The Companies Act, 2015

Posted on September 12th, 2018

By Pamella Ager | Geoffrey Muchiri

The Companies Act 2015 (the Act) is amongst a suite of new laws intended to streamline business in Kenya, by making it easier for entities to establish a presence and operate. Although quite voluminous, the Act takes into consideration, developments in technology and procedure, to boost the ease of doing business. In addition, the Act codifies and gives life to the now generally accepted principles of corporate governance.

Below are some of the more salient features of the Act:-

  • The introduction of sole membership of private companies; entrepreneurs will no longer be required to incorporate a company with at least two members(as required under the previous Companies Act (Cap 486). This takes into consideration the Government’s intention to increase and facilitate entrepreneurial activity in Kenya
  • Several provisions that remove previous procedural technicalities for compliance have also been codified. These include:-
  1. No obligation for a private company to have a company secretary, where it its paid-up capital, does not exceed Kshs. 5 million
  2. Private companies are allowed to have only one director, while public companies must have at least two
  3. The minimum age of a director is now 18 years, down from the previous 21 years, with no prescribed maximum age
  4. A company’s objects are now not deemed to restrict its capacity; a company may transact only subject to its own limitations
  5. The members of a private company may pass written resolutions circulated in hard copy or electronic form
  • A company may notify shareholders of notices and announcements through its website
  • Sector-Specific model articles of association shall be prescribed
  • The Act codifies directors’ fiduciary duties, as stipulated under common law. These include: duty to exercise reasonable care, skill and diligence, duty to act within powers and duty to avoid conflicts of interest In respect of accountability and transparency, the following provisions have been introduced:-
  1. Private companies must file financial statements within 9 months of the accounting period with the Registrar of Companies (RoC)
  2. Resolutions, written memorandum and agreements affecting the company’s constitution are to be filed at the Companies Registry within 14 days of their passing
  • Directors’ fixed term service contracts in excess of two(2) years will require shareholders’ approval
  • The requirements for valid execution of a document by a company have been changed to signing by 1 director in the presence of an attesting witness
  • The RoC is to be informed of changes in a company’s directorship or directors’ addresses within 14 days of effecting the change
  • Transfer by the company of a substantial non-cash asset to director shall only be by resolution. A non-cash asset is considered substantial where its value exceeds 10% of the company’s assets and is more than Kshs 5 million, or one that exceeds Kshs 10 million
  • An application may be made to the AG or the Official Receiver for a disqualification order against a director or company secretary, where he/she is unfit to hold office, or where the company becomes insolvent. The duration of such an order is between 2 to 15 years
  • Takeovers and Mergers will now be governed by the Act(once it comes into force), as opposed to the previous position, where takeovers were governed by the Capital Markets Act (Cap.485A) and the regulations made thereunder
  • The introduction of comprehensive Financial Reporting requirements in line with International Accounting Best Practice(developed after Enron and Parmalat) which includes amongst others setting out the functions, remuneration terms and extent of liability of Auditors (exemption of liability is proscribed)
  • Golden parachutes which are common place during the exit and/or ouster from office of any director, are subject to approval by the shareholders.
  • Winding Up (which was previously governed and available under the old Companies Act 1948) is now repealed as a whole and replaced with legal concepts such as administration, liquidation and moratorium which are governed by the Insolvency Act 2015
Related Practice areas

What You Need to Know About the 30% Local Ownership Rule for Foreign Companies

Posted on August 13th, 2018

By Pamella Ager

 

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By way of Legal Notice No. 109 of 2016, all the remaining parts of the Companies Act, 2015 (the 2015 Act) came into operation on 15th June, 2016. With them, so too did Part 37 of the 2015 Act which contains provisions relating to foreign companies which carry on business in Kenya.

Section 974 of the 2015 Act provides that a foreign company shall not carry on business in Kenya unless it is either registered, or it has applied to be so registered and the application has not been dealt with, within the prescribed period. In the case of the latter, the company will be taken to have been registered as a foreign company and it will be entitled to be issued with a certificate of registration. The term “carrying on business in Kenya” includes but is not limited to, offering debentures in Kenya, or being a guarantor for debentures offered in Kenya.

It is an offence for a foreign company to carry on business in Kenya without being so registered and the penalty incurred is a fine of not more than  KES  5 million (USD 50,000). Further, where a foreign company has being convicted of this offence and it continues to carry on business in Kenya all the same, the company and each of its officers who are in default will be liable to a fine of not more than KES 500,000 (USD 5000) for each further offence committed on each day which the contravention continues.

Section 975(2) contains the criteria for approval for registration of a company as a foreign company. Among these, the company must demonstrate in its application that at least 30% of the company’s shareholding is held by Kenyan citizens by birth, this is what has been dubbed the “30% local ownership rule”. The term “citizen by birth” is defined under Article 14(1) of the Constitution, 2010 to mean a person who, on the day of their birth, whether or not they were born in Kenya, either their mother or their father was a citizen. Therefore, following the commencement of the 2015 Act, any foreign company that wishes to be registered as such in Kenya, must have at least 30% of its shareholding held by people who have a parent or parents, who are Kenyan citizens.

However, in accordance with Section 65 of Part 7 of the Sixth Schedule of the 2015 Act, where the company was the holder of a certificate of registration as a foreign company, immediately before the repeal of Section 367 of the repealed Act (Cap. 486), it will continue to be registered as a foreign company under Part 37 of the 2015 Act. This provision is in line with Section 994(5) of the 2015 Act, which provides that as soon as practicable, after the commencement of Part 37, the Companies Registrar shall transfer to the Foreign Companies Register, the records relating to foreign companies that were registered under the repealed Act (Cap. 486) immediately before commencement.

There has been significant debate on how this provision will affect business in Kenya, with an outcry that the provision must be urgently amended to encourage foreign direct investment in Kenya, something Kenya has been applauded for, when compared to some of its neighbours. There have also been some discussions on whether indeed the Companies Registry is currently strictly ensuring compliance with this provision. Whatever the case, the provision is in the 2015 Act and is operational by Legal Notice No. 109 of 2016, like all the remaining parts of the 2015 Act. It is also worth noting, that whereas Section 995 of the 2015 Act grants the Cabinet Secretary the power to make Foreign Companies Regulations, at this time, no such regulations have been made. We continue to watch whether this section and other controversial provisions in the Companies Act, which have attracted significant debate will be amended.

 

Related Practice areas

In the Open: Disclosure Requirements Under the New Company Regulations

Posted on June 27th, 2018

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Pursuant to the Companies Act, 2015 (the Act), directors of a company are required to prepare a directors’ remuneration report for each financial year of the company. The Act requires regulations to be in place, which regulations shall prescribe the information to be included in a directors’ remuneration report, how the information is to be set out in the report and what is to be the auditable part of the report. Previously, the Companies (General) Regulations, 2015 (the 2015 Regulations) were in place. The 2015 Regulations had set out the information to be disclosed in a directors’ remuneration report. This included an aggregate amount of remuneration and benefits paid to or receivable by the directors of the company, in respect of their qualifying services.

In September 2017, the Companies (General) (Amendment) Regulations, 2017 (the 2017 Regulations) came into effect. The 2017 Regulations have amended the 2015 Regulations and seek to introduce more disclosure requirements for the directors’ remuneration report. The 2017 Regulations now require disclosure to be made with regard to each individual director as opposed to the aggregate amount of the directors’ remuneration, as was the case in the 2015 Regulations. Consequently, disclosure requirements in the directors’ remuneration report are now more extensive. In addition to the requirement for the report to disclose the remuneration of each individual director, the 2017 Regulations also seek to provide further guidelines for additional information that the directors’ remuneration report should contain. The information to be contained in the directors’ remuneration report is broadly categorised into two; information not subject to audit and information subject to audit.

Not Subject to Audit

The directors’ remuneration report needs to capture major decisions on directors’ remuneration, including any substantial changes relating to the directors’ remuneration, made during the year and the context in which the decisions and changes were made. To this extent, the 2017 Regulations require the report to contain a statement of voting at the previous general meeting as follows:

  • In respect of a resolution to approve the remuneration report, the percentage of votes cast for and against the report and the numbers of votes withheld
  • In respect of a resolution to approve the directors’ remuneration policy, the percentage of votes cast for and against the report and the number of votes withheld

The 2017 Regulations further require that where there is a significant percentage of votes against the resolutions highlighted above, the report should contain a summary of the reasons for those votes, as far as the directors are aware and any actions taken by the directors in response to those concerns. Directors are also required to prepare a policy statement detailing the summary of each director’s performance conditions for the director to be entitled to share options or a long-term investment scheme. A summary of the methods to be used in assessing performance conditions also needs to be stated. The policy statement should also disclose the duration of directors’ contracts, notice periods and termination payments under the contract. In relation to a director’s contract of service, the report shall state whether a director is entitled to compensation in the event of early termination of a contract and such details that enable members of the company to estimate the liability of the company, in the event of such early termination.

The above information though not subject to audit is required to be in the directors’ annual remuneration report.

Subject to Audit

The following information required to be disclosed in the directors’ report is subject to audit:

  • Directors’ Emoluments and Compensation
  • Under this, the following information should be disclosed:

    • The total amount of the salary and fees paid to the director
    • The total amount of bonuses paid or receivable by the director
    • The total amount paid as expense allowances that are chargeable to tax or would be chargeable to tax if the director were an individual
    • The total amount of any compensation for loss of office paid to the director
    • The total estimated value of any benefits received by the director, other than in cash
  • Share Options
  • The report should also contain, in respect of each director of a company, the details of their share option information. This includes the number of shares that are subject to a share option at the beginning and end of the financial year, the number of shares that have been awarded, exercised or have expired or if there has been any variation to the rights. With regard to unexpired share options, the report should state the price paid for each share and the period within which a right should be exercised.

  • Long-term Incentive Schemes
  • Any details of a scheme of interests that a director may have at the beginning of a financial year or if later, on the date of their appointment as a director of the company, should be disclosed. The details of the schemes of interests awarded to the director in the relevant financial year, as well as those that the director may have at the end of the financial year, also need to be disclosed.

    The 2017 Regulations recognise the fact that the long-term incentive schemes are subject to certain qualifying conditions and require that the report sets out the period within which the qualifying conditions for the long-term investment scheme have to be fulfilled and whether there are any variations. A long-term incentive scheme for purposes of the 2017 Regulations means an interest in respect of which assets may become receivable, in respect of the qualifying services of a director.

  • Pension
  • The report also needs to disclose pension information of a director of a company who has served during the relevant financial year and has rights under the pension scheme. The pension information includes the details of the pension arrangement and any changes to those arrangements and the management of the assets and financial affairs of the pension scheme.

  • Past Directors’ Compensation
  • The details of any significant award made in the relevant financial year to any person who was not a director at the time of making the award, but was previously a director of the company must be disclosed.

  • Payments to Third Parties
  • The directors’ remuneration report should also contain the aggregate amount of any consideration paid or receivable by third parties, for making available the services of a director of a company. Payments made to a person who is a director of a company and is involved as the director of any of the company’s subsidiary undertakings or has dealt with any other undertaking by virtue of the company’s nomination should be disclosed.

    It is important to note that the Regulations require the above information to be provided with respect to each individual director, save for information relating to share options, where the Regulations allow for aggregation, in the opinion of the directors. Disclosure in respect of each individual director will result in a disclosure of excessive length.

    The 2017 Regulations will with no doubt enhance transparency in the remuneration of company directors. With the new rules in place for instance, it is now mandatory that companies integrate details of individual director remuneration into their annual financial reports. The 2017 Regulations are also expected to bring an end to the current reporting practice where listed firms only provide an aggregate amount of total director emoluments, leaving shareholders to guess what each executive or director takes home. Shareholders will now more transparently have the power to approve directors’ pay at general meetings, a move that may see boards of loss-making companies take a pay cut to match the company’s economic situation.

    The liability of companies at the time a director joins and leaves a company, as well as after a director has left a company, will now be more certain and can be projected without causing any economic effect to the performance of listed companies.

    Notably, the 2017 Regulations are in line with constitutional requirements that every citizen has the right of access to information. The 2017 Regulations are also in line with the guidelines on corporate governance practices by publicly listed companies in Kenya, which require companies to establish a formal and transparent procedure for remuneration of directors, which should be approved by the shareholders. The Regulations are therefore a remarkable and progressive legislative development.

     

     

     

     

     

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