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CPA
Intermediate Leval
Company Law November 2019
Suggested Solutions

Company Law
Revision Kit

QUESTION 1a(i)

Q Highlight six ways through which a person might cease to become a member of a company. (6 marks)
A

Solution


ways through which a person might cease to become a member of a company.

1. Transfer of shares.

2. Death.

3. Bankruptcy.

4. Forfeiture of shares.

5. Sale by the company in exercise of lieu.

6. Valid surrender of shares.

7. Rescission of contract.

8. Repudiation by an infant.

9. Winding up or liquidation.

10. Redemption of redeemable preference shares.

11. Disclaimer by trustee in bankruptcy.

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QUESTION 1a(ii)

Q (ii) Outline four rights of a member in relation to meetings of a company. (4 marks)
A

Solution


Rights of a member in relation to meetings of a company.

  1. Inspection of minutes of general meetings.
  2. Attend general or class meetings of the company.
  3. Notices of general meetings.
  4. Vote at the meetings.
  5. Right of members to appoint proxies.
  6. Right of members to demand a poll at general meeting.


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QUESTION 1b

Q With specific reference to Directors, summarise five provisions of the Companies Act in your country which govern the removal of a director from office before the expiry of his term. (10 marks)
A

Solution


  1. A special notice must be issued to remove a director
  2. On failure of non-compliance with the guidelines of the Companies Act,2015
  3. The Company may, by ordinary resolution, remove a director prior to the expiration of his term of office, notwithstanding anything to the contrary in any agreement between the Company and the director.
  4. However, a decision to remove a director or to appoint a person to replace a director removed under this article requires special notice at a meeting to remove a director.
  5. A person appointed to replace a director who is removed under this section is, for the purpose of determining the time at which the person is to retire from office taken to have become a director on the day on which the director in whose place the person is appointed was last appointed as a director.
  6. A vacancy resulting from the removal of a director under this section may be filled as a casual vacancy if not filled at the meeting at which the director was removed.
  7. Directors cannot remove one of their members from the office of director.


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QUESTION 2a(i)

Q Explain the meaning of the term "promoter". (2 marks)
A

Solution


Meaning of the term "promoter".

Is someone who commits to starting a company based on a given project and initiates it and takes the necessary steps to achieve that goal.

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QUESTION 2a(ii)

Q Highlight three fiduciary duties of a promoter of a company. (6 marks)
A

Solution


Fiduciary duties of a promoter of a company.

  1. Register or cause registration of the company.
  2. Determine and settle the name of the company.
  3. Prepare or cause preparation of the constitutive and other documents.
  4. Disclose any personal interest.
  5. Secure the services of directors.
  6. Ensure that the company has an independent board of directors.
  7. Prepare the requisite prospectus if any.
  8. Enter into business contracts on behalf of the company.
  9. Act bona fide for the benefit of the company information.
  10. Proper accounting.
  11. Meet all the preliminary expenses of company formation.
  12. Acquire assets for use by the company.


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QUESTION 2a(iii)

Q Outline two remedies to the company for breach of fiduciary duty by promoters. (2 marks)
A

Solution


  1. The company is generally entitled to any secret profits made by promoters in violation of their fiduciary duties. This amount may be recovered through litigation against monies received
  2. When promoters subscribe for company securities on the basis of a prospectus containing misrepresentations and investor suffer loss or damage , they are liable to compensate for the loss suffered.
  3. a company has an action in damages against a promoter for breach of his fiduciary duties. This action is sustainable even in the absence of fraud.
  4. under the provisions of the companies Act the High Court has jurisdiction to subject a promoter public examination.
  5. The company may terminate contracts entered into by promoters on its behalf prior to its incorporation. This recourse restores the two parties to the state they were in before the signing of the contract. However, the remedy can be lost in various situations, such as delays or affirmation.


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QUESTION 2b(i)

Q Highlight four ways in which the remuneration of the Company Auditor might be fixed. (4 marks)
A

Solution


Ways in which the remuneration of the Company Auditor might be fixed.

  1. For the purposes of this section, "remuneration" includes amounts paid for fees.
  2. An auditor is appointed by the members of a company, the members shall decide the auditor's remuneration, either by ordinary resolution or in such as members may, by ordinary resolution, determine.
  3. If the directors of a company appoints an auditor, the directors shall fix the remuneration of the auditor.
  4. An auditor appointed by the Cabinet Secretary is entitled to receive from the company remuneration at areasonable rate fixed by the Cabinet Secretary.
  5. By the registrar if appointed by him.


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QUESTION 2b(ii)

Q (ii) Discuss three remedies available to a company whose auditor has been negligent. (6 marks)
A

Solution


Remedies available to a company whose auditor has been negligent.

Negligence is an act or omission resulting from a failure on the part of the person concerned to exercise a reasonable degree of care and skill reasonably expected in the circumstances of the case. The degree of care and skill used should depend on the depth of the auditor's investigation and the type of controls to be applied. Simple definition, negligence is a breach of duty of care

Remedies.

  1. An auditor who fails to use a reasonable degree of care and skill in the performance of auditing duties may be liable in tort to pay damages to a person who suffered economic loss as a result.
  2. A failure by an auditor to exercise reasonable care and skill could give the company both a right of action for breach of contract and an alternative right of action in tort.
  3. Criminal Sanction.
  4. Termination of contract/Removal.

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QUESTION 3a(i)

Q Describe the circumstances for lifting of the veil by:
(i) The Courts. (6 marks)
A

Solution


Circumstances for lifting of the veil by:

(i) The Courts.

1.Prevention of fraud or improper conduct:If a company's media is used to commit fraud or misconduct, the courts will lift the veil and examine what really happened.

2.Tax Evasion: Sometimes the corporate veil is used to evade tax or avoid any kind of tax liability. It is impossible for the legislator to fill all the gaps in the law, hence the importance of the intervention of the judiciary. In such cases, the courts lifts the corporate veil and find out what is really going on with the company.

3.Identifying coperate enemies: In times of war, the courts are ready to lift the corporate veil and determine the nature of the conglomerate: sometimes in the case of conglomerates, where Solomon V solomon principle may not be respected, the courts may lift the veil to see the reality of the economic group itself.

4. Where a company acts as an agent for its shareholders: When a company acts as the agent of a shareholder, the shareholder is liable for the acts of the company. In each case, the question of whether the company is acting as an agent of its shareholders is a question of fact. There may be an express agreement to this effect or a tacit agreement depending on the circumstances of each particular case. In the case of economic crimes, the courts have the power to lift the veil and consider the economic reality behind the legal façade.

5. Where Company is a sham or cloak: When the court finds that company is a mere cloak or sham and is used for some illegal or improper purpose, it may lift veil.

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QUESTION 3a(ii)

Q The Statutes. (6 marks)
A

Solution


Circumstances for lifting of the veil by:

The Statutes.

  1. Reduction in number of members: section 33 of the Companies Act.
  2. Investigation of company membership.
  3. Fraudulent trading
  4. Non-publication or mis-description of the Companies name.
  5. Investigation of companies affairs.
  6. Group accounts.


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QUESTION 3b(i)

Q (b) In relation to company investigations, outline four powers of an inspector appointed to investigate the affairs of a company. (4 marks)
A

Solution


Powers of an inspector appointed to investigate the affairs of a company.

Powers.

  1. It has the power to shut down the businesses in question, ie. Whether such investigations are necessary for the holding or subsidiary to conduct investigations.
  2. To examine officers and agents of the company on oath.
  3. To administer oath.
  4. Demand from company officials to produce books, documents and other information.
  5. To apply to the court for persons to give evidence there in for purposes of their investigation


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QUESTION 3b(ii)

Q Describe four types of content to be stated in an annual return of a company. (4 marks)
A

Solution


Contents of annual return of a company.

  1. The address of the company's registered office.
  2. The directors and secretaries of the company.
  3. The type of company and its principal business activities.
  4. Any person appointed as authorized signatories.
  5. Total amount of indebtedness in respect of all registerable charges
  6. Financial statements or exemption(cerificate) statement where applicable.


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QUESTION 4a(i)

Q Outline four purposes of holding company general meetings. (4 marks)
A

Solution


Purposes of holding company general meetings.

  1. Comply with legislative requirements.
  2. Report to the members on the activities going on.
  3. Present the financial accounts to the members.
  4. Appointment of an auditor (if required).
  5. Ensure committee rotation happens in an orderly manner.
  6. Consider any other topics as required by the company rules.
  7. Consider and vote on rule changes and recommendations.
  8. Provide opportunities for members to ask questions and provide feedback to the committee


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QUESTION 4a(i)

Q Distinguish between "voting by a show of hands" and "voting by poll". (4 marks)
A

Solution


Distinction between "voting by a show of hands" and "voting by poll".

➢Voting by show of hands refers to voting that is cast for any resolution where the members use their hands to vote for or against the resolution

➢voting by poll refers to a system where polling paper is distributed among the members present at the meeting, in person or by proxy, to have the voting right in the poll in proportion of the number of shares held by each of them

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QUESTION 4b(i)

Q Describe four effects of a share transfer. (8 marks)
A

Solution


Effects of a share transfer.

There may be times when you want to change the share structure of your company; either by adding a new shareholder or by changing the existing proportion of shares between shareholders. A share transfer is the process of transferring existing shares from one person to another; especially by sale.

Effects.

Depending on if the share price rises or falls, it may result in:

1. Company lay-offs.

2. Movement in other stock prices in similar industries.

3. More dividends paid to shareholders.

4. Increased capital for new products.

5. Possibile company merger or takeover.

6. Decreased or increased interest from investors

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QUESTION 4b(ii)

Q Explain two consequences of a forged transfer. (4 marks)
A

Solution


Consequences of a forged transfer.

➡An instrument on which the signature of the transferor is forged is called forged transfer.

➡It is a null transfer and does not confer any title.

➡This is so because in case of forgery, not only is there no free consent, but there is no consent at all,Hence,

➡ This transfer will never confer an ownership upon the transferee, however important the transaction may appear.

➡If the company registers any forged transfer, the real owner can apply to the company for the rectification and get his name placed back in the register.

Consequences

  1. A forged transfer is a nullity and, hence, the original owner of the shares continues to be the shareholder and the company is bound to restore his name on the register of members
  2. Transferee doesn't get a legal title of the shares.
  3. If innocent buyer buys the forged certificate, such a buyer obtains no legal ownership on the shares.
  4. If the company issues a share certificate to the transferee and he sells the shares to an innocent buyer, the company is liable to compensate such a buyer, if it refuses to register him as a member, or if his name has to be removed on the application of the true owner.
  5. If the company suffers loss by reason of the forged transfer, as it may have paid damages to an innocent buyer, it may recover the damages independently from the person who lodged the forged transfer.


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QUESTION 5a

Q (a) Highlight three ways in which a company might raise share capital. (6 marks)
A

Solution


Ways in which a company might raise share capital.

  1. Offer by tender - where tenders are invited and shares sold to the highest bidder. This ensures that the highest possible price is obtained.
  2. Rights issue - This is an issue of shares by the company to existing members who are given the priority and right to acquire shares in proportion of their existing shares held.
  3. Private placement - company offers the shares to a few large institutional investors like banks, pension schemes e.t.c.
  4. Direct offer to the public - Under a prospectus issue the company sells the shares directly to the public through IPO.
  5. Offer for sale - An "offer for sale" is an arrangement whereby a company sells some of its shares to a financial institution called "issuing house". The issuing house will then re-sell the shares to the public.


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QUESTION 5b

Q Summarise four types of share capital. (8 marks)
A

Solution


Types of share capital.

1. Reserve share capital - In order that the guarantee fund referred to above removed from the directors control and made more permanent, a company may, by special resolution, determine that it shall only be called up in the event of winding up.

2. Called-up share capital - Called-up capital Equal to the total amount of calls on the shares, whether paid or not, plus any paid up share capital which has not been called and any share capital which will be paid up at a later date determined under the articles of association.

3. Nominal or authorised share capital - Each company must indicate the amount of its nominal capital in its memorandum. The chart shows the maximum number of shares a company is allowed to issue and the par value per share. It does not indicate that shares have been issued and paid for.

4. Issued share capital - Some or all of the nominal capital must be issued in return for cash or the transfer of non-cash assets. Issued capitai is of far more importance than nominal capital since each shareholder is liable to paythe price of shares issued to him.

5. Paid-up share capital - This is the sum of the payments received by the company. The paid-up capital will be equal to the call capital unless certain shareholders refuse to pay the calls. Paid-up capital is important because if a business refers to the amount of capital it has on its stationery, that reference should be paid-up capital.

6. Uncalled share capital - This is the difference between the amount already paid-up and the total nominal value of the issued shares.

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QUESTION 5c

Q (c) Standard Limited issued a debenture to Finance Bank years ago. The debenture was described as a fixed and floating charge over all the assets of the company. However, due to inadvertence, the charge was not dated or registered within time. The company is now in liquidation and the loan is in arrears. Finance Bank seeks your legal advice on whether it can rely on the charge to prove its claim in liquidation proceedings of the company. Advise Finance Bank. (6 marks)
A

Solution


1. This problem is based on the legal consequences of non-registration of a charge.

2. In this case, the charge to Finance Bank by Standard Limited was not registered and the company is now in liquidation.

3. The unregistered charge cannot be relied upon by Finance Bank to prove its claim.

4. If the complaint is not registered in a timely manner, the charge against the liquidator will be canceled and the secured amount will be paid immediately.

5. Finance Bank can only prove and rank the debt as an unsecured creditor

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QUESTION 6a(i)

Q Describe six powers and duties of the Company Secretary of a company. (6 marks)
A

Solution


Describe six powers and duties of the Company Secretary of a company.

  1. Attend all meetings, including board meetings, and take minutes of such proceedings.
  2. Give notice of meeting to members and others as directed by the Board of Directors.
  3. To conduct and record transfer of shares and conduct correspondence with shareholdersas regards calls, transfers, forfeiture.
  4. To countersign instruments to which the company seal has been affixed
  5. To keep the books of the company, particularly those relating to the internal administration of the company, e.g. the shares register and register of charges.
  6. For quoted companies to ensures compliance with Nairobi Stock Exchange and Capital Markets Authority Requirements.
  7. For banks he ensures compliance with Central Bank of Kenya statutory requirements.
  8. To make all the returns of the company, e.g. the annual returns, notice of specialresolutions, etc.


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QUESTION 6a(ii)

Q (ii) Summarise four breaches and omissions of duty by a Company Secretary which might lead to being penalised. (4 marks)
A

Solution


Breaches and emissions of duty by a Company Secretary which being penalised.

  1. Failure to publish the company's name.
  2. Refusal to facilitate inspection of registers.
  3. Failure to register charges.
  4. Failure to file annual returns documents.
  5. Failure to maintain registers.
  6. Failure to publish directors names in official


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QUESTION 6b(i)

Q Outline four changes that aforeign company must give notice of. (4 marks)
A

Solution


Changes that a foreign company must give notice of.

  1. Amendments to the articles of association or any other document relating to the company filed at the time of registration.
  2. Change of director.
  3. Change of local representative or local representatives
  4. Powers to change any Kenyan director and board member of a company resident in Kenya.
  5. Change of the name or address of a local representative


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QUESTION 6b(ii)

Q Summarise three provisions that might be contained in the above regulations.(6 marks)
A

Solution


  1. Consider the circumstances of the property, whether in Kenya or not .
  2. The keeping by a registered foreign company of records and registers about specified charges and their inspection.
  3. The consequences of failing to register a charge in accordance with Companies Act.
  4. The circumstances in which a registered foreign company ceases to be subject to Companies Act.


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QUESTION 7a(i)

Q Outline two powers of the Liquidator exercisable with the sanction of the court. (2 marks)
A

Solution


Powers of the Liquidator exercisable with the sanction of the court.

  1. To bring or defend suits or other legal proceedings in the name and on behalf of the Company.
  2. Pursue the activity of the company to the extent necessary for a beneficial liquidation.
  3. Make any compromise or arrangement with creditors.
  4. Pay any classes of creditors in full.
  5. Appoint a lawyer to assist him in the performance of his duties.
  6. To compromise all calls and liabilities to calls and other debts and liabilities.


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QUESTION 7a(ii)

Q (ii) Highlight five grounds for compulsory liquidation by the Court. (10 marks)
A

Solution


Grounds for compulsory liquidation by the Court.

  1. The company by special resolution,has resolved that it should be wounded up by the court.
  2. The company has not commenced operations within one year of the date of incorporation or ceased operations for a full year.
  3. The company fails to file a statutory report with the Registrar or to hold a statutory meeting.
  4. The number of members of the company has been reduced to less than two if it is a private company and below seven if it is a public company.
  5. The company is unable to pay its debts.
  6. The court considers that it is just and equitable to wind up the company.
  7. The company has suspended its business for a whole year
  8. For a company incorporated outside Kenya and carrying on business in Kenya, its liquidation procedure is initiated in the country of its incorporation or in the territory where it has its establishment.
  9. The company did not hold a statutory meeting under the Companies Act.


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QUESTION 7b

Q Summarise four strategies that a company might employ against hostile take-overs. (8 marks)
A

Solution


Strategies that a company Might employ against hostile take-overs.

Hostile takeover occurs when another company (called the acquirer) acquires a target company directly from the shareholders of the target company through a takeover bid or a proxy vote.

1. Poison Pill Defense.

To execute a poison pill, the targeted company dilutes its shares in a way that the hostile bidder cannot obtain a controlling share without incurring massive expenses.

2. The Golden Parachute

is a provision in the employees contract. It states that they will get a large bonus in cash or stock if the company is acquired. This makes the acquisition more expensive, and less attractive.

3. Shark repellants/The super majority

is a defense that requires 70 or 80 percent of shareholders to approve of any acquisition. This makes it much more difficult for someone to conduct a takeover by buying enough stock for a controlling interest.

4. A staggered board

Directors delay the receivership process by preventing the entire board from being replaced at the same time. Terms are staggered, with some members elected every two years and others every four years. Many companies interested in making acquisitions don't want to wait four years for their board to be complete.

5. Dual-class stock

Allows business owners to hold voting stock while the business issues stock with little or no voting rights to the public. This way, investors can buy shares, but not control of the company.

6. Employee Stock Ownership Plan

Another preemptive line of defense against a hostile corporate takeover would be to establish an employee stock ownership plan (ESOP). An ESOP is a tax qualified retirement plan that offers tax savings to both the corporation and its shareholders.By establishing an ESOP, employees of the corporation hold ownership in the company. In turn, this means that a greater percentage of the company will likely be owned by people that will vote in conjunction with the views of the target company's management rather than with the interests of a potential acquirer.

7. Golden parachutes

The golden parachute is an additional compensation for the top management of the target company in the event of dismissal following a successful hostile takeover. Since such an offset reduces the target company's assets, this defense reduces the amount the acquirer is willing to pay for the target company's stock. As such, this defense could be detrimental to shareholders. This effectively deters hostile takeovers.

8. Greenmail

Greenmail is where a target company acquires its own shares from a hostile bidder at a premium above market price, causing the bidder to agree not to seek control of the target company in the near future.

9. Leveraged buyout

A leveraged buyout occurs when management uses debt financing to purchase a target company. This defense burdens the target with the debt. In this case, management becomes the bidder and competes with the hostile bidder for control of the target company.

10. Crown jewels defense

Sell ​​the most valuable part of the business in the event of a hostile takeover attempt. This obviously makes the target less attractive and discourages a hostile takeover.

11. White knight

A white knight is a hostile takeover defense strategy whereby a 'friendly' person or company acquires a corporation at fair consideration when it is on the verge of being taken over by an 'unfriendly' bidder or acquirer. The unfriendly bidder is also known as the "black knight."

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