What new Companies Act means for entrepreneurs in Kenya
Nairobi, September 20
It is an exciting time for the business community in Kenya. On September 11, 2015, the President assented to the Companies Act, 2015, which repeals the 1948 Companies Act (Cap 486).
However, the New Companies Act will only become operational on a date to be set by the Cabinet Secretary by notice in the Kenya Gazette. This development is significant as Kenya seeks to establish itself as the regional commercial hub of East Africa and the region.
The New Companies Act is alive to the current business practices and realities. It also introduces legal and commercial concepts that were previously not permitted or governed by the 1948 Companies Act. The New Companies Act takes cognisance of the role that technology currently plays in the society. Fines and penalties have also been updated to reflect prevailing economic conditions.
It is quite detailed as it borrows heavily from the UK Companies Act of 2006. Seeing as the UK is a more advanced financial and legal market, it will be interesting to see how the new principles play out and hopefully spur growth and innovation in commercial transactions in Kenya.
It goes without saying that with the excitement is also with a fair amount of anxiety in relation to what will be expected of companies in Kenya and how the transition will happen from the old regime to the new one. The new legislation has about 1,027 sections and runs into hundreds of pages, assimilating and understanding it will no doubt be a daunting task.
In this article, we will highlight some of the key changes that are proposed to be effected through the New Companies Act noting that these are based on the draft of the Companies Bill and the Hansard notes that we have been able to access as we all await the final form of the Act that was assented to by the President.
One significant change that was introduced at the third reading is that a foreign company, which from the definition of the New Companies Act is a branch entity, is now required to have at least 30 per cent of the company’s shareholding held by a Kenyan citizen by birth. The effect of this provision is that every branch that wishes to operate in Kenya will be required to effect a share transfer or share allotment of at least 30 per cent of its shares to a Kenyan individual in its jurisdiction.
It appears that the impact of this provision may not have been fully appreciated for the following reasons — there may be foreign shareholding restrictions in the other jurisdictions; it may be very expensive, if not impossible, for Kenyan individuals to purchase or invest at least 30 per cent in a foreign company and the process of carrying out a due diligence in a company in another jurisdiction to effect the share sale or allotment would not only be time-consuming, but also expensive.
The repealed Companies Act provided that a private company must have at least two shareholders. The New Companies Act provides that a company can have one member. Companies that have already been incorporated can also reduce the members to one member. This is a very useful development and will negate the need to have a second shareholder where one does not beneficially exist.
Company’s memorandum of association
The repealed Companies Act provided that a company is only allowed to do the objects which are set out in its memorandum of association, otherwise such objects would be ultravires. This led to a situation where the memorandum of association of companies ran into pages with the aim of including every conceivable object under the universe. The New Companies Act now provides that unless the articles of the companies expressly restrict the objects of the company, the objects are unrestricted.
Natural person as a director
The new Companies Act provides that a private company can have at least one director while a public company can have two directors. This is not a departure from the repealed Companies Act. However, the new Companies Act now provides that a company must have at least one director who is a natural person. Companies that do not have a natural person as a director have six months after the commencement date to comply with this requirement. This requirement does not arise where the director is a corporation sole.
Company secretary for a private company
In terms of corporate governance, a private company with a paid up share capital of less than Sh5 million is not required to have a secretary. Although not expressly provided for, this implies that a private company with a paid up share capital of Sh5 million and above would be required to have a secretary. The new Companies Act provides that anything that should have been done by a company secretary may be done by a director or any other person authorised to do so by the directors.
The new Companies Act provides for written resolutions except for the following two instances: when removing a director or an auditor from office before the end of his term. Under the repealed Companies Act, a company could not pass a resolution by way of written resolutions unless expressly provided for under the articles of association. A company can now publish a notice of a general meeting or written resolution of a meeting on its website.
A limited company is not allowed to acquire its own shares except in two instances when a reduction of shares duly made and when forfeiting shares, or accepting the surrender of shares, in accordance with its articles, for a failure to pay an amount payable for the shares. The New Companies Act provides further details on instances when financial assistance is allowed.
To a great extent, we laud the Companies Act’s intention to change the company law regime in line with international developments and move away from the current system of company law which is based on the old UK Companies Act of 1948.
The Cabinet Secretary is mandated to come up with several regulations under the New Companies Act. This process should be expedited as it will provide clarity and certainty to all stakeholders on how the provisions of the New Companies Act should operate. Transitional provisions have also been provided in the legislation.
Of paramount importance is for the authorities to take particular care in ensuring a smooth transition from the old regime to the new one. As has happened in the past with new legislation, there may be provisions included in the New Companies Act that are impractical in the Kenyan context and may hinder development.
The authorities should take steps to identify such provisions quickly and facilitate for appropriate amendments. It is also important for private and public companies to seek legal advice to ensure that they are operating in accordance with the provisions of the New Companies Act.