COMPANY LAW

SHARES
Shares are indivisible units of the capital of the company. Fawell I in Barlands trustee
vs. Steel Bros (1901) 1 ch. 279 defined a share as 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 place, but also consists of a series of mutual covenants
entered into by the shareholders inter se in accordance with section 22 of the
companys act.
Shares represent the equal portions into which capital is divided each shareholder is
entitled to a portion of a companys profits in proportion to the number of shares held
by him.
A shareholders liability is usually measured against his indebtedness to the company
on the amount unpaid on shares held by him.
Section 76 requires that each class of shares be distinguished by its appropriate
number. The distinction is not necessary if all shares rank equally.

SHARE CAPITAL
Capital is a particular amount of money with which a business is started. For a
company is usually called share capital.
Types of capital
1. Authorized or nominal capital
This is the nominal value of the shares which a company is authorized to issue by its
memorandum of Association. It is the maximum amount of capital which the company
will have. This amount can be increased or reduced only if the company changes the
memorandum. Nominal capital is also called registered capital.

2. Issued capital
This is the nominal value of the shares which are offered to the public for subscription. It
represents the portion of the nominal capital that has been given out to be subscribed
by the public or by any persons concerned.
3. Subscribed capital
Page 1 of 10

This is the part of issued capital which has been taken up by the public. When all the
issued capital has been subscribed then subscribed and issued capital are equal.
4. Called up capital
This is part of the issued capital which has been called up on the shares. This is the part
of the issued capital which shareholders are liable to pay as and when called.
5. Paid up capital
This is part of the issued capital which has been paid up by the shareholders. When
calls are made on the shares and shareholders fail to pay up the amount thus owing is
called calls in arrears or calls unpaid.
6.

Reserved capital

This is any part of the companys share capital which a company may resolve by a
special resolution not to be called except in the event of a winding up. Section 62 of the
companies Act provides that a company by special resolution determine that any portion
of its uncalled capital be reserve capital.
Reserve capital can only be turned into uncalled capital by leave of the court. Reserve
capital is different from reserves or reserve fund. Reserve fund or reserves refers to
undistributed profits kept by the companies to cater for emergencies.

Application and allotment of shares:

Application is an offer by a prospective shareholder in lieu of a prospectus issued by
the company. Allotment is the acceptance of an application and it results to a
contractual relationship between the company and the applicant, allotment of shares
is an allocation (appropriation) by the board of directors of a given number of shares
in response to an application.
As the post is the medium of communication allotment is deemed completely on the
instant, the letter of allotment is posted even though the allotment letter is delayed in
the post or it never reaches the offeree (applicant) household fire insurance Co. vs.
Grant (1879) 4 Ex. 216.
Provisions regarding allotment
Page 2 of 10

1.

Allotment must be by a resolution of the board of directors unless there is

clause in the articles providing otherwise.

2. Allotment must be made within a reasonable time, in Ramsgate Viction Hotel vs.
Monte fiore (1866) Lr1 Ex 109. Monte fiore was entitled to refuse an allotment as his
offer had lapsed due to undue delay in allotment.
3.

Allotment must be communicated to the applicant where the post is used

allotment is completed as soon as the company posts the letter of acceptance,

provided the letter is sufficiently stamped and correctly addressed.
4. The allotment must be absolute and unconditional. The allotment must be made
in accordance to the conditions of the offer subject to provisions of the articles.
In Ramabhai vs. Ghai Ram (1918) Born LR 595, R applied for 400 shares in a company
on condition that he was appointed a branch manager of the company. He was allotted
shares but was not appointed a branch manager. It was held that he was not bound by
the allotment.
5. An offer may be withdrawn any time before communication of its acceptance.
An applicant can withdraw his offer any time be fore his offer has been accepted
sec. 52 (5) an applicant cannot withdraw his application until after the expiration of
the third day after the opening of the subscription list.

Requirements of allotment.
1. A public company must file a prospectus or a statement in lieu of prospectus
must be subscribed before allotment.
2. The minimum subscription as provided in the prospectus must be subscribed
before allotment. If the minimum subscription is not met within sixty days all money
received from applicants must be returned forthwith otherwise the money will attract
default interest at 5% p.a from the seventy fifth day.
3. Section 52 provides that no allotment should be made of shares applied for until
the third day from the date of issue of the prospectus.
4. Under section 53; if prospectus states that application has been or will be made
to the stock exchange, then such permission must be applied before the third day of
the issue of prospectus, failure to which allotment would be void.
Page 3 of 10

Irregular allotment
Under sec.51 an allotment made by the company to an applicant in contravention of
provisions of sec. 49 (failure to meet minimum subscription) or section 50 (failure to
issue a statement in lieu of prospectus) is voidable at the discretion of the applicant
within one month after the holding the statutory meeting of the company within one
month after the date of allotment. The above applies regardless of the fact that the
company is in the course of winding up.
If any director knowingly contravenes provisions of section 49 or 50 he must
compensate the company and the allotee respectively for any loss or damages or costs
incurred.

Return of allotment (section 54)

A company is required to deliver within sixty days the following to the registrar of
companies for registration: a) Return of allotment
A return has details of the number and nominal amount of shares, names, addresses
and description of the allotees and amount paid or payable on each share.
b) A contract in writing (or if not in writing particulars of the contract, stamped with
the same stamp duty as if the contract has been in writing) constituting the title of
the allotee to any shares allotted as fully or partly paid up otherwise than in cash;
together with any contract of sale of services or other consideration for allotment,
such contracts being duly stamped and a return stating the number and the nominal
amount of shares so allotted, the amount credited as paid up and the consideration
for allotment.
Issue of shares at premium.
Section 58 provides that shares can be issued at a higher price than the nominal value.
Such constitutes a share premium which must be transferred to a share premium
account. The amount so transferred can only be held for the following: a) Paying up unissued shares which are then issued to members as fully paid
bonus shares.
Page 4 of 10

b) Writing off preliminary expenses.

c) Writing off the expenses or commission paid or discount allowed on any issue
of share or debentures.
d) Providing for the premium payable on the redemption of any debenture of the
company.
Issue of shares at a discount.
Section 59 permits issue of shares at a discount to the following conditions: a) The issue must be of a class of shares already issued.
b)

It must be authorized by a resolution passed in a general meeting and

sanctioned by the courts.

c) The resolution must specify the maximum rate of discount.
d) The company must have commercial business for not less that one year.
e) Shares must be issued within one month of the sanction by the courts within the
time courts may allow.

Share of no par value.

Under section 4 (2) and section 23 (2) of the act, companies are prohibited from issuing
of no par value.

SHARE CERTIFICATE
Every one whose name is entered in the register of members has a right to receive a
share certificate in respect of those shares he holds in the company. A certificate should
be issued within sixty days of the allotment or lodgement of transfer. In case of default,
the company and every director, manager, secretary and every other officer who
knowingly is part to the default is liable to a max penalty one hundred shillings in
respect of every day during which the default continues. One can however escape
liability if he/she proves that he was not aware of the fact that the certificate had not
been issued.
To be valid, a certificate must have a common seal of the company affixed to it and
must also be stamped, one or more directors must sign it. It must state the name,
Page 5 of 10

address and occupation of the holder, number of shares and their distinctive number
and amount paid.

Legal effects of share certificate:

A certificate is a prima facie evidence of the title of the member to the shares specified
in the certificate per section 83. lord Caris says that a share certificate is a solemn
affirmation under the seal of the company that a certain amount of shares or stock
stands in the name of the individual mentioned in the certificate.
In Bahia & San Francisco Rly (1868) C R 30 B 584 the object of a share certificate was
stated the power of granting certificates is to give the shareholders opportunity of more
easily dealing with their shares in the market and to afford facilities to them of selling
their shares at once showing a marketable title and the effect of this facility is to make
the shares of greater value.
In addition to the above the certificate makes the company liable in two ways: 1. Estoppel as to title
the company will in no way deny that a holder to a share certificate is entitled to those
shares. In Dixon vs. Kenmery & Co. (1900) 1 ch. 833 L was the secretary of a company
and also a stock broker. D applied for 300 shares in the company and paid for them. Ls
clerk who owned no shares executed transfer in favour of D. the company without
requiring the production of a share certificate from the clerk, registered the transfer and
gave D a new certificate. It was held that the company was estopped from denying the
validity of Ds certificate and was liable to D in damages.
The company may not be bound by a certificate issued without the authority or the
board of directors or where the certificate is a forgery e.g. in the case of Ruben vs.
Great Fingal consolidated (1906) of C439.
2. Estoppel as to payment.
If the certificate indicates that the shares are fully paid the company is estopped as
against a bonafide purchaser from alleging that the amount stated in the certificate as
being paid has been paid. A case in support of the above is in Bloomenthal vs. Ford
(1897) AC 156 B.

Page 6 of 10

When the person named in the certificate knew that the shares were not fully paid for in
such a case he has not been misled by the certificate and the rule of estoppel does not
apply. (Crickmans case Re Carobbeam Co. (1875) LR 10 ch. App. 614).

Loss of certificate
Articles authorize directors to issue duplicate if such a certificate is proved to have been
lost or destroyed, defaced, mutilated or torn on payment of two and half shillings or such
s a lesser sum.
Transfer of shares
Section 75 states the shares or other interests of any member shall be movable
properly transferable in manner provided by the articles of the company provided by the
articles of the company.
The articles of a public company may and those of a private company must restrict
rights to transfer.
Article 23 of table A of the first schedule to the Act states
Subject to such of the restrictions of these regulations as may be applicable, any
member may transfer all or any of these shares by instrument in writing in all usual or
common form or any other form in which directors may approve.
Article 24 of fable A of the first schedule states
The directors may decline to register the transfer of shares to a person whom they shall
not apply; and they may also decline to register the transfer of a share on which the
company has lien. Articles restrict but not forbid the transfer of shares.
In case of refusal, the company must send a notice to the transferee and the transferor
within sixty days from the date on which the date of instrument of transfer was delivered
to the company.

Procedure of transfer
The following are the usual steps taken when transferring shares.
a) For a share warrant a mere delivery of the share warrant transfers ownership
of the shares.
Page 7 of 10

b)

To transfer shares a written instrument of transfer is executed by the

transferor and the transferee, duly stamped, specifying the name, address and
occupation of the transferee, which is delivered to the company for registration
together with a share certificate.
Certificate of transfer
When the shareholder is selling only part of the share he does not deliver share
certificate but the selling broker produces it along with the transfer instrument to an
officer of a company who certificates the transfer by writing its margins the words
certificate lodged and mentions the number of shares for which it is lodged: the officer
then hands the certificated instrument back to the broker together with the balance
ticket for any share not registered.
The transferor to get a new certificate uses the ticket and the certificated instrument is
given to the transferee, which he uses to acquire a new certificate.
The company thus conceals the old certificate and prepares two certificates
a) One for share sold
b) For the unsold portion of the shares.
If a company after certifying returns the original certificate together with the certificated
transfer to the transferor who uses it to commit fraud on the transferee, the third party
has no right against the company.
The terms implied between seller and buyer
a)

That the seller will give to the purchaser genuine of transfer and share

certificate required to enable the purchaser to be registered.

b) The seller will not prevent the buyer from registering the transfer.
c) The seller will compensate the buyer for any calls or liability which may arise in
respect of shares sold. The purchaser must also indemnify the seller against calls
made after date of contract.

Effect of transfer:

Page 8 of 10

Position of the transferee before he is registered as a member

1

The transferor continues to be the legal owner of the shares set as a

trustee of the transferee

2

The transferee has no rights as a shareholder of the company.

The transferee has equitable claim

If calls are made, the transferor must pay and recover the amount from

the transferee
5
6

If dividends are paid the transferor is entitled to them.

Transferor must vote as the transferee directs [massel white vs v.h

massel white $son limited] (1962) ch. 964

Priority between transferees

When two or more persons lay their claim to the same shares, the priorities as between
the different claimants will be decided in accordance with the following rules:
1

The first to secure registration will get priority irrespective of the date

when his claim arose.

2

As between claimants, the earlier in point of time will be preferred,

irrespective of the date when notice was given to the company.

Notice of transfer
It is not mandatory, but it is advisable to give notice of the lodgement of transfer to the
transferor.

Forged transfer
Consequences of forged transfer
1

Forged transfer does not pass any legal title to the transferee

In instances where the company has issued a share certificate to the

transferee of forged transfer and he sold these to an innocent buyer, the

buyer gets no right to be registered as a shareholder, in such case he can
claim damages from the company.
Page 9 of 10

If the company has been put to loss by reason of the forged transfer, it

may recover the loss from the person who procured registration, even though
he might have acted in good faith.

Blank transfer
This is a transfer of shares which is executed without the name of the transferee being
filled in the transfer form of deed which a transferor hands over to purchaser or pledgee.
The transferor also hands over to the purchaser the share certificate along with the
blank transfer form or deed, the date the date of sale and name of the transferor are left
blank
The blank transfer is thus used as negotiable instrument. The advantage in giving a
blank transfer form is that the buyer or pledgee will be at liberty to sell again without his
name and signature to subsequent buyer.
At the end of the transfer the first seller is treated as the transferor and the last buyer
as a shareholder and his name is registered in the company register.

Page 10 of 10