Introduction
The Companies Act of 2015 brought with it many provisions that had not previously existed under the repealed Companies Act (Cap. 486). Cap. 486 had only 406 sections that spanned about 270 pages. Agitation by various stakeholders across both public and private domains generated the stir necessary for Kenya to embark on its long-overdue evolution to contemporary company and insolvency laws. It is arguable that the new Companies Act is the most comprehensive piece of legislation on Kenya’s statute books. The statute has over 1,000 sections meant to consolidate and reform the law relating to the incorporation, registration, operation, management, and regulation of companies in Kenya. The statute itself heavily borrows from the UK Companies Act of 2006.
The paper deliberates the expansion by the Act of the limits of Company Law in Kenya and also discusses the prospects that these fresh advances in law and have created for legal practitioners.
Recent Developments in Company Law in Kenya
The new Companies Act did not revolutionize corporate governance as such; it introduced a strict regime that requires considerable compliance. Today, a company is required to set apart a more significant portion of its resources to ensure that it is complying with the new statute and connected regulations. The new Act plays an essential role in recognizing and protecting smaller players, who make up a substantial part of the Kenyan economy, by requiring lesser compliance under the small companies’ regime. Some of the changes that the Companies Act brought are as follows:
Formation of Companies
The Companies Act, 2015 makes a measured point of creating two separate regimes for private companies and public companies. Regulation of private companies is by far diminished when compared to the control of public companies. SMEs are, therefore, encouraged to incorporate themselves to limit liability and access credit facilities easily. The Companies Act improves the ease of doing business in Kenya in that a single person is now able to form a company. The Companies Act revises the previous minimum requirement of at least two people for private companies and 7 for public companies.
The Companies Act imposes certain conditions for forming private and public companies. The articles of a private company must restrict the member’s right to transfer shares, limit the number of members to 50 and prohibit invitations to the public to subscribe to shares or debentures of the company. Additionally, companies limited by guarantee, and whose certificates of incorporation do not expressly state that they are private are not now private companies. The articles of a public company must, on the other hand, grant its members the right to transfer shares in the company, allow invitations to the public to subscribe for shares or debentures, and the certificate of incorporation must expressly state that it is a public company. Other types of companies include companies limited by guarantee and unlimited companies.
Name of Company
In Part V, the Companies Act, 2015 gives a detailed account on rules of naming and reservation of names. The significant development, however, relates to the provisions of naming public and private companies to indicate the type of company. The name of a public limited company should end with the words “public limited company” abbreviated as “PLC”. The name of a private limited company, on the other hand, must end in “limited” or abbreviated as “LTD”. A private company may, however, be exempt by the cabinet secretary from using a name that ends with the word “limited” or “LTD”. If a company desires to change its registered name, it must typically do so through a special resolution. The applicant for such a change must lodge the notice along with the special resolution with the registrar within 14 days after agreeing on the alteration of name.
Increased Sanctions
The old Companies Act (Cap. 486) was lenient and lax in its provisions. For instance, the penalty for issuing false statements was imprisonment for up to two years or a maximum fine of KES10,000 or both. The new Companies Act has brought with it more significant sanctions against directors, officers and members for offenses and non-compliance. Many of the penalties under the new Act range from KES500,000 to KES1 million, whereas imprisonment may be for up to 10 years. For instance, a company that fails to appoint the minimum number of directors will have its officers liable to a fine of up to KES500,000. The provision is arguably to provide more excellent protection to shareholders and potential investors from losing money as historically seen in the English South Sea Bubble case.
Constitution of the Company
Initially, the Memorandum of Association was the constitutive document of a company. It contained the object clause which would render some acts ultra vires. The Companies Act, 2015 has changed this situation by first making the Articles of Association the constitutive document of a company. The actions that a company may undertake are no longer limited under statute unless the articles of association themselves restrict such activities. The model articles contained in the Companies (General) Regulations of 2015 are a new milestone that provides both public and private companies a recommendation on the best practices expected in the market.
Directors (Appointment and Duties)
The Companies Act requires that every private company to have at least one director, whereas a public company must have at least two directors. At least one director of every company needs to be a natural person. Appointed directors must consent to such appointment in writing. The old Act did not have such a requirement. Directors are now able to execute documents on behalf of a company with only a signature and a single witness. Such execution serves as a sufficient formality to convert text documents into deeds. Previously, it was necessary for the company officers to affix the company (common) seal and for two directors or one director and the company secretary to witness the affixing of the company seal to the legal document to constitute it as a deed. Having a document under seal is no longer a requirement for an execution to be considered a valid act. A company now need not have a company (common seal).
Another development concerning directors is the codification of their common-law duties into statute. The Companies Act, 2015 recognizes several common-law responsibilities of directors, including the obligation to act within their powers,the responsibility to promote the success of the company, among other responsibilities. All these duties derive from common-law and the principles of equity.
The advancement of company secretaries is the exemption of companies whose capital is less than KES5 million from appointing a company secretary. The company secretarial function may now be carried out by an agent or a director of the company. Private companies with a share capital of more than KES5 million and all public companies must appoint a company secretary.
The Institute of Directors of Kenya
A more recent development in company law in Kenya is the anticipated establishment of the Institute of Directors of Kenya (“IOD”) through the Institute of Directors Bill of 2019. The preamble of the bill describes the statute as follows:
“An Act of Parliament to establish the Institute of Directors of Kenya; to provide for the registration and regulation of the standards and practice of the profession and for connected purposes.”
Once established, the IOD will act as the professional body for all directors in Kenya. It will issue certificates of registration to its members annually. The IOD will, therefore, will provide quality assurance to companies and entities in general who appoint IOD members into their boards of directors. Some of the functions that the IOD include:
To set, maintain and continuously improve the standards of learning, professional competence and professional conduct for directors;
To enhance the standards and effectiveness of directors through training and education;
To develop and facilitate continuous training programs for members and honorary fellows of the institute;
To determine the standards of professional practice and ethical conduct of directors;
To promote the development of institutional capacity for good corporate governance and to encourage research on corporate governance; and
To publish books, periodicals, journals, and articles on corporate governance; among other functions.
The IOD is further expected to discipline the directors who fail to adhere to the standards of professional conduct. The bill proposes the creation of a committee of the board to act as a disciplinary committee. The board of the IOD will have the mandate of referring any matter to the disciplinary committee if it has reason to believe that any registered member is:
Convicted of an offense that is punishable by imprisonment for more than six months if the board of the IOD believes that such violation has dishonoured the member before public view; or
if a member ends up convicted of wrongdoing amounting to professional negligence or misconduct in respect of their position as a director.
Once a member’s conduct has been referred to the disciplinary committee, the member is entitled to a fair hearing, and they may seek the representation of an advocate of the High Court of Kenya. The disciplinary committee is empowered to administer oaths and may regulate its procedure. If the committee finds that a member is guilty, various forms of punishment are listed as follows:
issuance of a letter of admonishment against the member;
suspension of the certificate of competence of the member for a period not exceeding three months;
imposing a fine against the member, and;
removal of the name of the member from the register.
Failure to adhere to any directives by the disciplinary committee will be an offense. An aggrieved member is allowed to appeal the decision of the disciplinary committee to the High Court. The board may however review a decision to suspend a member for a valid reason.
Beneficial Ownership Information
The Statute Law (Miscellaneous Amendments) Act, 2019 introduces section 93A to the Companies Act (Register of Beneficial Owners). According to this section, every company shall keep a register of its beneficial owners. A company must also enter in its record of beneficial owners, information relating to its beneficial owners as prescribed in the regulations. A company must subsequently lodge with the Registrar a copy of its register of beneficial owners, within thirty days after completing its preparation. Companies other than publicly listed companies must file with the Registrar a copy of any amendment to its register of beneficial owners within fourteen days after making the amendment.
If a company fails to comply with a requirement of section 93A, the company, and each officer of the company who is in default, commit an offense and on conviction are each liable to a fine not exceeding five hundred thousand shillings. Upon conviction, if a company continues to fail to comply with the relevant requirement, a daily penalty accrues against the company. What is outstanding is now for the BRS to publish on the Kenya Gazette the Companies (Beneficial Ownership Information) Regulations and to update the BRS Portal on e-citizen updated to capture Beneficial Owners details.
Shareholders
Numerous advancements have occurred concerning the rules around meetings and resolutions by shareholders. Under Cap 468, shareholders were required to be unanimous in some written decisions for private companies. This requirement no longer exists under the Companies Act, 2015. A simple majority will suffice for ordinary resolutions, while a majority of 75% must exist for special resolutions. Private companies are further no longer required to hold Annual General Meetings unless they elect to do so in their Articles of Association. For meetings on short notice, the consent is now at 90% of the nominal value of shares with a voting right.
Public companies are, however, required by law to hold Annual General Meetings within six months after the end of a financial year. For communications of such meetings, and other communications generally, the Companies Act, 2015 has made it seamless by codifying the use of electronic communications provided that the articles acknowledge such means of communication.
Where a company wants to issue new shares, the Companies Act, 2015 has made it compulsory for such issues to be first made available to the existing shareholders. These are the shareholder’s pre-emptive right. For share allotment in public companies, at least up to one-quarter of the share’s nominal value must be paid up. Private companies have been further allowed to offer financial assistance for the purchase of shares. One condition, however, must be fulfilled for such support; it must be part of a larger purpose of the company and in good faith for the interest of the company. Public companies are, however, prohibited from giving financial assistance in the purchase of their shares.
Relief for companies, in general, may be seen through the new provision that allows a company to buy back its shares. The procedure to seek approval for share buy-backs is longer for public companies. Such shares are held as treasury shares by the company.
Other Advancements in Company Law and Practice in Kenya
The Companies Act, 2015, and connected laws have increased the frontiers of company law and practice in Kenya in many different ways. Take-overs are now significantly regulated by both the Companies Act, 2015 and the Capital Markets (Take-Over) Rules. The previous Companies Act did not have extensive regulations on mergers and acquisitions.
A regime for small companies has been created by the new Companies Act that exempts them from preparing group financial statements and from appointing auditors. A small company under the new Act is one which has a turnover of below 50 million shillings, has less than 50 employees and the value of its net assets according to the balance sheet at the end of a financial year is not more than 20 million shillings. Dormant companies have also been exempt from publishing financial statements. Annual returns must, however, be filed within 28 days, down from the initial 42 days under the old Companies Act. The registration of company charges must also be done within a reduced period of 30 days from the creation of such a charge, down from the initial period of 42 days.
Under the Companies Act, 2015, foreign companies intending to register in Kenya are subjected to greater scrutiny in terms of disclosure than the case was under the old Companies Act. A foreign companies’ registry now exists to store the details of the company and its officers, for closer monitoring of these companies.
Contemporary Company Law Work for Legal Practitioners
Several openings accrue from the new Companies Act and connected legislation. These opportunities may be summarized as follows:
1.3.1 General Business Documents
Companies require so many different documents in their day-to-day operations. Legal practitioners may take advantage of this opportunity. These documents include:
Joint Venture Agreements: This is a document which parties execute to partner on a particular project. A joint venture is a distinct entity from that of the two parties. A joint venture may be registered as a partnership and terminates when the parties achieve their goals. The skill of legal practitioners is essential in drafting such agreements.
Resignation Letter of a Company Director: A director may either be a natural person or a company. Resignation of a company director, therefore, requires more than implicit conduct. A clear-cut letter must be drafted and signed by the director, and the companies’ registry needs to be aware of such changes.
Agency and Proxy Documents: Registered members of a company may elect another person to act on their behalf. The Companies Act further allows a trust relationship to exist, where one person holds shares in trust for the ultimate benefit of another person. Such arrangements must be express. The expertise of legal practitioners is needed to make such engagements proper and precise.
Employment Contracts: Companies employ a considerable number of people altogether. Clauses in an employment contract need to be precise and must cover different situations such as confidentiality and non-compete clauses. Employment significantly is regulated by statute. As a result, therefore, legal practitioners are now needed more than ever by companies to ensure that their employment practices comply with the legal requirements.
General Letter of Instruction: Letters of instruction give another person the authority to act on one’s behalf. A member of a company may, for instance, provide written instructions to a stockbroker to sell shares on their behalf. Legal practitioners have an opportunity to draft the proper letters of instruction for members of different companies and companies in general.
Share Certificate: Dematerialization of paper securities in the securities exchange has dramatically reduced the use of share certificates. However, many companies prefer to remain privately owned to prevent the colossal compliance requirement for going public in both the Companies Act and the Capital Markets Act. Legal practitioners may take advantage of this situation by drafting share certificates on behalf of various companies.
Share Sale and Purchase Agreements: These are instruments used to transfer shares in a company. These instruments need to be detailed to show the intention to sell, consideration, and particulars of the parties. Taxes also need to be paid on these instruments. Legal practitioners are, therefore, crucial in drawing up share sale and purchase agreements that are sound in law and practice.
Memorandum of Understanding: Companies may enter into non-binding agreements with organizations in general or even institutions such as universities for internships, among other purposes. Such bargains are usually in writing through a memorandum of understanding. Legal practitioners possess the requisite skills to draft such documents and explicitly exclude the intention to create legal obligations.
Resolutions: Resolutions may either be special resolutions or ordinary resolutions. It is accepted a practice that decisions must be drafted and form part of the company records to be valid. A resolution passed in a meeting needs the attestation of the chairperson of the meeting and the company secretary where applicable. Legal practitioners may, therefore, take advantage of the opportunity to draft resolutions for companies to meet the necessary legal requirements.
Loan Agreement: Companies can borrow money in multiple ways, such as by placing a floating charge against their assets, issuing debentures, among other means. Such a loan agreement can only be drafted expertly by a trained legal mind.
Director Consent Letter: The Companies Act of Kenya requires a director to voluntarily accept an appointment to act as a director of a company. The consent letter is the general business document used to signify a director’s consent to serve as a director of a company. Legal practitioners can draft this letter on behalf of companies to increase the scope of their practice.
1.3.2 Formation of a Company
Forming a company is still business that practitioners can participate in today, despite advances in technology that have made incorporation virtually seamless. Promoters of a company with substantial capital now need custom articles of association that meet their specific business needs. Further, legal non-compliance for such sponsors spells catastrophe since they can attract fines of a substantial amount which will reduce any initial capital they may have put up in their business. Practitioners are therefore needed even more by people looking to enter the Kenyan market.
1.3.3 Corporate Secretarial Work
The Companies Act of 2015 has heavily regulated public companies. When read together with the Capital Markets Act, Income Tax Act, and the numerous subsidiary legislation, corporate non-compliance becomes a reality that could have devastating consequences on companies. The Companies Act of 2015 has therefore enhanced the role of practitioners as corporate secretaries; which now presents a lucrative opportunity for trained and competent persons to get business and to grow their practices.
There has also been an increase in corporate secretarial work for practitioners through the exemption of companies that have a share capital of less than KES 5 million from appointing a company secretary. The Companies Act allows these smaller companies to have their corporate secretarial work conducted by an agent or a director of the company. Practitioners can become these agents and take advantage of this new opportunity.
1.3.4 Opportunities in Dispute Resolution
The Companies Act, 2015 has expanded the locus standi of shareholders and officers in the company. Directors have a right to protest against removal. Shareholders, on the other hand, have pre-emptive rights on the issue of new shares. Fraudulent trading has been criminalized in the Companies Act, 2015, whereas derivative actions now exist under this statute. All these advancements are susceptible to attracting disputes in the corporation. The Institute of Directors of Kenya Bill 2019 goes a step further to provide for the regulation of directors in Kenya. The board governing the institute has been empowered to refer a disciplinary matter to the disciplinary committee of the board. Opportunities in dispute resolution have therefore expanded for practitioners. Practitioners may come in as negotiators, mediators, arbitrators, and litigators in case any of these disputes materialize.
1.3.5 Expanded Businesses
The Companies Act, 2015 did remarkably well to limit the operation of the ultra vires principle. Businesses are thus, able to enter into new frontiers of activities. The model today is one where a holding company operates many subsidiaries that span across different industries. The financial market is an example of this. It is common to see holding companies that are active in the banking, insurance, telecommunications, and capital markets industries all at the same time. This increased scope of the business has also meant an increased stream of work for practitioners. Furthermore, share buy-backs, company charges, treasury shares, and financial assistance by companies has provided practitioners with an increased source of business for their practice.
BIBLIOGRAPHY
Companies Act, 1962
Companies Act, 2015
Companies (General) Regulations, 2015
Institute of Directors of Kenya Bill, 2019
Salomon v Salomon & Co. Ltd [1896] UKHL 1, [1897] AC 22
Pravin Bowry, ‘Change in Corporate Laws in Kenya Welcome’ (Standard Digital, 14th October 2015) https://www.standardmedia.co.ke/article/2000179549/change-in-corporate-laws-in-kenya-welcome accessed 11th August 2019.
Dale Richard, ‘The First Crash: Lessons from the South Sea Bubble’ (2004) Princeton University, JSTOR <www.jstor.org/stable/j.ctt6wpz4m> accessed on 11th August 2019.