LEGAL ALERT IMPACT OF THE NEW COMPANIES (AMENDMENT) ACT 2017 ( THE AMENDMENT ACT )

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1 LEGAL ALERT IMPACT OF THE NEW COMPANIES (AMENDMENT) ACT 2017 ( THE AMENDMENT ACT ) A summation of some notable changes in the regulation of companies and expanded reporting/ disclosure obligations. 1. Introduction The Companies (Amendment) Act of 2017 ( the Amendment Act ) came into effect on 16 August The Act has made extensive changes to the Companies Act No. 17 of 2015 ( the Companies Act ) most notably, by enhancing the directors duties and liabilities and protecting shareholders. 2. Purpose of the Amendment Act The Amendment Act was enacted to, among other things; a) Correct drafting errors for consistency purposes and to eliminate ambiguities in the Companies Act; b) Reduce the regulatory burden imposed on companies registered under the Companies Act; c) Improve ease of doing business; d) Improve corporate governance in company affairs; and e) Protection of members by requiring the members to be notified of decisions made by the board. 3. The key amendments made and their Implications 3.1 Substitution of the term Cabinet Secretary with the term Attorney General for purposes of devolving functions The Amendment Act deletes the definition of the term Cabinet Secretary in section 2 of the Companies Act and substitutes it with the definition of the term Attorney General. The effect of this is that all the functions and powers that were previously vested in the Cabinet Secretary have now been devolved to the Attorney General. The functions and powers of the Attorney General include; power to require documents, information and explanations relating to financial statements or director s reports; power to designate classes of companies; power to appoint auditors of a private or public company where they have failed to appoint one within the time prescribed; power to appoint the Registrar of Companies ( the Registrar ), deputy registrars and assistant registrars of companies among others. 3.2 Striking out of companies with the same or similar names Under section 58 of the Companies Act, the Registrar has powers to direct a company registered by a name that is similar to that of an existing company to change it. The Registrar must also notify the company of the

2 period within which to comply with the direction. However, the provision neither prescribes the period within which to comply nor the penalty for non-compliance with the direction. The Amendment Act provides for a period of 14 days within which to comply with the direction. Failure to comply entitles the Registrar to strike off the name of the company from the Register of Companies by a notice in the Gazette. The effect of being struck off the register is that the company stands dissolved. 3.3 Disclosure of beneficial owners to ascertain ownership of a company The Amendment Act has increased the scope of the information to be found in a register of members to include details of the beneficial owner(s). The details include the name and address of the beneficial owners. A beneficial owner is defined in the Amendment Act to mean a natural person who ultimately owns or controls a legal person or arrangements or the natural person on whose behalf a transaction is conducted, and includes those persons who exercise ultimate effective control over a legal person or arrangement. This requirement applies to all companies registered under the Companies Act. Therefore, all companies will have to amend their registers to include details of the beneficial owner(s) or risk a fine of up to five hundred thousand shillings. This amendment makes the ownership and control of business entities more transparent. In order to ascertain the beneficial ownership of a company, one may conduct an online official search on the e-citizen platform for companies registered under the Companies Act of For companies registered under the Companies Act (Cap 486), one may file an application with the Registrar requesting for a CR12 which contains the details of all the members at a fee of Kshs The main challenge to this requirement is that companies records at Companies Registry are notoriously out of date and there is no mechanism by which the Company can compel shareholders to reveal the beneficial ownership of shares being held. 3.4 Extension of the period for lodging the register of members The Companies Act provides that every company must lodge with the Registrar a copy of its register of members within 14 days of completing its preparation. This period has been extended to 30 days to ensure compliance with the new requirement of including beneficial owners details in the register of members. Any subsequent amendments to the register of members must be lodged with the Registrar within 14 days of the amendment. Public limited companies are, however, exempted from this limitation period. This means that they can lodge their amended registers with the Registrar any time after making the amendment. 3.5 Requirements for registration of a conversion of a public limited company into an unlimited private company Section 90 of the Companies Act allowed the Registrar to register a conversion of a public limited company into an unlimited private company (this is as provided in Section 7 of the Amendment Act but appears to be an error) where the application for such registration does not entirely meet the requirements set therein. The Amendment Act makes it mandatory for the Registrar to refuse registration of such a conversion where the application does not contain a statement of the company s new name on conversion. The statement must be accompanied by an assent of the members to the conversion and a copy of the new company s articles. 3.6 Keeping of the register of members and debentures for inspection

3 Section 94 and 573 of the Companies Act made it mandatory for the register of members and the register of debentures to be kept available at the company s registered office for inspection by the members in private companies and in case of public companies, by the members and any other person upon request. The Amendment Act provides alternatives by allowing companies to keep copies of the registers either at their registered office, their branch office or at the office of the person who prepared them. This makes it convenient for members and other persons to access the register at other offices other than a registered office of the company for inspection. 3.7 Definition of members of a director s family for purposes of declaring conflicts of interest Under Section 123 of the Companies Act, family members of a director are specified as the director's spouse, a child or step-child of the director, a child or step-child of the director's spouse who lives with the director and has not reached eighteen years of age or a parent of the director. The Amendment Act has expanded this category to include; a brother or sister of the director, a brother or sister of the spouse of the director, a grandchild of the director, a spouse of the director s child or stepchild, a brother or sister of the director s spouse or grandchild. The effect of this addition is that directors are required to disclose the abovementioned persons interests in a transaction or arrangement with the company. Directors are also required to obtain authorization before proceeding with the transaction or arrangement. Such authorization is given by the other directors in the case of private companies, and in the case of public companies, by a majority of the board members or a majority of the company members. 3.8 Requirement for disclosure of other directorships held by directors in the register of directors The Amendment Act amends section 135 of the Companies Act to include disclosure of information on directorships held by a director in another company, if any. This is to ensure that companies are fully aware of any potential conflict of interest that may arise out of such directorships. Companies will now be required to amend their register of directors to reflect the changes (if any) and notify the Registrar of such changes within 14 days. 3.9 Duty of a director to avoid conflicts of interest Section 146 of the Companies Act, requires directors to avoid conflict of interest situations. Such situations may arise where the director exploits any property, information or opportunity regardless of whether or not the company benefits from the exploitation. The Amendment Act has clarified this provision by referring to exploitation of only confidential information and opportunities in the company or for the company. The amendment has also expanded the situations of conflicts to include exploitation of the director s position in the company. It is immaterial whether or not the company benefits from such exploitation Liability of directors for breach of duty to avoid conflicts of interest The Amendment Act has deleted section 146 (3) (a) of the Companies Act which absolves directors of liability for breach of the duty to avoid conflict of interest if they can show that they were not aware of the circumstances giving rise to such breach. The effect of this is that it will no longer be a defence for directors to claim that they were unaware of the circumstances giving rise to a conflict of interest in the company Transactions by public companies requiring majority of the members or majority of the board s approval Section 146 (5) of the Companies Act allows directors of a public company to continue acting in all transactions where their interests conflict with those of the company provided the transactions are approved by the other directors.

4 The Amendment Act, however, requires the conflicted directors to seek approval from either a majority of the members or a majority of the directors who have no personal interest in the transaction. Such approval is required for all transactions valued at 10% more than the value of the company s assets. Failure to obtain the approval constitutes a criminal offence punishable by disqualification of the conflicted director for a period of up to 5 years Period within which to declare interest in a transaction or arrangement Section 151 of the Companies Act requires directors of a public company to disclose their interests in a transaction with the company to the directors and members of the company. Such disclosure may be made either orally at a general meeting of the company or by a written notice delivered to them by hand, post or electronically. The Amendment Act requires the interested director to disclose such interests to the members within 72 hours of their knowledge of the existence of a conflict. There is no equivalent limit for private companies. Failure to comply with this requirement constitutes a criminal offence punishable by a fine not exceeding one million shillings Requirement to notify members of the action to be taken upon consideration of a declaration of interest Under the Companies Act, a conflicted director may declare his or her interest in a Notice of Declaration which is subject to the board s consideration. The Amendment Act makes it a mandatory requirement that, upon consideration of the declared interest, the board must notify the members of the action to be taken in the next general meeting. This amendment has facilitated a greater oversight role of the members over the decision making processes of the company Directors and connected persons liabilities for entering into property transactions with the company Section 162 (6) and (7) of the Companies Act exempted persons connected with a director 1 and directors from civil liability for entering into property transactions with the company. The exemption is subject to proof of lack of knowledge of a conflict of interest when entering into such transactions. The Amendment Act has repealed this provision to the effect that, it will no longer be a defence for connected persons and directors to claim that they were unaware of the conflicting circumstances when entering into transactions with the company Minimum period for keeping minutes of directors meetings Section 210 (2) of the Companies Act requires companies to keep the directors minutes for a minimum period of 10 year. This period has been reduced to 7 years to harmonize the time frame for record keeping by companies in the Companies Act Meetings of classes of members for purposes of voting The Amendment Act has amended section 308 of the Companies Act by inserting subsection 8 which allows a class of members to vote as a group at a meeting on any variation that adversely impedes their rights. This amendment protects the interests of the different classes of members in relation to their class rights. 1 person s connected with a director are defined under section 122 (1) of the Companies Act to include the director s family members, a company with which the director has an equity share or voting power, a trustee of s trust where the director is a beneficiary, the director s or connected person s partner, or a firm in which the director or a connected person is a partner

5 3.17 Shareholders right of pre-emption are non-derogable The Amendment Act has repealed section 344 of the Companies Act which allows a private company, by its Articles of Association, to exempt the right of pre-emption on the allotment or sale of the company shares. This amendment makes it mandatory for all companies, including private companies, to offer shares to its existing shareholders before allotting them to other persons. This means that the existing shareholders right of pre-emption is non-derogable by company articles or otherwise Variation of class rights in a company having a share capital is subject to the members consent Section 393 (2) of the Companies Act allows a company to vary class rights by its Articles of Association or with the consent of the holders of the class of shares. The Amendment Act has repealed parts of this provision to the effect that class rights in may only be varied if the shareholders of that class consent to the variation, either in writing or by a special resolution. This requirement only applies to companies having a share capital Exemption from providing information about interests in a public company s shares The Amendment Act has amended section 539 (2) of the Companies Act by deleting paragraph (a) which relates to disclosure of information on interests held in the shares of a public company. This provision exempts a person who has consulted the Central Bank of Kenya (CBK) from disclosure of such information. A repeal of this provision means that it will no longer be necessary for one to consult CBK to be considered for the exemption. The only requirement is that the person seeking the exemption must prove existence of special reasons warranting such an exemption Definition of spouse to ascertain interests in shares The Amendment Act has amended section 564 of the Companies Act by redefining the word spouse to mean a husband or wife as is defined in the Marriage Act of The implication of this is that cohabitees will no longer be entitled to claim an interest in the shares of a company. Proof of such claims shall be a marriage certificate issued pursuant to any of the five systems of marriage (Customary, Hindu, Islamic, Christian or Civil marriage) under the Marriage Act Companies excluded from the small companies regime Section 626 of the Companies Act has been amended to exclude the following companies from the small companies regime; i. listed companies within the East African Community; ii. a company and its subsidiaries, which carry on co-operative society activities; iii. a company and its subsidiaries, which carry on micro finance activities; and iv. a company and its subsidiaries, which trade in insurance market or banking activity; This means that the abovementioned companies will not benefit from the exemption to, among other things; prepare group financial statements for the year, provide information about their employees and benefits received in their annual financial statements and lodge the director's report and company's annual profit and loss account The accounting reference date to be set by an ordinary resolution The Amendment Act has amended section 633 (2) of the Companies Act which sets the accounting reference date of a company as the last day of the month of the company s anniversary. This amendment gives

companies the liberty to determine their accounting reference dates by an ordinary resolution unless provided otherwise in the articles or any law. 3.

6 companies the liberty to determine their accounting reference dates by an ordinary resolution unless provided otherwise in the articles or any law Annual returns to be signed by a director or secretary of the company The Amendment Act has amended section 705 of the Companies Act to make it mandatory for a company s annual returns to be signed by either a director or company secretary before lodging them with the Registrar. Failure to comply with this requirement is a criminal offence punishable by a fine of up to two hundred thousand shillings Exemption of companies not formed under the Companies Act Part XXXVI of the Companies Act provided a mechanism for companies registered other than in accordance with Kenyan company laws to enjoy the benefits available to companies registered under the Companies Act e.g. section 969 (6) of the Companies Act allowed unregistered companies to register under the Act only for purposes of liquidation which is an advantage they would not otherwise enjoy while unregistered. The Amendment Act has repealed this Part so that the Companies Act shall no longer apply to companies that are not incorporated under it as well as unregistered companies. Administration of such companies including matters registration, liability of the members, liability of officers of such companies and dissolution will be governed by the legislations that establish them. 4. Conclusion From the foregoing, it is imperative that companies affected by the new changes take reasonable steps to ensure that they, in conjunction with their directors and other officers, are fully aware of the new requirements and the impact of the same on their obligations. They must also take the necessary steps to ensure compliance with the new requirements. For legal advice on Corporate & Commercial matters, please contact Ashwini Bhandari at Bhandari.A@dalyinamdar.co.ke or Shitul Shah at Shah.S@dalyinamdar.co.ke Nairobi Office: ABC Towers, ABC Place P.O. Box Nairobi. Tel: +254 (0) (0) 722 / Mombasa Office: Sea View Plaza, 1st Floor, Mama Ngina Drive P O Box Mombasa Tel: (0) , This information is intended to be a general overview of the topic dealt with and should not be used as a substitute for taking legal advice. The Firm shall not be liable for any actions taken on the basis of this information. Should you require legal advice on this topic please do not hesitate to contact our lawyers.

Chapter 30 LAWS OF KENYA. Revised Edition 2010 (1981) Published by the National Council for Law Reporting with the Authority of the Attorney General

Chapter 30 LAWS OF KENYA. Revised Edition 2010 (1981) Published by the National Council for Law Reporting with the Authority of the Attorney General LAWS OF KENYA The Limited Partnerships Act Chapter 30 Revised Edition 2010 (1981) Published by the National Council for Law Reporting with the Authority of the Attorney General www.kenyalaw.org 2 CAP.