A person who wishes to acquire shares can do so by either:
- Transfer – This is by acquiring shares from an existing shareholder.
- Allotment – This is by acquiring shares directly from the company, usually by presenting an application to the company, which can then allot and issue shares.
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Notably, the Companies Act, 2015 does not prescribe a formal application as it is the preserve of the individual company. The contract by which a subscriber agrees to take a number of shares and the company agrees is subject to ordinary rules of contract as modified by Companies Act. For a public company wishing to obtain share capital from the public, it directs a written invitation in the form of a ‘prospectus’ accompanied by an ‘application form.’ Such shares can only be with respect to the company’s unissued shares. The subscriber to the shares uses the application form to apply for a certain number of shares and submits his application with the issue price to the company. This is followed by an issuance of a ‘share certificate.’
Moreover, with regard to public allotments, the company must be privy to the provisions of the Capital Markets Act, Cap 485A and the rules made by the Capital Markets Authority (CMA) under the Act i.e., the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 which prescribes inter alia, approvals for all public offers and publication of a prospectus (Information Memorandum).
Exercise by Directors of Power to Allot Shares
Section 327 of the Companies Act, 2015 provides that the Directors should not exercise a power of the company to allot shares in the company; or to grant rights to subscribe for, or to convert any security into shares in the company, except in accordance with Section 328 or 329.
Power of Directors to Allot shares
Private company with only one class of shares. Section 328 of the Companies Act, 2015 stipulates that if a private company has only one class of shares, the Directors may exercise any power of the company to allot shares of that class or, to grant rights to subscribe for or to convert any security into such shares, except to the extent that they are prohibited from doing so by the company’s Articles.
Power of Directors to Allot shares: Authorization by company
Section 329 of the Companies Act, 2015 states that the Directors may exercise a power of the company to allot shares in the company, or to grant rights to subscribe for or to convert any security into shares in the company only if they are authorised to do so by the company’s Articles or by a resolution of the company.
Such authorization may however be given for a particular exercise of the power or, for its exercise generally and may be unconditional or subject to conditions and it cannot be effective unless it states the maximum amount of shares that may be allotted under it and specifies the date on which it will expire, which may not be more than 5 years from:
- In the case of authorisation contained in the company’s articles at the time of its original incorporation — the date of that incorporation; or
- In any other case, the date on which the authorising resolution is passed.
An authorisation may be renewed or further renewed by resolution of the company for a further period not exceeding five years and/or be revoked or varied at any time by resolution of the company.
General Prohibition of Commissions, Discounts and Allowances
Section 330 of the Companies Act provides that except as permitted by Section 331, a company should not apply any of its shares or capital money, either directly or indirectly, in payment of any commission, discount or allowance to any person in consideration of the person subscribing or agreeing to subscribe, whether absolutely or conditionally, for shares in the company.
As per Section 331 of the Companies Act, 2015, a company may pay a commission to a person in consideration of the person subscribing or agreeing to subscribe whether absolutely or conditionally for shares in the company only if the payment of the commission is authorised by the company’s Articles and the commission paid or agreed to be paid does not exceed 10% of the price at which the shares are issued or the amount or rate authorised by the articles, whichever is the less.
Registration of Allotment
Section 332 of the Companies Act 2015 provides that a company must register an allotment of shares as soon as practicable and in any event within 2 months after the date of the allotment. The company, and each officer of the company who is in default of this provision is liable to a fine not exceeding Ksh.500,000. Continued failure to comply attracts a further fine not exceeding Ksh.50,000.
Return of allotment by Limited Company
Section 333 of the Companies Act, 2015 stipulates that within one month after making an allotment of shares, a limited company (via either the Director or Secretary) must lodge with the Registrar for registration a return of the allotment. The company must ensure that the return contains the information prescribed by the regulations and is accompanied by a Statement of Capital that specifies:
- the total number of shares of the company;
- the aggregate nominal value (amount) of those shares;
- names, addresses and descriptions of allottees;
for each class of shares, the:
- particulars prescribed by the regulations of the rights attached to the shares;
- total number of shares of that class;
- aggregate nominal value of shares of that class; and
- amount paid up and the amount (if any) unpaid on each share (whether on account of the nominal value of the share or in the form of a premium).
Return of Allotment by Unlimited Company Allotting New Class of Shares
Pursuant to Section 334 of the Companies Act, 2015, an unlimited company that allots shares of a class with rights that are not in all respects uniform with shares previously allotted must, within one month after making such an allotment, lodge with the Registrar for registration a return of the allotment. The company must ensure that the return specifies the particulars of the rights attached to the shares prescribed by the regulations.
Offence for company to fail to lodge return of allotment for registration
Section 335 of the Companies Act, 2015 states that if a company fails to lodge a return of allotment, the company, and each officer of the company who is in default, commits an offence and on conviction are each liable to a fine not exceeding Ksh.200,000. Continued failure to comply attracts a further fine not exceeding Ksh.20,000.
Provisions about allotment not applicable to shares taken on formation
This is provided for in Section 336 of the Companies Act, 2015. The provisions of this Part on allotment do not apply to the taking of shares by subscribers to the memorandum on the formation of the company.
Public companies: Allotment if issue not fully subscribed
Section 354 of the Companies Act, 2015 states that a public company should not allot shares of the company offered for public subscription unless the issue is subscribed for in full or, the offer is made on terms that the shares subscribed for may be allotted in any event or, if specified conditions are made and those conditions are satisfied.
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Public companies: Effect of Irregular Allotment if issue not Fully Subscribed
Section 355 of the Companies Act, 2015 provides that if an allotment of shares is made to an applicant in contravention of section 354, the applicant has a right to avoid the allotment at any time within one month after the date of the allotment, but not later. Each Director of the company who is in default is liable to compensate the company and the allottee respectively for any loss, damages or expenses that the company or allottee may have sustained or incurred because of the contravention. Proceedings to recover any such loss, damages or expenses may not be brought more than three years after the date of the allotment.