COMPANIES LAW

ABDULLAH MALIK

Aims & Objectives: This course will focus on the structure and characteristics of business organizations, with an emphasis on the corporate form of organization. Case law and statutory material will be based on Pakistani law. Students will not be taught, nor expected to know, all the pertinent Pakistani statutes in their entirety; however, after having taken this course, students should be able to identify, analyze and research all legal issues relevant to corporations under Pakistani law. Examples from American jurisprudence will be presented to emphasize certain issues and to give the students a comparative perspective. Topics will include (in no particular order) policy and economic underpinnings, basic fiduciary law, shareholder voting, derivative suits, mergers and acquisitions, corporate governance and securities regulation. The method of teaching will be primarily Socratic. Course Materials: Course readings will be case materials, statutes and excerpts from various treatises, articles, etc. and will be provided to the students in the form of a course pack or handouts, at least one week prior to the pertinent lecture. Grading: 40% final, 25% midterm, 15% short paper and presentation,20% class participation. Lecture 1 Introduction

Aims and objectives of the class Forms of business organization (excerpts from Cox and Hazen (treatise) pgs. 1 - 44) Companies Ordinance, 1984: Sections 1 13 Securities and Exchange Commission of Pakistan Act, 1997 (the SEC Act): Sections 1, 2, 3, 20. Case Law:
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Company should have independent existence and should have power to govern its affairs by itself. (The State vs. Aizas Ahmad. 1986 PCR.L.J. 561) Company is a distinct entity separate from shareholders and Directors and liability of company cannot be passed onto its directors personally. (A. Rehman vs. Tehsildar. 1993 CLC 1222) A company is a distinct entity separate from its Chief Executive. (Ayaz Durrani vs. Chairman Wapda. PLD 2000 Lah. 414) Company is a separate juristic person and interests of company and shareholders are separate. (Messrs Franksons vs. Muhammad Hussain. 1983 CLC 1042)

Lecture 2 Formation and Promoters Liability

Promoters liability and pre-incorporation contracts (excerpts from Cox and Hazen pgs. 73 - 88) Companies Ordinance, 1984: Sections 14 25 (Memorandum of Association), Sections 26 27 (Articles of Association), Forms of Memorandum and Articles of Association (First Schedule to the Companies Ordinance) Case law: Object and scope - Articles of Association of a company are terms of contract between the members and the terms are legally binding upon the members. Such right is enforceable in law provided law does not forbid the terms. (United Liner Agencies of Pakistan (Pvt.) Limited vs. Miss Mahenau Agha. 2003 SCMR 132) Assessee not in existence at time of assessment - Not liable to any tax company could not be taxed in respect of business carried on by promoters before date of its incorporation. (Messrs Haripur Rosin & Turpentine Factory Ltd., Lahore vs. Commissioner of Income Tax, North Zone. 1973 PTD 297 Lahore-High-Court-Lahore) Promotion of a company by any person does not lead to conclusion that he can be termed as its owner-company has its own separate legal entity from its promoters and shareholders. (Muhammad Anwar vs. Muhammad Iqbal. 1984 CLC 103 Karachi-High-Court-Sindh) Contracts entered into by the promoter of a corporation can be binding on the corporation without formal adoption of such contracts by the corporation in certain instances (McArthur v. Times Printing Co. (US))

Lecture 3 - Limited Liability and Piercing the Corporate Veil (1)

Concept of limited liability and its limitations (excerpts from Cox and Hazen: pgs. 99 - 134) National Accountability Ordinance, 1999 Section 1, 2, 3, 4, 5, 9, 10. Schedule to the National Accountability Ordinance, 1999. Optional Reading: Excerpts from Annual Report of National Accountability Bureau for the year 2005 (pages 1 45 of the report). Report can be found at http://www.nab.gov.pk/Downloads/Annual_Report_2005.pdf

Lecture 4 Limited Liability and Piercing the Corporate Veil (2)

Companies Ordinance, 1984 - Section 32, Section 2(8) Case law: Word "limited" used in S.2(8), Companies Ordinance, 1984 means that the liability of shareholders for the debts or any other obligation of the company is limited to the extent contributed by them in the share capital --- Shareholder cannot be made liable beyond the extent of his contribution towards the share capital ---For any unsettled liability, it is only the assets of the company which can be proceeded against by an unpaid creditor or claimant. (Messrs. Sakhi Dattar Oil Mills and Cotton Industries through partner vs. Messrs.Mahmood Pvt. Ltd. 2006 CLD 191 Karachi-High-Court-Sindh) The distinction should be marked and maintained between an incorporated company legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets rights and liabilities on the other. (Union Council, Ali Wahan, Sukkur vs. Associated Cement (Pvt.) Limited. 1993 SCMR 468) Discussion of the meaning of person, as relating to a corporate body for the purposes of the National Accountability Ordinance, and willful default. (Mst. Fehmida Begum vs. Federation of Pakistan. PLD 2000 Lahore 602) Piercing the veil in affiliated corporation settings (Walkovsky v. Carlton (US)

Intermixture of affairs, lack of corporate formalities, instrumentality theory as grounds for piercing the corporate veil (Sea Land Services, Inc. v. Pepper Source (US))

Lecture 5 Financing the Corporation

Valuation of a going business and accounting (excerpts from Booth and Hamilton. Pgs. 167 - 193) Companies Ordinance, 1984: Sections 16, 17, 82 96, 248 251. Third, Fourth and Fifth Schedule to the Companies Ordinance Case law: Companies Ordinance 1984 S. 97---Confirmation of reduction of authorized share capital ---Questions for consideration stated. ----S. 97--Application for reduction of authorized share capital by 50%-Proposal was made by a special resolution carried out at the meeting of Board of Directors, who were the only shareholders of the company. Proposed reduction was just, fair and reasonable and was not likely to adversely affect the interests of the shareholders who had themselves resolved the same ---Proposal for reduction of share capital was confirmed in circumstances. (In re: Pak Asian Fund Limited. 1999 CLC 1603 Karachi-High-Court-Sindh) Companies Ordinance 1984 S. 90---Indian Companies Act (I of 1956)-- English Companies Act, 1989---Corresponding provisions of English as well as Indian Company laws---Comparison---Voting power of each shareholder under S. 90(2) of Companies Ordinance, 1984, must be equal to the paid value of his shares---Provision of S.90 of Companies Ordinance, 1984, is departure from the previous law---Law in England and India is different where different classes of shares are recognized--Provision of Companies Ordinance, 1984 provides only one class of share and every shareholder is given right to vote proportionately (Pakistan Wapda and others vs. Kot Addu Power Co. Ltd. 2000 PLD 461 Lahore-High-Court-Lahore)

Lecture 6 Corporate Governance (1)

Corporate Governance (excerpts from Cox and Hazen pgs. 135 182) Excerpts from Research Study on Harmonizing Code of Corporate Governance with other Laws/Regulations in Pakistanby Osama Siddique

(this will be electronically distributed to the students in the second week of the semester). Companies Ordinance, 1984: Sections 158, 159, 160, 161, 164, 172, 173. First schedule table A (Regulations for management of a company limited by shares). Companies Ordinance 1984. Case law: Agha Safdar vs. Mullick Wilayat Hussain Company. 1987 CLC 2351. Pervez Aslam vs. Synthetic Chemical Co. Ltd. PLD 1980 Kar. 401. Auer v. Dressel (US)

Lectures 7/8 Corporate Governance (2)

Board structure, fiduciary duty and duty of loyalty (excerpts from Cox and Hazen pgs. 183 - 264) Code of Corporate Governance, Pakistan 2002. Companies Ordinance, 1984: Sections 174 204, 214 - 225. Case law: Being trustees of money on behalf of company, director, held could not retain any profit, which he had made as director. Such director would be liable to company for such profit. (Messrs. Muhammad Bakhsh & Sons Ltd. vs. Azhar Wali Muhammad. 1986 MLD 1870) No director of a company can be allowed to shift his liabilities or claim exemption therefrom for any reason whatsoever in absence of any express provision of law. (State Bank of Pakistan vs. Messrs Salman Associates (Pvt.) Ltd. Karachi. 1992 MLD 142 (B)) Smith v. Van Gorkam (US) Northeast Harbor Golf Club Inc. v. Harris (US)

Lectures 8/9 Majority + Minority Shareholders

Close corporations, freezouts (excerpts from Cox and Hazen pgs. 383 411, 640 644) Excerpts from papers by Ali Cheema, Faisal Bari, Osama Siddique, Sikander Shah and Moeen Cheema (these will be electronically distributed to the students in the third week of the semester). Companies Ordinance, 1984: Sections 263, 290 292 Case law: Shahbazud Din Chaudhry vs. Services Industries. PLD 1988 Lahore 1
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Shaheen Foundation vs. Capital F.M. 2002 CLD 188 Revisit Pakistan Wapda and others vs. Kot Addu Power Co. Ltd. covered in Lecture 5. Perlman v. Feldmann (US) Sinclair Oil Corp. v. Levien (US)

Lecture 10 Accounts and Audits

Accounting and Financial Reporting (excerpts from Hamilton and Booth pgs. 115 166) Companies Ordinance, 1984: Sections 230 236, 252 255 Case law: Companies Ordinance 1984 Ss. 230 & 233---Object, scope and import of Ss.230 & 233, Companies Ordinance, 1984---Failure to comply with provisions of Ss. 230 & 233 of the Ordinance---Effect---Object of Ss. 230 & 233, Companies Ordinance is to enable Directors at any time to obtain, by inspection of books, true view of the state of affairs of company. (Mst. Khurshid Ismail vs. Unichem Corporation. 1996 CLC 1863 Karachi-High-Court-Sindh) Naveed Textile Mills Ltd. vs. Central Cotton Textile Mills Ltd. PLD 97 Kar 432 Institute of Chartered Accountants of Pakistan vs. Messrs. Hyder Ali Bhimji & Co. Karachi CLD 2002, 1207

Lecture 11 - Public offering of shares (1)

An Introduction to Capital Markets (excerpts from The Law of Securities

Regulation by Thomas Lee Hazen) Background of the SEC Statutes, Federal Regulation of the Distribution of Securities (excerpts from The Law of Securities Regulation by Thomas Lee Hazen) Companies Ordinance, 1984: Section 52 58, 61 62, 65, 68, 71 Lecture 12 Public Offering of Shares (2) Companies (Issue of Capital) Rules, 1996 (will be distributed to the students during the fourth week of the term)
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 The Registration Process/Public Offering (excerpts from The Law of Securities Regulation by Thomas Lee Hazen) Case law: Phrase offer for sale to the public of 10%of the share of company held by a person contention. Such offer of sale to the public deemed to be a prospectus. Sale of shares, held, would not mean an offer to the public as contemplated by S.62 (1) and not a prospectus as deemed in sec.62 (2). Provisions of cl.(5) of sec.62 ,however, would cover case of person making sale of shares even if they exceeded 10% of the issued capital of company. (1987 CLC 1919) Lecture 13 Insider Trading Listed companies (Prohibition of Insider Trading) Guidelines (will be distributed to the students electronically during the fourth week of the term) SEC Rule 10b-5, 14e-3 (will be distributed to the students electronically during the fourth week of the term) Companies Ordinance, 1984. Section 220 - 224 Case law: Chiarella v. United States (Supreme Court of United States) Dirks v. Securities and Exchange Commission (Supreme Court of United States) United States v. OHagan (Supreme Court of United States) Lecture 14 - Mergers and Acquisitions

Corporate Combinations (excerpts from Cox and Hazen pages 589 634) Revisit valuation of a going business covered earlier (excerpts from Hamilton and Booth) Companies Ordinance, 1984: Sections 284, 287 Listed Companies (Substantial Acquisition of Voting Shares and Takeover) Ordinance, 2002 (will be distributed to the students during the fifth week of the term) Case law: Arrangement in the nature of amalgamation/merger of companies--Concept-- Application for merger/amalgamation of two companies

could be entertained under S.287 of the companies Ordinance, 1984 without meeting the requirements of S.284 of the said Ordinance--Principles. (2004 CLD 1 Lahore-High-Court-Lahore) Ss. 287 & 284---Amalgamation of companies---Sanction of Court-Requirements---Factors to be kept in view while examining the scheme of merger/amalgamation of companies by the Court stated---Where members of both the companies had overwhelmingly supported the resolution for merger without any coercion etc.; Corporate Law Authority had extended its no objection and had declared the merger/amalgamation to be in accordance with law. (1997 CLC 1873 Karachi-High-Court-Sindh) Acquisition of rights and interest of defendant-Company by other company by way of merger---Effect---Plaintiff agent could not object to such acquisition or merger as same would not change his status. (2004 CLD 343 Karachi-High-Court-Sindh) Weinberger v. UOP (US)

Lecture 15 - Debt & Reorganization

Companies Ordinance, 1984: Sections 113 120, 284 286 Case law: Companies Ordinance 1984 ----S. 114---Redeemable and transferable debentures with the right to control the affairs of the Company could not be issued to the creditors. (1991 MLD 841 Lahore-High-CourtLahore) Scheme for rearrangement, approval of---Role of Companies Judge--Scope---Court does not sit merely to register the decision of meeting but before sanctioning a scheme, it has to examine and satisfy itself whether the proposed scheme is fair and reasonable, taking into consideration all the material facts, interest of all classes and bona fides of parties. (2005 CLD 1818 Lahore-High-Court-Lahore) Compromise or arrangement proposed between a company and its creditors or any class of creditors or between a company and its members or any class of members would also take in its sweep any scheme of amalgamation/ merger of one company with another-Functions, powers and jurisdiction of Company Court, which was called upon to sanction such a scheme---Scope, nature of jurisdiction and its broad contours stated elaborately. (2003 CLD 1209 KarachiHigh-Court-Sindh)
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Companies Ordinance 1984 ----Ss.284. 285, 286, 287 & 288---Scheme of arrangements--Repayment of debts. (2002 CLD 1352 Karachi-HighCourt-Sindh)

Lecture 16 Privatization

Privatization Commission Ordinance, 2000 Privatization Commission (Amendment) Ordinance, 2002 Case law: Mian Farooq Ahmad Sheikh and others v. Privatization Commission and others. 2006 CLD 1 Khalid Mahmood v. Federation of Pakistan through Secretary, Ministry of Finance and others. PLD 2003 Lahore 629 2005 CLC 1931 Fazal Rehman & sons limited v. Ghee Corporation of Pakistan. 2003 CLC 1823 Employees management Group Pak Saudi Fertilizers v. Government of Pakistan. 2002 CLD 1565 Petrosin Products Pakistan v. Federation of Pakistan. 2001 CLC 820 and 2001 CLC 1412

Lecture 17 Corporate Litigation

Nature of derivative suit (excerpts from Cox and Hazen pgs. 415 - 478) Companies Ordinance, 1984: Revisit Sections 263 and 290, 474 480 (offenses by the company), 7 10 Revisit pertinent portions of the SEC Act Case law: PLD 96 SC 543 PLD 2003 Case No. 003K503 PLD 1995 SC 320 SC CLD 2002 1487

Lecture 18 Winding up and dissolution

Companies Ordinance, 1984: Section 297, 305 306, 311, 319, 321, 350, 358, 359, 360

Case law: Winding up of company---Inability of company to pay its debts---Loan obtained by company was secured by mortgage of property and registration of charge in favor of petitioner under S.127 of Companies Ordinance, 1984---Acknowledgment of outstanding liabilities by company in its letters addressed to petitioner. Company was commercially insolvent and was unable to pay its debts---High Court ordered winding up of company in circumstances. (2006 CLD 227 Lahore-High-Court) S. 350---Dissolution of company under S. 350, Companies Ordinance, 1984--- Effect: Company which had been dissolved, no longer existed as a separate juristic person or legal entity, capable of holding any property or being sued in any Court, as opposed to the company in liquidation, which retains its corporate existence, as during liquidation, its administration and management converges into liquidator --- If the winding up is revoked, the company revives. (2005 PLD 399 KarachiHigh- Court-Sindh) Companies Ordinance 1984 ---S.350--Dissolution of Company--Order for-- Certificates having been given by official liquidator (i) that claimants' claims have been verified, fully satisfied and receipts of payments obtained from such claimants have also been placed on record, (ii) that statements of expenses and assets submitted by official liquidator have been scrutinized and accepted by office as well as by counsel for State Bank of Pakistan and ex-management-- Nothing remained to be done, company was therefore finally dissolved under S.350 in circumstances. (1987 MLD 347 Lahore-High-Court)

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