership in a company. Shares in a company are personal
property of the shareholder.15 Transfer of shares is the handing over of titles of shares from one
man to another. A shareholder may transfer his shares of the company to any person, regardless
of whether he’s a member or not at any time. A shareholder transfers his shares when he feels
they are not a great investment or feels the shares are no longer of value to him. When a
shareholder transfers his shares, he absolves himself of all the rights and responsibilities that
come with owning the shares and the buyer becomes the sole owner of the shares.
Transfer of shares may only be registered by a company if proper documents of transfer, transfer
of shares form, have been delivered to the company, failure to which the transfer is deemed
void.16 There must also be an intermediary that manages the records and all the paperwork
between the shareholder, the company and the buyer; the intermediary agent can be a trust
corporation, a financial institution, a bank or transfer agent.
The succession of shares of a deceased shareholder in Kenya is regulated by The Law of
Succession Act CAP 160,17 and the Companies Act No. 17 of 2015. An appointed representative
or administrator gains title over the estate of the deceased shareholder upon their appointment.
Transmission is the automatic transfer of a shareholder’s shares by operation of the law when he
dies or is declared bankrupt, through the principle of survivorship.18
Transmission of shares is regulated by the subject company’s articles of association and in
absence, Regulations 8(2) of the Companies (General) Regulations, 2015. Transmission of shares
safeguards the continuity of membership in a company hence fortifying sustainability and
running of the company.
Process of transfer of shares
13
Section 354 of the Companies Act of 2015.
14
Section 355 of the Companies Act of 2015.
15
Section 323, Companies Act (2015)
16
Section 497(2), Companies Act (2015)
17
Section 4, Law of Succession Act Cap 160
18
In re Estate of Johnson Njogu Gichohi (Deceased) [2018] eKLR
Page 8 of 12
A sale of shares agreement is drawn where both parties agree to the sale and purchase of the
shares. Afterwards the transfer of shares form is filled which contains details such as the current
shareholder, the buyer, the company from which the shares are being transferred, the type of
shares among other things. The board of directors then either rejects or approves the transfer. If a
company refuses to register the transfer of shares it shall send a notice of refusal to the transferor
and transferee giving reasons for such refusal.
The board may refuse when;
The shareholder transfers shares to his or her representative.
The provisions guiding the transfer of shares as provided in the articles of association are not
fulfilled.
The instrument of transfer is not as per the provisions of the Companies Act.
One the board of directors approves the transfer of shares, a new certificate for proof of transfer
is drawn indicating the transferee as the sole owner of the shares.
5. PUBLIC OFFER OF SHARES
A public offering is a sell or equity shares or debt securities by a company to the public ,19 in
order to raise funds intended to cover the company’s shortcomings, funding businesses or
making investments. The issue offers security such as bonds to investors in the open market. An
offer is not regarded as an offer to the public if it cannot result, directly or indirectly in securities
of the company becoming available to persons other than the ones receiving it, 20 or when it is a
private concern of the person receiving it and the one making it. 21A private company limited
shares shall not offer any securities to the public.22
It requires the filling of registration statements with the appropriate regulatory authorities. A
predetermined offering price that the issue will be sold at must be agreed on by the issuers.
Public offers are applicable to a company’s Initial Public Offering (IPO) and subsequent offering.
An IPO is the first time a private company issues corporate stock to the public. Younger
companies seeking capital to expand often issue IPO’s and also established private companies
seeking to be publicly traded as a part of a liquidity event.
6. CONTINUING OBLIGATIONS AND DISCLOSURE OF INFORMATION
TO THE MARKET
Kenya, public offers are primarily regulated under the Capital Markets Act and the
Companies Act, with oversight from the Capital Markets Authority (CMA). These regulations
ensure transparency, protect investors, and maintain the integrity of the capital. Under these
19
Section 510(1), Companies Act (2015)
20
Section 510(2)(a), Companies Act (2015)
21
Section 510 (2) (b), Companies Act (2015)
22
Section 511(1)(a), Companies Act (2015)
Page 9 of 12
statutes, companies are required to provide timely and accurate disclosures to the market to
promote transparency and protect investors. The companies must disclose any material changes
in their financial condition, while the Capital Markets Authority (CMA) regulations require listed
companies to publish quarterly and annual financial statements .These obligations ensure that
investors have access to essential information that may affect their investment decisions,
fostering a fair and efficient capital market. Non-compliance can result in significant penalties,
emphasizing the importance of adherence.
Directors must disclose information about their shareholding and major shareholders
must disclose voter-holder information to the company which in turn is disclosed to the market
by the company. Thus, both market efficiency and corporate governance objectives are promoted
by the disclosure agreements.
7. MAINTENANCE OF CAPITAL
The issued share capital of a company limited by shares is the primary security for the
company’s creditors. A limited company by its memorandum declares that its capital is to be
applied for the purpose of the business. The creditors give credit to a company because of .
capital and therefore the capital of the company should not be “watered down”. The Companies
Act attempts to prevent capital being watered down such as making it illegal for a limited
company to issue shares at a discount.. Purchase of Own Shares According to a leading case
Trevor vs. Whitworth, it is illegal for a limited company to purchase its own shares. 23 Such a
purchase, if permitted would constitute an indirect reduction of the paid up capital. It is
presumed that whenever a company buys its shares it would do so by utilizing its paid up capital.
REDEMPTION OF SHARES A limited company having a share capital may issue redeemable
shares that are to be redeemed, or are liable to be redeemed, at the option of the company or the
shareholder if the articles authorize such issue. 24It however provides that: No such shares shall
be redeemed except out of profits of the company which would otherwise be available for
dividend or out of the proceeds of a fresh issue of shares made for the purposes of the
redemption. No such shares shall be redeemed unless they are full paid. The premium if any
payable on redemption must have been provided for out of profit of the company or out of
company’s share premium account. Where any such shares are redeemed otherwise than out of a
23
The Companies Act0(00CAP.486 pf 2015) Section 424.
24
The Companies Act (CAP. 486 of 2015) Section 520.
Page 10 of 12
fresh issue, there shall, out of profits which would otherwise have been available for dividend, be
transferred to a reserve fund to be called “Capital Redemption Reserve Fund”, a sum equal to the
nominal amount of the shares redeemed.
DIVIDENDS The basic rule is that “dividends must not be paid out of capital”.Dividends can
only be declared up to the amount recommended by the directors, ensuring that they retain
control over profit distribution. Additionally, dividends must be paid solely from profits,
prohibiting any payments from capital, which protects the company's financial stability and
creditors. While interim dividends can be paid at the directors' discretion, a general meeting
cannot mandate such payments, reinforcing the board's authority. Furthermore, dividends may be
distributed in kind, such as specific assets, but this must not adversely affect the capital structure.
Lastly, dividends do not bear interest against the company, further safeguarding its capital
resources.25
8. VARIATION OF SHARE CAPITAL
Variation of share capital refers to when a company, from time to time, by ordinary
resolution increase its capital, consolidate its shares or any of them into a smaller number of
shares, sub-divide shares or any of them into a larger number of shares or cancel any shares not
taken or agreed to be taken by any person. Sections 404 and 405 of the Companies act provides
that a limited company having a share capital may alter its share capital by increasing or
decreasing its share capital26. The increasing or decreasing of the share capital can be through
various actions, such as:
Issuing New Shares: Increasing share capital by issuing more shares to existing or new
investors.27
Reducing Share Capital: A company may choose to reduce its share capital for various reasons,
such as returning funds to shareholders or restructuring its finances.28
Share Buybacks: Repurchasing shares from the market, which reduces the total number of
shares in circulation. A company can repurchase its own shares from the market, which reduces
the number of outstanding shares and may increase the value of remaining shares.
Stock Splits or Consolidations: Adjusting the number and value of shares without changing the
overall value of equity. A stock split increases the number of shares while reducing their nominal
value, whereas a consolidation combines shares, increasing their nominal value but decreasing
their number. When subdividing, consolidating or dividing shares, a company shall ensure that
25
https://www.collegesidekick.com/study-docs/2894257 > accessed 11 October 2024.
26
Section 404 and 405 of the Companies Act, 2015.
27
Section 404(1)(a) of the Companies Act, 2015.
28
Section 404(1)(b) of the companies Act, 2015.
Page 11 of 12
the proportion between the amount paid and amount if any unpaid on each resulting share is the
same.29
Conversion of all or any fully paid shares into stock: Section 404 of the Companies Act
empowers companies to convert fully paid shares into stock, provided they are authorized by
their Articles of Association and obtain necessary shareholder approval.30
Rights Issues: Companies can offer existing shareholders the right to purchase additional shares
at a discounted price, effectively raising new capital.
Each of these variations can affect shareholder equity, control of the company, and financial
metrics.
Notice to registrar of Sub-division or consolidation
After altering its share capital, the company must notify the Registrar of Companies within
30 days. The company should specify the shares that are affected and accompanied by a
statement of capital which should contain, the total number of shares, the aggregate nominal
value of the shares, for each class of the shares (the particulars of the rights attached to the
shares, the total numbers of shares of that class and the aggregate nominal of the shares) and the
amount paid up and the amount if any unpaid on each share on account of the nominal value of
the shares.31
Your document is not well formatted
You need to include relevant sections of the companies act and increase on Kenyan
Jurisprudence
29
Section 405 of the Companies Act, 2015.
30
Section 404 of the Companies Act, 2015.
31
Section 406 of the Companies Act, 2015.
Page 12 of 12
