MEMBERSHIPA person is a member of a company if the subscribes to the memorandum of association of a company and upon registration his name entered in the register of members. Members are also called cooperators or shareholders. A shareholder is a person who holds shares in a company while a member is one whose name appears in the register of members. The terms members and shareholders are used synonymously specifically in the case of a company limited by guarantee and having a share capital and unlimited company whose capital is held in definite shares. There are circumstances where a person may become a member of a company without being its shareholder without being a member. The following are instances where a person becomes a member without being a shareholder of the company. 1. In the case of companies limited by guarantee or unlimited companies, because such companies may not have share capital. 2. A deceased member continues to be a member as long as his name is on the register of members, but he cannot be a shareholder of the company. 3. A transferor of shares continues to be a member until the transfer is registered and the name replaced. 4. Subscribers to the memorandum are treated as members by the fact of subscription on registration of the company they are entered in the members register even before they are allotted any shares. The following are instances where a person becomes a shareholder of a company without being its member. a) A person who holds a share warrant. b) A transferee or legal representative of deceased or insolvent member is not a member until his name appears in the register although he is a shareholder. Modes of acquiring membership: Section 28 of the companies act provides that a person may become a member of a company by: a) Subscription to the memorandum: 1 Subscribers to the memorandum are deemed to have agreed to become members. The names are entered in the register of members upon registration of the company. In official liquidation vs. Suleman Bhai, S subscribed to a company’s memorandum for two hundred shares, but actually took 20 shares. It was held that he was liable in the winding up of the company for all the 200 shares, as he became a member by the very fact of subscription. A subscriber to the memorandum cannot rescind the contract to take shares on the ground of misrepresentation made by a promoter (metal constituents Ltd, Re Lord Lurgen’s case (1902) Ich 707 because: i) By his name act he brought the company into existence. ii) The company could not appoint an agent before it came into existence and it is therefore not liable for the promoters act. iii) By signing the memorandum he became bond as between himself and the company and also between himself and other persons who became members. b) Agreement and registration: Every person who agrees in writing to become a member and whose name is entered in the register of members is a member of the company. Registration of a name as a member of a company may be obtained through: 1. Application and allotment. An application for shares is an offer to take shares; allotment is acceptance of that offer by the company, which creates a binding contract between the applicant and the company. An application may be absolute or conditional. If conditional the allotment must be in accordance to the terms of the application (Aldborough Hotel Co. Re. Simpson’s case (1986) 4 ch. 484). 2. Transfer. One becomes a member when the transfer of shares is affected and his name is entered in the register of members. 3. Succession. 2 The company has power to register any person as a shareholder to whom the right to any shares (or debentures) in the company has been transmitted by the operation of law, and in such a case an instrument of transfer is not necessary. c) Qualification shares: Before one is appointed a director of a public company, he must take or sign an agreement to take and pay for qualification shares (if any) in which case he is in the same position as a subscriber to the memorandum. d) Estoppel: Any one who allows his name to remain in the register of members or otherwise holds himself out or allows himself to be held out as a member is estopped from denying being a member of the company. CESSATION OF MEMBERSHIP A person ceases from being a member once his name is removed from the register. A shareholder may cease from being a member of a company by: 1. An act of the parties. 2. Operation of law. 1. Act of parties. The following are instances where a person may cease to be a member through act of parties: a) If one transfers his shares to another. b) If one’s shares are forfeited. c) If the company sells the person’s shares under a provision in the articles. d) If one rescinds the contract to take shares on grounds of misrepresentation. e) If redeemable preference shares are redeemed. f) If one surrenders his shares, if such is permitted by articles. g) If share warrants are issued in exchange of fully paid shares. 3 2. Operation of law. One may cease membership through operation of law in any one of the following ways:a) Insolvency – shares of insolvent vest in the official receiver or assignee. b) Death – shares of the deceased are vested in the legal representative, however the deceased’s estate remain liable as long as the name of the deceased is in the register. c) Sales of shares in execution of a court decree. d) Winding up of a company. Rights and liabilities of members. Rights of members. The rights are conferred either by company’s act, the memorandum and articles of association or by the general law. Rights conferred by the companies act are called the statutory rights. The following are statutory rights: (1) Right to obtain copies of the memorandum and articles on request and on payment of the prescribed fee. (2) Right in priority to have shares offered incase of increase of capital. (3) Right to transfer shares. (4) Right to vote on resolutions at meetings of the company. (5) Right to apply to court to have any variation of his rights set a side by the court section 7 (4). (6) Right to have a share certificate for shares held. (7) Right to inspect register of members, register of debenture holders and copies of annual return. (8) Right to receive a copy of the statutory report. (9) Right to apply to the BOD to call an annual general meeting when the company fails to call such a meeting. (10) Right to receive notice of meetings, attend and vote at meeting. (11) Right to appoint a proxy and inspect proxy register. 4 (12) Right to demand poll alone or with others. (13) Right of a body corporate to appoint a representative to attend and vote at the general meetings. (14) Right to require the company to circulate resolution. (15) Right to have any request minutes of proceedings of a general meeting. (16) Right to receive dividends when declared. (17) Right to receive copies of annual accounts of the company with the auditors’ report. (18) Right to participate in the appointment of directors and auditors in the annual general meetings. (19) Right to petition to the court for the winding up of the company. (20) Right to share surplus. The rights conferred on members by memorandum of association are called documentary rights, while rights conferred on members by the general law are called legal rights. Liability of members Liability of members depends on the nature of the nature company. Liability may be summarized as follows: 1. for unlimited companies each member is liable in full for all the debts contracted by the company during the period he was a member. 2. In case of limited by shares each member is liable to pay the full nominal value of the shares held by him. 3. For a deceased member, his estate is liable in respect of partly paid shares and where the shares have been registered to the name of representatives they become liable. 4. When one (a member) is adjudicated bankrupt, the official receiver may sell the partly paid shares in which case the buyer becomes liable thereof or he may disclaim them as onerous property. 5. When membership is reduced below seven and two for public and private companies, every member aware of the fact becomes severally liable for the 5 payment of debts of the company after six months of trading from such reduction in number. 6. For companies limited by guarantee each member is liable to contribute the amount guaranteed by him to be paid in the event of winding up. Register of members. Section 112 requires every company to maintain a register with the following particulars:a) The name and address of each member. b) For a company with share capital, shares held by each member distinguished each share by its number and extent to which the shares have been paid up. c) The date each person was entered in the register as a member. d) The date on which any person ceased to be a member. Where the company has converted any of its shares into stock a notice of the conversion has to be given to the registrar. If default is made in maintaining the register, the company and every officer in default shall be liable to a default fine. Section 114 provides that on issue of a share warrant, the company must strike out of the register, the name of the member because of the issue of the share warrant he ceases to be a member in which case the following particulars should be entered in the register: a) The fact of the issue of the warrant. b) Statement of the shares included in the warrant c) Date of issue of the warrant Index of members. Section 113 states that every company with more than fifty members is required to keep an index that may be in the form of a card index. The index should be kept where the register is kept. Any alteration in the register should be noted in the index within fourteen days. Failure to comply with any of the above may attract a fine. Location of the register. 6 Section 112 (2) requires that the register must be kept at the company’s registered office. It may be kept elsewhere provided. a) The work of making it up is done at another office. b) The register is prepared by another person. Inspection of register of members. Inspection of the register of members and debenture holders is open to the public for at least two hours a day. Inspection is free for members and a fee of Ksh 2 is charged for every inspection. The right to inspect includes the right to make extracts from the register. A fine of Ksh 40 is imposed for refusal to inspect or refusal to supply extracts. The object of inspecting the register is immaterial. Extracts have to be supplied within fourteen days upon receipt of the demand. The right to inspect ceases upon the commencement of winding up and an order of the court must be obtained if inspection is required after that date. Closure of register of members. Under section 117 a company can close a register for 30 days after an advertisement in a local daily. Closure is usually done prior to payment of dividends or issue of new shares. Rectification of register of members Section 118 provides that courts can order rectification of register of members in the following cases: a) Where one’s name is entered or omitted from the register of members without any sufficial cause. b) Where default is made or unnecessary delay take place in entering on the register the fact that any person having ceased to be a member. Courts may require companies to pay damages to the aggrieved person. 7 No notice of trust on register. Section 119 states that no notice of any trust express, implied or constructive, shall be entered on the register of members or debenture holders. The trustee can be entered in the register in his personal capacity and not as a trustee, and he will exercise the rights of a shareholder, and is alone liable for shares calls and to be put in the list of contributories. Branch register. Section 121 a company carrying business outside Kenya in any part of the commonwealth countries may keep a branch register in that part. Notice must be given to the registrar of the situation of the office where a branch register is kept within one month of the opening of the office and any change in its situation or discontinuation of such a register. A branch register is deemed to be part of the company’s register of members. Annual return. Section 125 provides that every company with share capital must file an annual return with the register once in every year. The return must be filed with the registrar forty two days after the annual general meeting (sec. 127). The following particulars must be included in the annual return in accordance to part of the fifth schedule. 1. The address of the registered office. 2. The place where the register of members or debenture holders is kept is not kept at the registered office. 3. Summary distinguishing between shares issued for cash and shares issued as fully paid or otherwise than in cash specifying. a) Amount of share capital and the number of shares. b) The number of shares taken up to date of the return. c) The amount called up, received and unpaid. d) Commission and discount in respect of shares or debentures. e) The total number of shares forfeited. 8 f) Total amount of shares for which share warrants are outstanding, the number of shares compared in each warrant and the amount of share warrants issued and surrendered since the last return. 4. The total amount of indebtedness in respect of all registrable charges. 5. A listing containing: a) The names and addresses of those who are members on the fourteenth day after the annual general meeting and those who have ceased to be members since the date of the last return. b) The number of shares held by each member. c) Particulars of the directors and the secretary. Section 125 (1) if the company has converted its shares into stock, the return should give the same particulars with regard to the stock as required for shares. Section 126 for a company with no share capital, the following facts should be included: a) The situation and the postal address for the registered office. b) The address of the place if the register of member is kept elsewhere. c) The address and place if the register of debenture holders is kept elsewhere. d) Particulars relating to directors and the company secretary. A statement containing the particulars of the total amount of in indebtness of the company in respect of all charges which are or were required to be registered with the registrar under the act. Documents to be annexed to annual return. Sec 128(1) the following documents must be annexed to the annual return. a) A copy of the balance sheet with all notes thereto duly certified by a director a or company secretary. b) A copy of auditors report and director’s report certified by a director and company secretary. Section 156(1) the profit and loss account and group account should be annexed to the balance sheet. 9 Section (129) requires that also a private company must also submit with annual return the following certificates:a) The company has not invited the public to subscribe its shares or debentures. b) Any excess of fifty members consists of entirely present and ex-employees. 10