THE COMPANY PROSPECTUS

Although Sections 39-48 regulates the contents and issue of prospectus, they do not define a prospectus

A prospectus is defined by Section 2 of the Act as “any notice, circular advertisement or other invitation,
offering to the public for subscription or purchase any shares or debentures of a company”.

The definition suggests that a prospectus embrace any document, notice, circular advertisement. What
matters is not the name given to the document by its authors but its effect on the person reading it.   If
the person reading the document would conclude that he was being ‘invited’ to apply for any shares or
debentures of a company, the document would legally be a prospectus even if it is not headed so.  The
offer must be made to the public.

Case Law: Nash vs. Lynde (1929)

The directors of a company prepared a document which was in the form of a prospectus and was in
marked “strictly private and confidential”.  The document did not contain all the material facts required
by the Acct to be disclosed.  It was circulated among the directors and their friends.  The plaintiff had
purchased shares on the footing of these documents which he obtained from a friend of a director.

It was held that the document received by him was not a prospectus as private communication between
business friends does not constitute a prospectus.  The “public” according to Section 57(1) is not
restricted to the public at large but includes any section of the public whether selected as members or
debenture holders or as clients of the person issuing the prospectus or in any other manner.

Case Law:  Re. South of England Natural Gas and Petroleum Co. Ltd (1911)

3000 copies of a prospectus headed “for private circulation only” were distributed to shareholders of
gas companies.  It was not publicly advertised.

It was held that the prospectus was an offer of shares “to the public” even though it was marked “for
private circulation only”.

Contents of the Prospectus

A prospectus must contain the necessary information to enable the public to decide whether or not to
subscribe for its shares or debentures.  The matters to be included in the prospectus are:-

(i)  Directors and auditors of the Company

-          Names, occupations, postal address, directors’ qualification shares, directors’ remuneration and
directors interest in the company’s promotion.

   (ii)  Formation Expenses

-          Benefits paid to promoters underwriting commission etc.

 (iii)  Investor Information

-          The minimum subscription

-          The amount payable on application

-          The time of opening of the subscription lists

-          Voting and dividend rights attached to different classes of shares.

(iv)  Company’s Business and Assets

-          Venders of property of the company

-          Amount paid for property bought or goodwill

-          Length of time business has been carried on.

The prospectus also contains reports such as:-

(i)  Auditor’s report showing profit and loss in each of the last five years, rates of dividend paid during
the last five years, assets and liabilities at the date of last accounts and details relating to subsidiary
companies.

(ii) Where the proceeds of the issue are to be used to buy a business, a report by named accountants on
profit and loss of the business for each of the last five years.

(iii) Where the proceeds of the issue are to be used to buy shares in any other body corporate, a report
by named accountants on profit or loss of that body corporate for each of the last five years.

The aim of   the statutory provision is to enable the prospective investor to asses the risk of the intended
investment, each matter is stated for a specific purpose, for example the names, occupations and postal
address of directors enables the prospective investors to know who the directors of the company are or
will be.  It is very important to know who the “drivers” will be since save arrival of the vehicle exclusively
depends on the competence of drivers who are called “directors”.  The disclosure of their occupation
and qualification would facilitate the ascertainment of their suitability for appointment as directors by
indicating whether they have relevant business experience.

Statement in Lieu of Prospectus

 Section 50(1) provides that a company having a share capital which does not issue a prospectus on or
with reference to its formation or which has issued such a prospectus but does not proceed to allot any
of its shares or debentures shall not allot any of the said shares or debentures unless, at least three days
before the first allotment, there has been delivered to the registrar for registration a statement in lieu of
prospectus.   
 Section 32(1) provides that if a company, being a private company, alters its articles in such a manner
that they no longer include the provisions which under Section 30, are required to be included in the
articles of a company in order to constitute it a private company, the company shall, on or before the
date of alteration, cease to be a private company and shall within 14 days after the said date, deliver to
the registrar for registration a statement in lieu of prospectus in the form and containing the particulars
set out in Part I of Second Schedule and Part II of that schedule, it must set out the reports specified
therein.

Section 32(3) provides that if default is made in complying with Subsection (1) above, the company and
every officer of the company who is in default shall be liable to a fine of Sh. 1,000.

Subsection 4 further provides that if the statement in lieu of prospectus delivered to the  registrar
contains an untrue statement, that is, misleading statement, every person who authorized the delivery
of the statement in lieu of prospectus for registration, shall be guilty of an offence and liable to
imprisonment for a term not exceeding 2 years or to a fine not exceeding Sh. 10,000 or both unless he
proves that the untrue statement was immaterial or that he had reasonable ground to believe and he
did up to the time of the delivery for registration of the statement in lieu of prospectus.

Liability or mis-statement or omission in a Prospectus

Prospectus constitutes the basis of the contract between the company and the person who purchases
shares or debentures.  The persons who are behind the company have full knowledge to the future
prospects and the present situation of the enterprise and the investing public has none.   It is but fair
that the former should not only disclose all the matters within their knowledge relating to the
enterprise, but should also state them correctly and accurately. Where an untrue statement occurs in a
prospectus, there may be:-

(a)    civil liability

(b)   criminal liability

(a)                Civil Liabilities

A person who has been induced to subscribe for the shares in a company on the strength of mis-
statement or omission in the prospectus may have a remedy either against the company or against the
directors.

Remedies against the Company

A person who has been induced to subscribe for shares may:-

(i)      Rescind the contract

(ii)    Claim damages
(i)         Recession of the Contract:

Where a person has purchased the shares of a company on the faith of a prospectus which contained an
untrue or misleading, but not necessarily fraudulent statement, he can seek rescission of the contract.

The right to rescind the contract is available if he proves the following:-

(i)  That the prospectus included an untrue or misleading statement or misrepresentation.

(ii) That the untrue or misleading statement was in respect of a material matter and was one of the
inducements to apply for shares or debentures.

Case Law:  R v. Kylsant (1932)

A prospectus of a company said that the company had paid a dividend every year between 1921 and
1927, years of depression, thus giving the impression of a financially stable company.  However, the
company had in each of those years incurred considerable losses on trading account and was only able
to pay a dividend out of reserves accumulated in previous years.  This fact was suppressed.

The court held that the prospectus was false in a material statement and conveyed a false impression.

(iii) That he has taken action promptly to rescind the contract.

The shareholder must start proceedings for rescission within a reasonable time and before the company
goes into liquidation.

(ii)                Claim Damages

  Any person induced by fraud to take shares is entitled to sue the company for damages provided he
has rescinded his contract in time.    The company is liable in damages where the misrepresentation is
an innocent one.

Remedies against the Directors

Any person who subscribed for any shares or debentures on the faith of the prospectus may sue for
compensation under Section 45 of the Companies Act. 

The directors would also be liable under the common law action of deceit for making a statement which
is false and which is known to them to be false or is made by them recklessly or without care, whether it
is true or false. But they would not be liable for damages if they honestly believed them to be true.     

(b)              Criminal Liabilities 

In order to enforce compliance with its provisions which relate to prospectus, the Companies Act
provides the following penalties for non compliance:-
(a)      Section 40(4) provides that if application form is not accompanied by a prospectus which contains the
prescribed matters and reports, any person responsible is liable to a fine not exceeding Sh. 10,000.

(b)      Section 42(2) provides that if a prospectus includes a statement purporting to be made by an expert
but does not include the expert’s written consent to the issue, the company and every person who is
knowingly a party to the issue shall be liable to a fine not exceeding Sh. 10,000.

(c)      Section 43(5) imposes a fine not exceeding Sh. 100 per day for issuing a prospectus without delivering a
signed copy thereon to the registrar for registration.

(d)     Section 46(1) provides that where a prospectus includes any untrue statement, any person who
authorized the issue of the prospectus shall be guilty of an offence and liable to imprisonment for a term
not exceeding 2 years or to a fine not exceeding Sh. 10,000 or both.

SHARE CAPITAL

In commercial parlance, the word “capital” is generally used to denote the amount by which the assets
of a business exceed its liabilities.  However, in legal parlance, the word “capital” is used to denote the
amount of money which a company raises from a sale of its shares.
           
Types of Capital

(a)        Nominal or Authorized Capital

This is the capital that is stated in the memorandum pursuant to Section 5(4) (a) of the Act. It is
authorized in the sense that, once the memorandum of association is registered, the company can take
immediate steps to raise the capital from the public without applying for a permit.  It is nominal because
it is calculated on the basis of nominal or book value of the shares.

(b)       Issued Capital
It is that position of the nominal capital which has been issued by the company.  It is also known as
subscribed or allotted capital.  It may be equal or less than nominal capital but cannot exceed it.

(c)        Paid-up Capital
It is that part of issued capital, which has been paid-up by the share holders.   It may be equal to or less
than the issued capital but cannot exceed it.                           
      
(d)       Called-up Capital
It is that amount of issued capital which the company has asked its shareholders to pay by means of
calls.

(e) Uncalled capital
This is the amount which remains unpaid on shares.  The company may at any time, call upon the
shareholders to pay the uncalled capital in accordance with the provisions of the articles.

(f)  Reserve capital
 Section 62 of the Act defines reserve capital as that portion of the issued but uncalled- up capital of a
limited company, which the company’s members by special resolution, have resolved that the company
shall not call up unless and until it is in liquidation.  It is to be called up only for purposes of
liquidation.  As soon as a resolution is passed, the capital is put on reserve and the directors’ power
under the articles to make calls on shares will not be exercisable in respect of that capital, unless the
company is wound up.  It is referred to in Section 62 as “the reserve liability” of a limited company.
Methods of Public Issue

(a)    Prospectus Issue

Under prospectus issue, the company sells the shares directly to the public rather than selling them
through intermediaries.

Company---->Sells shares to--->Public

The company issues a document generally called a prospectus.  As a precaution against unsuccessful
issue, the company may underwrite the issue.

(b)   Placing

A placing occurs if the company instead of selling its shares directly to the public arranges with a broker
to sell them on its behalf.

Company---> Broker --->sells the shares to---> Public

                      (Acts as the company’s agent)
A placing may be “private placing” if the broker ‘places’ them with his clients instead of the general
public.
                    
(c)    Offer for Sale

An offer for sale is an arrangement whereby a company sells the whole of its shares to an “issuing
house” and the issuing house then resells the shares to the general public, usually at a profit.

any---> Sells shares to----> Issuing House---> Resells shares to Public

The issuing house issues a document called “offer for sale”.

(d)   Offer by Tender

An “offer by tender” occurs if a company writes tenders for its shares and resells them to the highest
bidder. This is done with a view to obtaining the best price possible for the shares.  Under this method,
the company fixes a minimum price for the shares and accepts the highest tendered price above the
minimum price.

(e)    Rights Issue

This occurs when a company which has been trading for sometime makes an offer to the existing
members to buy shares of a new issue in proportion to the number of shares they hold.
 The existing members, rather than the public, are thereby given a ‘right’ to buy new shares.   A member
who does not want to keep the shares will have a right to sell them straight away if he accepts the
company’s offer.

(f)     Bonus Issue

It is a method by which a company instead of paying a cash dividend to its members retains the cash but
issues new shares to the members.  The company thereby increases the nominal capital and acquires
the cash it needs for business expansion.

This method can only be used if the articles make a provision for it because the general rule at common
law is that dividends are payable in cash (Wood vs. Odessa Waterworks Company).

(g)    Conversion Issue

Occurs either during a re-organization of a company’s capital structure or when two or more companies
amalgamate. What usually happens is that holders of one type of shares (preference shares) are offered
the right to convert them into shares of another type in the same company e.g. ordinary shares, or in
the case of amalgamation, the shares of another company.

COMPANY SHARES

Shares

A share is an interest of a shareholder in a definite portion of the capital. Shares measure rights of a
shareholder to receive a certain amount of profit of the company while it is a going concern, and to
contribute to the assets of the company when it is going to be wound up.

A share is, therefore, the interest of a shareholder in the company measured by a sum of money, for the
purpose of liability in the first place, and of interest in the second, but also consisting of a series of
mutual covenants entered into by all shareholders inter se in accordance with Section 22.

A share is not a sum of money, but an interest measured by a sum of money and made up of various
rights contained in the contract.
A person who acquires a share in a company automatically becomes subject to the obligations imposed
by the Company’s Act, the company’s memorandum of association and the company’s articles of
association.  He also becomes entitled to the rights similarly conferred.

Corporate shares: - These are shares created by the company for issue to its employees.  They are
therefore, shares that serve special purpose.

They are usually given to employees to win their cooperation in management.

These shares don’t carry any voting rights but have the right to earn dividends.
 Deferred/Founder shares: - These are shares given or issued to the founders as a reward for their
services.  They are few and carry a right of residual profit when other shareholders have been paid.

Even then, founders don’t like being given these shares because they prefer to be given preferential
shares which are of course cumulative and participating in nature.

Stocks

A stock is one unit of a company’s capital comprising several number of shares put together e.g. a
company may decide that every ten shares shall converted to constitute one stock so that instead of
members buying shares they buy stocks each one of which represents ten shares.

When a company decides to consolidate its shares into stocks, consolidation does not alter the par value
indeed the total value of the shares comprised in one stock becomes the value of the stock they
constitute.

The conditions under which shares may be converted into stocks or vice versa Under Section 64 and
Section 63

(i)         It must be the type of company that is allowed to convert its shares. Only companies registered as
“limited” are allowed to convert.
(ii)        Conversion can be undertaken if only the Articles of Association of a Company contain express provision
to that effect, but where the articles are silent, the company cannot undertake such
conversion.  However, if the company wishes to do so, it must first alter the articles to make a provision
for conversion.
(iii)       Only the company itself can take a decision to convert shares into stocks. Directors of a company do not
have the authority in law to make this decision.
(iv)       The shares to be converted must only be those which are fully paid for by the members.
(v)        Where a company has taken a decision to convert shares into stocks, that company must give a notice of
conversion to the registrar of company within 30 days from the date the resolution was made.
(vi)       After the shares have been converted into stocks and have been issued to stockholders any share
certificate they had should be substituted with stock certificate but not stock warrants.

Distinction between Shares and Stocks

Shares                                                                         Stocks

1.      A share is a distinct individual unit of Stock is not divided into equal
capital in a company and shares can be parts/denomination and subject to articles,
bought and sold in whole units. may be bought or sold in any convenient
subdivisions.
2.      Under Companies Act, shares are Stocks bear no distinguishing
required to be distinguished. features.

3.      A company can issue shares directly.

A company cannot issue stock
directly; rather it can only convert its fully
paid shares into stock.
 Shareholder’s Obligations

The primary obligation of shareholder is to observe the provisions of the Company’s Act as well as the
provisions of the company’s memorandum and articles.  Incase of a company limited by shares, he is
under obligation to pay, when called upon to do so, the amount if any, unpaid on the shares he holds.

Shareholders Rights

The rights conferred to shareholders by the Act include: -

1.      Section 8(2), to object to a proposed alteration of the company’s objects.
2.      Section 74(1), to apply to the court for cancellation of a proposed variation of the rights attached to a
particular class of shares.
3.      Section   89(1), to inspect without fee the register of holders of debentures of the company.
4.      Section 106(1), to inspect without fee copies of the instruments creating charges and the company’s
register of charges.
5.      Section 115(1), to inspect without fees the register of members.
6.      Section 132(1), to require the directors to convene an extraordinary general meeting of the company.
7.      Section 132(3), to convene an extraordinary general meeting of the company if the directors fail to do
so.
8.      Section 136(1), to appoint a proxy to attend a meeting
9.      Section 158(1), to receive a copy of every balance sheet together with a copy of the auditors report
10.  Section 211(1), to apply for a court order in cases of oppression.
11.  Section 221(1), to apply to the court for the winding up of the company.

Rights conferred by memorandum and articles of association: -

(a)    Income rights- Dividends
(b)   Capital rights-return of capital on a winding up or authorized reduction of capital
(c)    Attendance of meeting and voting.

CLASSES OF SHARES

The classes of shares, which can be created and issued by a company, are not prescribed by the
Company’s Act.  They depend on the provisions of the company’s constitution, usually the articles of
association.

Legally, therefore, a company may create any type of or class of shares it pleases, but in practice the
following are the classes of shares generally issued by companies: -
(a)    Ordinary shares
(b)    Preference shares

Ordinary shares

The word “ordinary” as used in relation to shares, has no legal meaning but was adopted to denote a
share, which has no special rights attached to it.  Ordinary shareholders have residual rights of the
company.
 Preference shares
A preference share must satisfy the following two conditions: -
(i)          It shall carry a preferential right as to the payment of dividend at a fixed rate.
(ii)        In the event of winding up, these must be a preferential right to the repayment of the paid up capital.

Types of Preference Shares

(i)          Cumulative and non-cumulative preference shares
(ii)        Participating and non-participating preference shares
(iii)      Convertible and non-convertible preference shares
(iv)      Redeemable and non-redeemable preference shares, Section 60(1).

TRANSFER OF SHARES

Section 75 provides that the shares of any member in a company “shall be movable property
transferable in manner provided by the articles of the company”.

According to Table A, Article 24 provides that the directors may decline to register the transfer of a
share not being fully paid share to a person to whom they shall not approve and they may also decline
to register the transfer of a share on which the company has a lien.

Where articles are framed with some limitations on the discretionary power of refusal, it follows on
plain principle that if the directors go outside the matters which the articles say are to be the matters
and the only matters to which they are to have agreed, the directors will have exceeded their powers.   If
the directors wrongfully exercise their power of refusal, the transferee may apply to the court for
rectification of the register and the entry of his name therein.

In case of private companies which have adopted Table A, Article 24 provides that the directors may in
their absolute discretion and without assigning any reason therefore, decline to register any transfer of
any share, whether or not it is a fully paid share.  Provided that the directors exercise their discretion
bonafide and within a reasonable time they cannot be ordered by the court to register a transfer of
shares which they have declined to register.  The directors’ power of refusal must be exercised within a
reasonable time from the receipt of the transfer which according to Section 80(1) is 60 days from the
date on which the transfer is lodged with the company.

Effect of Transfer

Unless shares are being transferred as a gift, a transfer is a contract of sale which is effected through the
agency of a stock broker who is a member of the Nairobi Stock Exchange.   The property in the shares is
however not vested in the transferee unless and until his name is entered into the company’s register of
members pursuant to section 28(2) of the Act.

In the interim period, the effect of the transfer is as follows:-

(i)          If the shares are partly paid, and a call is made the transferor is legally liable and must pay the amount
required and then seek an indemnity from the transferee.
(ii)        If dividends are declared and paid the transferor is the person who, according to the company’s
records is entitled to them.  He would however hold the dividends on trust for the transferee, unless the
shares were bought “ex-dividend” or “ex-all”.
(iii)      If a meeting of a company is convened and the transferor decides to attend the meeting, his right to
vote or otherwise will depend on whether he has fully paid for the shares.
(a)     If he has been fully paid for the shares, he must vote as the transferee directs.   In such a case he is
regarded as the transferee’s trustee.
(b)     If not fully paid up, he would have a prima facie right to vote in respect of those shares.