CM Advocates LLP Statement on the Protection of Shareholders under Uganda’s Companies Act of 2012.
Authored by CM Advocates LLP
Introduction
Shareholders are members of the company who have contributed their money towards the company’s share capital. Shareholders have an interest in the company commensurate to the extent of their shareholding which is represented by shares.
Although a company is a legal person existing separate from its members, it in fact has no mind of its own and must depend on the leadership of its directors. Various theories exist as to whether directors are agents of the company or of the shareholders. What is uncontested though is that they owe a fiduciary duty to the company rather than to shareholders. It is therefore possible to envisage a situation where directors actions benefit the company, yet prejudice some shareholders, especially minority shareholders and or low ranking shareholders.
The law provides safeguards for shareholders to check on the powers of the directors to ensure that their interests are not prejudiced. There are various ways shareholders are protected. The Act distinguishes what decisions can be made by the directors and which ones can only be made by the shareholders. Secondly, the Act bestows a cause of action to shareholders whereby any aggrieved shareholder can petition the courts or the registrar of companies for relief and lastly, the power to appoint and disappoint certain officers.
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The power to appoint and disappoint.
Shareholders have the power to appoint certain critical officers of the company, and to remove them. These include directors and auditors. The directors then appoint other officers necessary for the day to day running of the company. Our law requires that a company must have at least one director for a private company and two directors for a public company. A person is not entitled to be appointed as a director of a company unless he or she has attained the age of eighteen. There are also other disqualifications. Shareholders may by an ordinary resolution appoint or remove any director. It is only shareholders that are entitled to vote on this decision. Given that the company will be run by the directors, this provision provides soft landing for the shareholders in case their interests come under peril. Directors therefore hold office at sufferance and at the will and authority of the shareholders.
It is admitted that this control through appointment and removal can be theoretical, especially where different classes of shares exist with different rights and status. The nature of passing resolutions is implicit on the extent of shareholding or interest in the company so that majority shareholders will almost always have their way, sometimes to the detriment of the minority. None the less, should a director turn rogue and injure the interest of shareholders, they (shareholders) can exercise their power to have him or her replaced.
The law further requires every company to appoint an external auditor to hold office from the conclusion of one Annual General Meeting (AGM) to the next. External Auditors are appointed and removed by ordinary resolution of the shareholders at a general meeting. Although the directors may appoint an internal auditor, the mandate to appoint an external auditor is vested in the shareholders. The duty of an external auditor is to independently prepare a report for the shareholders on the company’s accounts, balance sheet, profit & loss accounts and all group accounts. The idea is to benefit from the report of an external and independent auditor in order to give the shareholders a clear assessment of the financial standing of the company and to help them make informed decisions.
Legal cause of action
Shareholders have the right to institute proceedings against the company to protect their interests or those of the company provided they are also prejudiced by the action complained of. In our law, this right is exercisable by any shareholder regardless whether they are majority or minority. The single and the only requirement is that the person bringing the action should hold shares in that company and be prejudiced by a certain action by the directors or the company. The common law itself went through the furnace of legal criticism to finally admit legal actions by minority shareholders.
It has been argued that internal reliefs have to be exhausted before what has come to be known as derivative actions, can be brought. This position is however theoretical at its best because we know that decisions in companies are passed by way of voting whereby each share represents a distinct vote. Therefore, under that approach, minority shareholders would never be able to invoke these procedures without the consent of the majority. It is no wonder that our present Companies Act does away with this bureaucracy in favor of some equity for minorities. The law thus creates a cause of action for shareholders if they feel their interest are in jeopardy, either before a court of law or before the registrar of companies.
This right is given to any member of the company who feels that the affairs of the company are being conducted in a manner oppressive to some members including himself or herself, to make a complaint to the registrar of companies or to the Court. This could be done to obtain an injunction on the actions, for any other equitable reliefs, or indeed to commence the winding up of the company.
Preemption rights
The law further provides for restriction on dilution of shareholding in private companies. The transfer of shares in a private company is usually limited and has to be approved by the directors and the shareholders. These are referred to as rights of preemption. In some instances, even the allotment of new shares has to be approved by the shareholders and in addition, the existing shareholders have the right of first refusal with respect to the shares to be transferred or allotted. Without this restriction, it could be possible to dilute the shareholding of existing shareholders and thus dilute their control in the company.
Conclusion
The link between a company and its shareholders exists in the rights or interest the shareholder has in the shares of that company. It is therefore critical to have avenues through which a shareholder especially a minority shareholder can protect their interests in the company.