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Although Sections 39-48 regulates the contents and issue of prospectus, they do not
define a prospectus
A prospectus is defined by Section 2 of the Act as any notice, circular
advertisement or other invitation, offering to the public for subscription or purchase
any shares or debentures of a company.
The definition suggests that a prospectus embrace any document, notice, circular
advertisement. What matters is not the name given to the document by its authors
but its effect on the person reading it. If the person reading the document would
conclude that he was being invited to apply for any shares or debentures of a
company, the document would legally be a prospectus even if it is not headed
so. The offer must be made to the public.
Case Law: Nash vs. Lynde (1929)
The directors of a company prepared a document which was in the form of a
prospectus and was in marked strictly private and confidential. The document did
not contain all the material facts required by the Acct to be disclosed. It was
circulated among the directors and their friends. The plaintiff had purchased shares
on the footing of these documents which he obtained from a friend of a director.
It was held that the document received by him was not a prospectus as private
communication between business friends does not constitute a prospectus. The
public according to Section 57(1) is not restricted to the public at large but
includes any section of the public whether selected as members or debenture
holders or as clients of the person issuing the prospectus or in any other manner.
Case Law: Re. South of England Natural Gas and Petroleum Co. Ltd (1911)
3000 copies of a prospectus headed for private circulation only were distributed to
shareholders of gas companies. It was not publicly advertised.
It was held that the prospectus was an offer of shares to the public even though it
was marked for private circulation only.
Contents of the Prospectus
A prospectus must contain the necessary information to enable the public to decide
whether or not to subscribe for its shares or debentures. The matters to be included
in the prospectus are:(i) Directors and auditors of the Company

Names, occupations, postal address, directors qualification shares, directors

remuneration and directors interest in the companys promotion.

(ii) Formation Expenses


Benefits paid to promoters underwriting commission etc.

(iii) Investor Information

The minimum subscription

The amount payable on application

The time of opening of the subscription lists

Voting and dividend rights attached to different classes of shares.

(iv) Companys Business and Assets

Venders of property of the company

Amount paid for property bought or goodwill

Length of time business has been carried on.

The prospectus also contains reports such as:(i) Auditors report showing profit and loss in each of the last five years, rates of
dividend paid during the last five years, assets and liabilities at the date of last
accounts and details relating to subsidiary companies.
(ii) Where the proceeds of the issue are to be used to buy a business, a report by
named accountants on profit and loss of the business for each of the last five years.
(iii) Where the proceeds of the issue are to be used to buy shares in any other body
corporate, a report by named accountants on profit or loss of that body corporate
for each of the last five years.
The aim of the statutory provision is to enable the prospective investor to asses
the risk of the intended investment, each matter is stated for a specific purpose, for
example the names, occupations and postal address of directors enables the
prospective investors to know who the directors of the company are or will be. It is
very important to know who the drivers will be since save arrival of the vehicle
exclusively depends on the competence of drivers who are called directors. The
disclosure of their occupation and qualification would facilitate the ascertainment of
their suitability for appointment as directors by indicating whether they have
relevant business experience.
Statement in Lieu of Prospectus
Section 50(1) provides that a company having a share capital which does not issue
a prospectus on or with reference to its formation or which has issued such a

prospectus but does not proceed to allot any of its shares or debentures shall not
allot any of the said shares or debentures unless, at least three days before the first
allotment, there has been delivered to the registrar for registration a statement in
lieu of prospectus.
Section 32(1) provides that if a company, being a private company, alters its
articles in such a manner that they no longer include the provisions which under
Section 30, are required to be included in the articles of a company in order to
constitute it a private company, the company shall, on or before the date of
alteration, cease to be a private company and shall within 14 days after the said
date, deliver to the registrar for registration a statement in lieu of prospectus in the
form and containing the particulars set out in Part I of Second Schedule and Part II of
that schedule, it must set out the reports specified therein.
Section 32(3) provides that if default is made in complying with Subsection (1)
above, the company and every officer of the company who is in default shall be
liable to a fine of Sh. 1,000.
Subsection 4 further provides that if the statement in lieu of prospectus delivered to
the registrar contains an untrue statement, that is, misleading statement, every
person who authorized the delivery of the statement in lieu of prospectus for
registration, shall be guilty of an offence and liable to imprisonment for a term not
exceeding 2 years or to a fine not exceeding Sh. 10,000 or both unless he proves
that the untrue statement was immaterial or that he had reasonable ground to
believe and he did up to the time of the delivery for registration of the statement in
lieu of prospectus.
Liability or mis-statement or omission in a Prospectus
Prospectus constitutes the basis of the contract between the company and the
person who purchases shares or debentures. The persons who are behind the
company have full knowledge to the future prospects and the present situation of
the enterprise and the investing public has none. It is but fair that the former
should not only disclose all the matters within their knowledge relating to the
enterprise, but should also state them correctly and accurately. Where an untrue
statement occurs in a prospectus, there may be:(a)

civil liability

(b) criminal liability


Civil Liabilities

A person who has been induced to subscribe for the shares in a company on the
strength of mis-statement or omission in the prospectus may have a remedy either
against the company or against the directors.
Remedies against the Company
A person who has been induced to subscribe for shares may:(i)

Rescind the contract

Claim damages

Recession of the Contract:

Where a person has purchased the shares of a company on the faith of a prospectus
which contained an untrue or misleading, but not necessarily fraudulent statement,
he can seek rescission of the contract.
The right to rescind the contract is available if he proves the following:(i) That the prospectus








(ii) That the untrue or misleading statement was in respect of a material matter and
was one of the inducements to apply for shares or debentures.
Case Law: R v. Kylsant (1932)
A prospectus of a company said that the company had paid a dividend every year
between 1921 and 1927, years of depression, thus giving the impression of a
financially stable company. However, the company had in each of those years
incurred considerable losses on trading account and was only able to pay a dividend
out of reserves accumulated in previous years. This fact was suppressed.
The court held that the prospectus was false in a material statement and conveyed
a false impression.
(iii) That he has taken action promptly to rescind the contract.
The shareholder must start proceedings for rescission within a reasonable time and
before the company goes into liquidation.


Claim Damages

Any person induced by fraud to take shares is entitled to sue the company for
damages provided he has rescinded his contract in time. The company is liable in
damages where the misrepresentation is an innocent one.
Remedies against the Directors
Any person who subscribed for any shares or debentures on the faith of the
prospectus may sue for compensation under Section 45 of the Companies Act.
The directors would also be liable under the common law action of deceit for
making a statement which is false and which is known to them to be false or is
made by them recklessly or without care, whether it is true or false. But they would
not be liable for damages if they honestly believed them to be true.
Criminal Liabilities
In order to enforce compliance with its provisions which relate to prospectus, the
Companies Act provides the following penalties for non compliance:(a)

Section 40(4) provides that if application form is not accompanied by a

prospectus which contains the prescribed matters and reports, any person
responsible is liable to a fine not exceeding Sh. 10,000.


Section 42(2) provides that if a prospectus includes a statement purporting to be

made by an expert but does not include the experts written consent to the issue,
the company and every person who is knowingly a party to the issue shall be liable
to a fine not exceeding Sh. 10,000.


Section 43(5) imposes a fine not exceeding Sh. 100 per day for issuing a
prospectus without delivering a signed copy thereon to the registrar for registration.


Section 46(1) provides that where a prospectus includes any untrue statement,
any person who authorized the issue of the prospectus shall be guilty of an offence
and liable to imprisonment for a term not exceeding 2 years or to a fine not
exceeding Sh. 10,000 or both.
In commercial parlance, the word capital is generally used to denote the amount
by which the assets of a business exceed its liabilities. However, in legal parlance,
the word capital is used to denote the amount of money which a company raises
from a sale of its shares.
Types of Capital

Nominal or Authorized Capital

This is the capital that is stated in the memorandum pursuant to Section 5(4) (a) of
the Act. It is authorized in the sense that, once the memorandum of association is
registered, the company can take immediate steps to raise the capital from the
public without applying for a permit. It is nominal because it is calculated on the
basis of nominal or book value of the shares.
Issued Capital
It is that position of the nominal capital which has been issued by the company. It is
also known as subscribed or allotted capital. It may be equal or less than nominal
capital but cannot exceed it.
Paid-up Capital
It is that part of issued capital, which has been paid-up by the share holders. It may
be equal to or less than the issued capital but cannot exceed it.
Called-up Capital
It is that amount of issued capital which the company has asked its shareholders to
pay by means of calls.
(e) Uncalled capital
This is the amount which remains unpaid on shares. The company may at any time,
call upon the shareholders to pay the uncalled capital in accordance with the
provisions of the articles.
(f) Reserve capital
Section 62 of the Act defines reserve capital as that portion of the issued but
uncalled- up capital of a limited company, which the companys members by special
resolution, have resolved that the company shall not call up unless and until it is in
liquidation. It is to be called up only for purposes of liquidation. As soon as a
resolution is passed, the capital is put on reserve and the directors power under the
articles to make calls on shares will not be exercisable in respect of that capital,
unless the company is wound up. It is referred to in Section 62 as the reserve
liability of a limited company.
Methods of Public Issue

Prospectus Issue
Under prospectus issue, the company sells the shares directly to the public rather
than selling them through intermediaries.
Company---->Sells shares to--->Public
The company issues a document generally called a prospectus. As a precaution
against unsuccessful issue, the company may underwrite the issue.

(b) Placing
A placing occurs if the company instead of selling its shares directly to the public
arranges with a broker to sell them on its behalf.

Company---> Broker --->sells the shares to---> Public

(Acts as the companys agent)
A placing may be private placing if the broker places them with his clients
instead of the general public.

Offer for Sale

An offer for sale is an arrangement whereby a company sells the whole of its shares
to an issuing house and the issuing house then resells the shares to the general
public, usually at a profit.

pany---> Sells shares to----> Issuing House---> Resells shares to Public

The issuing house issues a document called offer for sale.
(d) Offer by Tender
An offer by tender occurs if a company writes tenders for its shares and resells
them to the highest bidder. This is done with a view to obtaining the best price
possible for the shares. Under this method, the company fixes a minimum price for
the shares and accepts the highest tendered price above the minimum price.

Rights Issue
This occurs when a company which has been trading for sometime makes an offer
to the existing members to buy shares of a new issue in proportion to the number of
shares they hold.
The existing members, rather than the public, are thereby given a right to buy new
shares. A member who does not want to keep the shares will have a right to sell
them straight away if he accepts the companys offer.


Bonus Issue
It is a method by which a company instead of paying a cash dividend to its
members retains the cash but issues new shares to the members. The company
thereby increases the nominal capital and acquires the cash it needs for business
This method can only be used if the articles make a provision for it because the
general rule at common law is that dividends are payable in cash (Wood vs. Odessa
Waterworks Company).


Conversion Issue
Occurs either during a re-organization of a companys capital structure or when two
or more companies amalgamate. What usually happens is that holders of one type
of shares (preference shares) are offered the right to convert them into shares of

another type in the same company e.g. ordinary shares, or in the case of
amalgamation, the shares of another company.

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 Companys Act, the companys memorandum of
association and the companys 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 dont 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 dont 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 companys 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


It must be the type of company that is allowed to convert its shares. Only
companies registered as limited are allowed to convert.
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.
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.
The shares to be converted must only be those which are fully paid for by the
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.
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



A share is a distinct individual

Stock is not divided into
unit of capital in a company and equal parts/denomination and
shares can be bought and sold in subject to articles, may be
whole units.
bought or sold in any convenient
Under Companies Act, shares
are required to be distinguished.
distinguishing features.

A company can issue shares


A company cannot issue

stock directly; rather it can only
convert its fully paid shares into

Shareholders Obligations
The primary obligation of shareholder is to observe the provisions of the Companys
Act as well as the provisions of the companys 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.
Shareholders Rights
The rights conferred to shareholders by the Act include: -


Section 8(2), to object to a proposed alteration of the companys objects.

Section 74(1), to apply to the court for cancellation of a proposed variation of the
rights attached to a particular class of shares.
Section 89(1), to inspect without fee the register of holders of debentures of the
Section 106(1), to inspect without fee copies of the instruments creating charges
and the companys register of charges.
Section 115(1), to inspect without fees the register of members.
Section 132(1), to require the directors to convene an extraordinary general
meeting of the company.
Section 132(3), to convene an extraordinary general meeting of the company if
the directors fail to do so.
Section 136(1), to appoint a proxy to attend a meeting
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.
The classes of shares, which can be created and issued by a company, are not
prescribed by the Companys Act. They depend on the provisions of the companys
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
Ordinary 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.
Preference shares
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.
In the event of winding up, these must be a preferential right to the repayment
of the paid up capital.
Types of Preference Shares
Cumulative and non-cumulative preference shares
Participating and non-participating preference shares


Convertible and non-convertible preference shares

Redeemable and non-redeemable preference shares, Section 60(1).
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
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 companys register of members
pursuant to section 28(2) of the Act.

In the interim period, the effect of the transfer is as follows: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.
If dividends are declared and paid the transferor is the person who, according to
the companys 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.
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.
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 transferees trustee.


If not fully paid up, he would have a prima facie right to vote in respect of those