Background

A person can acquire shares in a private company by subscription at the time of incorporation of the company, by allotment by the directors of the company, by purchase from a shareholder or transmission upon death of a shareholder. Each route to shareholding has its own formalities. Acquisition by subscription is by signature of the memorandum of association. Acquisition by allotment is by resolution of the directors. Acquisition by purchase from another shareholder is by a share transfer and requires approval of the directors. There are also statutory filings to be done for each mode of acquisition. Ultimately the company must enter the acquirer in the register of members.

Two questions have troubled the Ugandan courts:

  • whether a person who has not paid for the shares subscribed to or allotted to him is considered a member of the company with full rights of a shareholder; and
  • whether the members register is conclusive proof of membership of the company?

This article reviews the answers to both questions as given by the Ugandan courts. Unfortunately the answers have been inconsistent.

Payment for shares

A company may make a call for payment of shares subscribed or allotted at anytime the company so desires. The call for payment need not be immediate upon the allotment or subscription. If the allottee or subscriber of the shares fails to pay for them when required by the company, the shares will be forfeited.

In Amin Mohammed Allibhai v Bugerere Properties Limited the High Court eld that a person does not become a shareholder by mere allotment of shares, he must pay for the shares. This also applies to subscribers to the memorandum of association who must pay for the shares subscribed to or have them forfeited.

The court explained that an allottee merely has an equitable interest in the allotted shares and does not become a shareholder of the company until he has paid for the shares and has had his name entered in the register of members.

In Cliff Masagazi v Afriland First Bank Uganda Limited the petitioner claimed to have provided non-cash consideration for his shares in the respondent bank. The court had to determine whether the petitioner's shares in the respondent company were paid up.

The court applied the Companies Act provision for shares allotted for a non-cash consideration. The provision requires the company to deliver to the registrar the contract constituting the title of the allottee and any contract of sale or for services or other consideration in respect of which that allotment was made.

The court found that there was no evidence that the company had awarded the petitioner shares in exchange for his services. The Court concluded that the petitioner had never paid up for the shares allotted to him and he was therefore not a member of the company.

The Alibhai and the Masagazi cases contradict the earlier decisions of Matthew Rukikaire v Incafex and Olive Kigongo v Mosa Courts.

In Olive Kigongo the court found that the petitioner was a shareholder as a subscriber to the memorandum of association and that payment for the shares was irrelevant as it was apparent that the company financed its activities through a loan.

In Rukikaire the Supreme Court rightly held that the obligation of a member to pay for shares arises when the company calls upon the shareholder to make payment for the unpaid shares during its operation or when the company is being liquidated. Therefore the lack of evidence that the appellant had paid for the shares did not affect his membership of the company.

Surprisingly the Alibhai and Masagazi decisions do not give any reasons for not following Rukikaire though it was cited to the court by counsel. By the doctrine of precedent, the High Court should have been bound by the Supreme Court decision, and should not have departed from it without explanation..

The Rukikaire decision represents the correct and binding position, because it comes from the highest court and is supported by the express language of the Companies Act. The Act defines a member of a company as:

  • the subscribers to the memorandum of the company who shall be taken to have agreed to become members of the company and who on registration shall be entered as members in its register of members: and
  • a person who agrees to become a member of the company and whose name is entered on its register of members.

Entry in the members register

It is the duty of the company to maintain a register of its members. The Company must enter the name of each shareholder into the members register and indicate the amount paid or agreed to be considered as paid on the shares held by such member. A failure by the company to discharge its obligations should not affect the status of the member.

In Mawogola Farmers & Growers Ltd v Kayanja it was held that if a person has paid for his shares and has been issued with a share certificate but his name is not in the share register, such a person should be allowed to prove he is a member despite the absence of a register. The register of members cannot be said to be conclusive of the membership of the company in such cases. A person may agree to be a shareholder and is made a shareholder by paying for his shares and actually being issued with share certificates, or being given receipts in respect of the payment although his name may not, de facto, be in the register. This case was followed in Rukikaire.

Amending the subscription page

We must debunk a common and popular misconception that the shareholders of a private company are always indicated on the subscription page of the memorandum of association and that this page needs to be amended to reflect new shareholders. This is not a correct statement of the law.

The subscription page of the memorandum of association of a company is a historic document signed at the birth of the company, by those present at the time. The operative language on the subscription page states that those signing have agreed to take shares in the company at its formation. Since the incorporation of a company can only happen once, the subscription page therefore never changes.

The acquisition of shares in a private company will be reflected in resolutions of the company either allotting or approving the transfer or transmission of shares, the accompanying statutory forms and for diligent companies, culminating in the entry into the members register and issue of share certificates. The annual returns of the company also reflect the membership of a company.

Conclusion

The correct and binding position of the law is the Rukikaire decision, which states that a person may be a member of the company even without payment for the shares.

It is the duty of the company to maintain its members register. However the presence of an individual's name on the members register is not the only way to prove shareholding. A failure by the company to maintain the register will not affect the status of the shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.