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Several changes have been introduced by the Companies Act 2015 that will
impact greatly on shareholders. The changes seek to combat shareholder
apathy particularly in decision making in public companies, provide
greater access to corporate information to enhance transparency, embrace
the benefits of the digital era in communication to shareholders and
regulatory procedures. More importantly, the Act seeks to balance the
rights of shareholders as owners, and the duties of directors as
managers of the company whose loyalty is to the company and not a single
shareholder.
Into the 21st Century
The new regime introduces electronic communication for the benefit of
not only the company but for shareholders as well. The Act now provides
for the dissemination through electronic forms or websites of company
publications. Shareholders and directors can now formally utilise
electronic forms in the conduct of business. This is augmented by the
Act sanctioning the use of websites to publish financial and operations
reports, written resolutions, issue notices for general meetings[1] and
results of polls. The Act also makes it mandatory for a quoted company
to publish financial statements on its website until the publication of
the annual financial statement for the next financial year of the
company. On failing to do so, the company and directors commit an
offence and are liable to pay a fine[2].
The new provisions allow easier and greater access for shareholders to
necessary information to not only reach an informed decision but also
exercise their right to vote and resolve issues in an expedient manner.
Resolutions & Meetings
The Act now provides that a private company may pass a resolution in
writing. The Act however does impose limitations, in that written
resolutions cannot be used to remove a director or auditor before their
term has ended.
The provisions on quorum for a meeting have also been changed under the
Act to update their application in the business environment. Quorum for a
meeting shall be one qualifying person in the case of a one shareholder
company and for other types of companies it will be two qualifying
persons subject to the provisions of the company’s constitution. The
term “a qualifying person” is defined as 1) a natural person who is a
shareholder of the company (acknowledging one shareholder companies), 2)
a person authorised to act as the representative of a corporation in
relation to the meeting, and 3) a person appointed as proxy of a
shareholder of the company in relation to the meeting.
In respect to proxies, the Act has extended the rights granted by
shareholders. Proxies are no longer limited to vote only on a poll at a
meeting of the company. They are now permitted to vote by a show of
hands and they are to exercise all or any of the shareholder’s rights
attaching to the class of shares. Furthermore, proxies can now be
elected to preside over a general meeting subject to the articles of the
company.
In relation to representatives of a corporate shareholder, the Act
provides for flexibility as it allows for the appointment of multiple
representatives to attend a meeting. However, the right to vote will be
wielded by only one of the representatives. The right to transfer shares
remains the only right a shareholder cannot nominate another person(s)
to exercise on their behalf.
Management Accountability to Shareholders
The right to vote and appoint directors is one of the tools of
governance critical in influencing directors and board members to serve
shareholder interests[3].
The Act in strengthening the position and rights of minority
shareholders has now lowered the threshold required to convene a general
meeting. Shareholders holding 5% of the paid up capital can now
convene a general meeting[4] to raise issues for discussion and have their concerns addressed.
The Act further provides for Derivative Actions allowing shareholders to
institute a suit against directors for breach of their duties. As a
derivative suit can be instituted by current or future shareholders
against present and past directors, it will complement the shareholders
oversight role as well as deter fraud and misconduct.
To enhance accountability to shareholders and mitigate the abuse of
powers by directors, the Act requires that substantial non-cash asset[5] transactions with related parties[6] obtain shareholder approval[7]. The Consequences of failing to obtain shareholder approval[8] and
the transaction can be held to be void with the parties involved being
liable jointly and severally to indemnify the company for any loss or
damage and they are also to account to the company for any gain made
(direct or indirectly)[9].
Conclusion
It will be imperative that companies review their articles to align them
to the provisions of the Act particularly in regard to the nomination
and election processes, the particulars to be stated in the information
provided to shareholders, the documents and information that is to be
provided in electronic form and which is to be posted on the company
website or both. A review of the governance policies is also advised so
as to provide a clear flexible frame work for shareholders and directors
to optimize their interactions to allow the company to adapt and meet
challenges expediently.
The interest of directors and shareholders may not always be in tandem,
but it is the ethos of the Act that such conflicts may be reduced by
ensuring the accuracy of information provided, prompt disclosure and
stronger internal controls.
In our final article, we will look at the key dynamic changes introduced
by the Act that impact on the company directly to make it a more robust
investment engine fit for this century.
On 6th November 2015 [10] the following parts of the Companies Act came into operation:
Part 1 – PRELIMINARY
Part 2 – COMPANIES AND COMPANY FORMATION
Part 3 – A COMPANY’S CONSTITUTION
Part 4 – CAPACITY OF COMPANY
Part 5 – NAME OF COMPANY
Part 6 – ALTERATION OF STATUS OF COMPANIES
Part 7 – COMPANY MEMBERS
Part 8 – EXERCISE OF RIGHTS OF MEMBERS
Part 9 – COMPANY DIRECTORS
Part 10 – DISQUALIFICATION OF DIRECTORS
Part 11 – DERIVATIVE ACTIONS
Part 12 – COMPANY SECRETARIES
Part 13 – RESOLUTIONS AND MEETINGS
Part 14 – SHARE CAPITAL OF COMPANY
Part 23 – COMPANY DEBENTURES
Part 31 – REGISTRAR OF COMPANIES AND REGISTRATION OF COMPANY DOCUMENTS
Part 32 – COMPANY CHARGES
Part 38 – LEGAL PROCEEDINGS
Part 40 – SERVICE OF DOCUMENTS ON AND BY COMPANIES
Part 42 – SUPPLEMENTARY PROVISIONS
First Schedule – CONNECTED PERSONS: REFERENCES TO AN INTEREST IN SHARES OR DEBENTURES
Second Schedule – MATTERS FOR DETERMINING UNFITNESS OF A DIRECTOR
Sixth Schedule – SAVINGS AND TRANSITIONAL PROVISIONS
[1] It is to be noted that the term “extraordinary general meeting” is no longer applied in the Act.
[2] Provided
a company’s publications are on the website it must adhere to the
requirements of the Act or be liable to pay the fine imposed.
[3] The
primary concerns for shareholders in profit driven companies is the
return on investment, the share market price and dividends to be
received. The priorities for non-profit companies are varied and are
dependent on the objects of the company. Due to their nature, the
standard for accountability and transparency expected of them is much
higher than for profit making companies.
[4] The
previous regime required that in order to requisition for a meeting,
the shareholders requisitioning held at least 10% of the paid up capital
of the company.
[5] This
is an asset whose value exceeds ten percent (10%) of the company’s
asset value and is more than Five Million or exceeds Ten Million.
[6] The
term “related party” in this context refers to, a director of the
company, a person connected to a director of the company, the holding
company or a person connected with a director of the holding company,
[7] Shareholder
approval has been required under the previous regime, however, no
monetary thresholds were provided or exemptions. The Companies Act 2015
provides for both providing greater clarity for both directors and
shareholders in expediting their duties and rights.
[8] Shareholder
approval is also required for loss of office by a director, loans or
guarantees to secure director’s obligations and contracts between the
company and the director. In this instance, director also refers to a
director of a subsidiary.
[9] A
director found to be in breach of this provision may be determined to
be unfit and will be at risk of being disqualified as a director.
[10] Legal Notice No.233 Companies Act (No.17 of 2015).
Disclaimer: This article has been prepared
for informational purposes only and is not legal advice. This
information is not intended to create, and receipt of it does not
constitute, a lawyer-client relationship. Nothing on this article is
intended to guaranty, warranty, or predict the outcome of a particular
case and should not be construed as such a guaranty, warranty, or
prediction. The authors are not responsible for any actions (or lack
thereof) taken as a result of relying on or in any way using information
contained in this article and in no event shall be liable for any
damages resulting from reliance on or use of this information. Readers
should take specific advice from a qualified professional when dealing
with specific situations.