INTRODUCTION

Many people own shares in public or private companies, and have a general understanding of what owning a share entails. The Kenyan company law has developed in company shares an extremely flexible system for the ownership of limited companies. Any class or type of share can be issued with such rights as are set out for those shares in the company's articles of association or the terms of issue of the shares. Most shares are ordinary shares but recent times have seen a proliferation of different classes of shares, including so�called "alphabet shares", for all sorts of purposes.  

Definition

The shareholders are the proprietors of the company. Therefore a "Share" may be defined as an interest in the company entitling the owner thereof to receive proportionate part of the profits, if any, and of a proportionate part of the assets of the company upon liquidation. A shareholder has certain rights and liabilities. 

Example 

A company set up to run a business will usually have money (and perhaps other assets) put into it by the shareholders in return for shares. E.g. A, B and C set up a company and decide that they will each put in Sh.1,000 as share capital. The simplest way for this to be represented is for the company to issue 1,000 sh. 1 ordinary shares to each of the three shareholders. The company's issued share capital will then be Sh. 3,000 divided into 3,000 shares of Sh.1 each. It is not the only way. An alternative would be for the three shareholders to take one share each and to lend the money to the company.

Features and Characteristics

The main characteristics of shares are stated below. 

1.   A share is not a sum of money, but is an interest measured in a sum of money and made up of various rights, contained in the contract

2.   A share is an interest having a money value and made up of diverse rights specified under the articles of association. 

3.   The holder of a share has certain duties and liabilities, as stated in the Companies Act and in the articles of a company. 

4.   A share is transferable and heritable subject to regulations framed in the articles of association of the company. 

5.   The shares or other interest of a member in a company is movable property, transferable in the manner provided by the articles of the company. 

6.   The shares must be numbered so as to distinguish them from one another.

Nature of Shares

A share is the interest of a member in a company. A member does not own any of the company�s assets as the company is a separate legal personality. A member�s ownership of shares in a company gives him two rights which are

i)       to participate on the terms of the memorandum and association when the company is a going concern and 

ii)     if and when the company is wound up, the right to participate in the assets of the company remaining after the debts of the company have been paid.

 A member is also liable for the amount, if any unpaid on the shares held by him

Rights Attached to Shares 

The main rights which usually attach to shares are:

1.     To attend general meeting and vote

Typically shares carry one vote each at general meetings but there may be non�voting shares or shares with multiple votes. Some shares may carry the right to vote only in particular circumstances.

2.     To a share of the company's profits

The distribution of profits is paid by means of a dividend of a certain amount paid on each share. A dividend may be paid only if the company has made profits and to the extent that it decides to distribute them. 

3.     To a final distribution on winding up 

If the company is wound up and all the creditors are paid the remaining assets are available for division among the members. This may be in two stages: 

(1)  a return of capital;

(2)  distribution of surplus capital. 

Some shares may be given a priority as to one or both of these.

That the company be run lawfully i.e. in accordance with the Companies Acts, the general law and the company's constitution.

In most circumstances only the members of the company will have the legal right to sue to make the company act lawfully, and even they may be restricted in their ability to sue under the common law rule. In Foss v Harbottle case two minority shareholders initiated legal proceedings against, among others, the directors of the company. The claimants asked the court to order the defendants to compensate for losses to the company as a result of alleged fraudulent activity. The court held that since the company�s board of directors was still in existence, and since it was still possible to call a general meeting of the company, there was nothing to prevent the company from obtaining redress in its corporate character and thus the action by the claimants could not be sustained: "The corporation should sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative."

However, the best known and perhaps the clearest statement of the rule in Foss v Harbottle was actually set out by Jenkins LJ in the case of Edwards v Halliwell:

"The rule in Foss v Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio.". The rule established that where the company suffers harm, the company itself is the true and proper claimant. Therefore the shareholders cannot generally sue for wrongs done to the company.

Basis of the Rule

The following are the basis of this ruling

(1)    The Right of the Majority Rule

The court has said in some of the cases that an action by a single shareholder cannot be entertained because the feeling of the majority of the members has not been tested and that  they may be prepared to waive their right to sue.

(2)    The Company is a Legal Person

The court has also said from time to time that since a company is a person at law, the action is vested in it and cannot be brought by a single member.

(3)    The prevention of multiplicity of Actions

This situation could occur if each individual member was allowed to commence an action in respect of a wrong done to the company.

(4)    The court�s order may be made ineffective

The court�s order could be overruled by an ordinary resolution of members in a subsequent general meeting.

Exceptions to the Rule in Foss vs. Harbottle (Protection of the Minority)

It is clear from Foss vs. Harbottle rule that it is the majority rule that prevails in the company management.  Such powers may be misused to exploit the minority shareholders and to serve personal ends.  This may be clear in case of private companies where few individuals own majority of shares.

Palmer rightly pointed out that, �a proper balance of rights of majority and minority shareholders is essential for the smooth functioning of the company�.

To curtail the power of the majority, the following exceptions have been admitted as follows:�

(i)         Acts which are ultra vires or illegal

Foss vs. Harbottle will apply only when the act done by the majority is one which the company is authorized to do by its memorandum.

No simple majority of members can confirm or ratify an illegal act, not even if all the shareholders are willing to do so.  In�case of ultra vires acts, even a single shareholder can restrain the company from committing those acts by filing a suit of injunction.  Majority rule will not prevail where the act in question is illegal.

(ii)       Acts supported by insufficient majority

For certain acts, it might require �th majority.  The rule in Foss vs. Harbottle cannot be invoked by a simple majority if the act requires special majority. If the requirements of special majority are not fulfilled, any shareholder can restrain the company from acting on resolutions.

In Edwards vs. Halliwell (1950) a trade union had rules which were the equivalent of the articles of association, under which any increase in members� contributions had to be agreed by a rd majority in a ballot of members.  A meeting decided by a simple majority, to increase the subscriptions without holding a ballot.  The claimants as a majority of members applied for a declaration from the court that the resolution was invalid. The court held that the rule in Foss did not prevent a minority of a company from suing because the matter about which they were suing was one which could only be done or validly sanctioned by a greater than simple majority.

(iii)      Where the act of majority constitutes a fraud on the minority

A resolution would constitute a fraud on minority if it is not bona fide for the benefit of the company as a whole. Similarly, an action of the majority which discriminates between majority shareholders and minority could constitute a fraud of majority. A special resolution would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and minority shareholders, so as to give the former advantage of which the latter were deprived.

The rule in Foss would create grave injustice if the majority were allowed to commit wrongs against the company and benefit from those wrongs at the expense of the minority, simply because no claim could be brought in respect of the wrong.

In Cook vs. Deek (1916) case the directors of a Railway Construction company obtained a contract in their own names to construct a railway line. The contract was obtained under circumstances which amounted to breach of trust by the directors who then used their voting powers to pass a resolution of the company declaring that the company had no interest in the contract.

The court held that the benefit of the contract belongs in equity to the company and that the directors would benefit themselves at the expense of the minority.  It is tantamount to majority oppressing the minority.  In case of breach of duty of this sort, the rule in Foss did not bar the claimants� claim.

In the Brown vs. British Abrasive Wheel Co. (1919) case, a company required further capital.  The majority who represented 98 percent of the shareholders, were willing to provide this capital but only if they could buy up the 2 percent minority.  The minority would not agree to sell and so the majority shareholders proposed to alter the articles to provide for compulsory acquisition under which 9/10th of shareholders could buy out any shareholders.

Lord Asbury held that the alteration of the articles would be restrained because the alteration was not for the benefit of the company.  The rule in Foss did not bar the claimant�s claim.

 (iv)Where it is alleged that the personal membership rights of the plaintiff shareholder has been infringed

Such individual rights include the right to attend meetings the right to receive dividends the right to insist in strict observance of the legal rules; statutory provisions in the memorandum and articles. If such a right is in question, a single shareholder can on principle, defy a majority consisting of all other shareholders.

Thus, where the chairman of a meeting at the time of taking the poll ruled out certain votes which should have been included, a suit by a shareholder was held to be validly filed.

Where the candidature of a shareholder for directorship is rejected by the chairman, it is an individual wrong in respect of which the suit is maintainable.

(v)  Where there is breach of duty

A minority shareholder can bring a suit against the company where there is a breach of duty by the directors and majority shareholders to the detriment of the company.

In Daniels vs. Daniels (1978) case a company on an instruction of the two directors (husband and wife), having majority shareholding sold the company�s land to one of them, (the wife) at a gross under value.  The minority shareholders brought an action against the directors and the company. The court held that minority shareholders had a valid cause of action.

(vi) Oppression and Mismanagement

Where there is oppression of minority or mismanagement of the affairs of the company, Foss vs. Harbottle does not apply.

Oppression refers to an act performed in a burdensome, harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement.

CLASSES OF SHARES

As stated in an earlier section of this chapter, there is a presumption of equality between the shareholders of a company. However, a company does not have to issue shares which all confer the same rights on the shareholders. A company can, and often will, issue shares of different classes, conferring different rights in respect of voting, dividends and return of capital in a winding up. The most common classes of shares are ordinary and preference.

a.     Ordinary shares

This term is used to refer to the shares which are not given any special rights. If the company issues shares which all enjoy uniform rights, they will be ordinary shares. But, should the company confer special rights on some of its issued shares, then the shares not enjoying those rights will be classed as the ordinary shares. The usual position is that the ordinary shares would carry the voting rights in general meeting, carry an entitlement to any surplus assets in a winding up and have no fixed rate of dividend. This gives the ordinary shareholder the power to influence the policies of the company but makes his investment more speculative than the preference shareholder. In a financial year where the company makes a considerable profit and makes a large distribution by way of dividend, the ordinary shareholder has a right to participate after the preference shareholder rateably in the funds available. But, should the company have a poor year when little profit is made, the ordinary shareholder will receive very little or perhaps nothing. The position of the preference shareholder, then, is significantly better.

b.    Preference shares

The most notable feature of preference shares is that they will normally have an entitlement to a fixed rate of dividend, usually expressed as a percentage of the nominal value of the shares themselves. This fixed rate dividend will be paid in priority to the dividends payable to the ordinary shareholders. The preference shareholder will not have an entitlement to a dividend ,(unless there is a specific agreement to the contrary) and will only receive a dividend in a particular year if the directors decide to declare one.

In that respect, they are more like the ordinary shareholder than the debenture holder, who will be entitled to a fixed rate of interest every year. The distributable profit in a poor year can be exhausted entirely in satisfying the claims of the preference shareholders without the ordinary shareholders receiving anything. If the company has performed so badly in a financial year that there is no distributable profit or not sufficient to satisfy the whole amount to which the preference shareholder is entitled, the preference shareholder may still be in a better position than the ordinary shareholder, because the preference share may well be cumulative, in which case, arrears of preference dividend will be carried forward and paid out of the distributable profits made in subsequent years and that is, of course, before the ordinary shareholder will receive anything. Preference shares can be classified as follows:

i) Cumulative or non�cumulative  ii) Participating preference shares or non�participating preference shares  iii) Convertible preference shares or non�convertible preference shares  iv) A preference share may be redeemable or irredeemable v) Equity shares

1.       Cumulative or Non-Cumulative.

In the case of cumulative preference shares, if the profit made by the company in a particular year is not sufficient to pay dividend at the prescribed rate, the shortage must be made up out of the profits of succeeding years. The dividends accumulate. In non�cumulative preference shares such shortages are not required to be made up. Dividends which are not paid do not accumulate but lapse. 

2.       Participating Preference Shares or Non-Participating Preference Shares

 In the participating preference shares type of shares, the shareholder gets a part of the surplus profits beyond the amount or rate prescribed for them, if such surplus profits are available. Sometimes such preference shareholders are given the right to share in the surplus asset upon liquidation if any such assets are available. In the non�participating preference shares type of preference share, the shareholder cannot participate in the surplus profits or in the assets in liquidation.

3.       Convertible Preference Shares or Non-convertible Preference Shares

The convertible preference shares types of shares can be converted into equity shares provided there is provision of such conversion in the Articles of a company. The non�convertible preference shares types of shares do not have the right of such conversion.

4.       A Preference Share may be Redeemable or Irredeemable

 The redeemable preference share could be redeemed i.e., purchased back by the company, subject to the conditions laid down in the articles and in the Act. An irredeemable preference share is one which cannot be purchased back. 

c. Equity Shares.

 All shares other than preference shares are called equity shares. The rights and priviledges of equity shareholders are laid down in the articles subject to the provisions of the Act.

Rights of Shareholders 

The Companies Act gives various rights to the shareholders of a company. The important rights are mentioned below. 

1.       A shareholder can attend and vote in the general meetings of the company, He is entitled to receive notice of all such meetings. 

2.       The holder of a share warrant does not ordinarily possess the right to vote, but the article of a company may give him that right. 

3.       A shareholder has certain rights in respect of accounts.  A shareholder must be given a copy of the balance sheet and the "statutory report" in the case of the statutory meeting" . 

4.       A shareholder is entitled to inspect the minutes of the proceedings of any general meeting without any charge. 

5.       A shareholder has the right to inspect the register and index of members and debenture holders and the annual returns, without any charge. He can also take extracts from any of them. 

6.       If the name of any member is, without sufficient cause, omitted from the register of members, he can apply to the court for rectification of the register. 

7.       A shareholder can transfer his share, subject to any restrictions that may be contained in the articles.

8.       A shareholder can apply for the winding up of the company under certain circumstances, for example if default is made in holding the statutory meeting and delivering the statutory report or if the number of members of the company is reduced to below seven (in the case of a public company) and below two (in the case of a private company). 

9.       If surplus assets are available after winding up, they are to be distributed among shareholders.

10.   Preference shareholders are entitled to get dividends.

11.   Shareholders have the right to apply to the court for relief and redress under certain circumstances, e.g. if the annual general meeting is not held ; if there is mismanagement and oppression by the majority etc. In the latter case, the shareholder can also apply to the court.

12.   A shareholder, jointly with certain other members, can call an extraordinary general meeting on Requisition. 

13.   A shareholder can avoid the contract of share and can claim damages, if there is any misstatement or deliberate secrecy of a material fact in the prospectus.

14.   The articles of association of a company may give various other rights and privileges to the shareholders. 

Classification

The rights of members, as explained above, can be classified in the following manner: 

(1)       Rights given from the Companies Act. 

(2)       Rights given by the ordinary laws of the country, i.e., legal rights, proprietary rights and remedial rights.

(3)       Contractual rights, i.e., rights given by the memorandum and articles of association. 

Liabilities and Duties of Shareholders 

Liabilities

The liability of a shareholder depends on the type of the company. In a company limited by shares, the shareholder is not liable to pay anything more than the nominal value of the share, whatever may be the liabilities of the company. In a company limited by guarantee, the shareholder is liable to pay up to the amount of the guarantee and the nominal value of the share, if there is a share. In an unlimited company, the shareholder is liable to an unlimited extent for the debts of the company. The capital clause of the memorandum of association contains provisions regarding the liability of shareholders. 

Duties and Obligations

 A shareholder has certain duties and obligations. They are summarised below: 

1.      A shareholder must pay the unpaid amount due on the share, when calls are made.

2.      In case of liquidation of a company, the shareholders are to be placed in the list of contributories.�

3.      In certain cases a transferor of a share is still liable for the unpaid shares of a company.

4.      The memo and the articles of association constitute a binding contract between the shareholder and the company. 

5.      All the shareholders are bound to follow the decision of the majority of the shareholder1.      <