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.
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
1. A share is a distinct individual unit of capital in a company and shares can be bought and sold in whole units.
2. Under Companies Act, shares are required to be distinguished.
3. A company can issue shares directly.
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.
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
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.
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.