The Companies Act 2015, Part III: Shareholder Gains & Management Oversight


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.





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