FORMATION OF A COMPANY INTRODUCTION There are several formalities, which have to be followed before a company is incorporated (formed).

The process is grouped in the following stages: 1. Promotion 2. Incorporation or Registration 3. Capital subscription 4. Commencement of business It should be noted that a private company need only to go through the first two stages only. A public company must go through all the four stages. 1. Promotion L.W Leertenberg defines promotion the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits there from. Promotion therefore has to do with the discovery of a business idea which can be profitably undertaken by a company and includes preliminary and detailed investigation of the feasibility of the idea, assembling of business elements and making provisions of the funds necessary to launch the enterprise as a going concern. Thus stages can be summarized as under: i) Preliminary analysis and examining the proposed idea to see whether the business is profitable. ii) Estimating the cost of production, selling price of goods and services and the amount of profits likely. iii) Arranging for he acquisition of labour, materials, capital and managerial ability. iv) Presentation to the public and underwrites the business proposition in order to make people to manage in the venture. This is done through the issue of a prospectus. 2. Registration or incorporation This involves registering the company with the registrar of companies under the companies Act. For a public company membership should be at least seven and at least Page 1 of 8

two for a private company. The people who are involved in registration of a company are called promoters. The following activities or steps are taken by promoters in order to register the company. a) Obtaining approval of the proposed name from registrar of the companies. Promoters are free to choose any name for their new company; section 19 of companies Act however has put restrictions on the names to be chosen. Section 19 (2) provides that no name shall be reserved and no company shall be registered by a name which in the opinion of the registrar is undesirable. Section 17 of the business names Act cap 499 lists instances when a name is deemed undesirable: Where the name chosen suggests a criminal or immoral intent. Where the name suggests association with the president or head of state or a government ministry or department or a local authority or suggests connection with an international organization such as World Bank e.t.c. If the name is misleading especially as to the nature of the business the company will undertake or as to the nationality or religion of the people behind the company. Where the name is similar to the name of an existing company, partnership or co-operative society. Section 109 of the companies name requires publication of the name of the company by: a) Painting or affixing and keeping painted or affixed name on the outside of every office or place where its business is carried on, in a conspicuous position; in easily legible roman letters. b) Having its name engraved in legible roman letters on its seal which shall take the form of an embossed metal die; c) Having its name mentioned in legible roman letters in all business letters of the company and in all notices and other official publications of the company and in all its bills of exchange, promissory notes, endorsements, cheques and orders for

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money or goods purporting to be signed by or on behalf of the company; and in all bills or parcels, invoices, receipts and letters of credit of the company. Section 20 of companies Act provides that a company can change its names subject to the following: Its the company itself that can change its name i.e. members in a general meeting. The resolution changing the name must be a special resolution. After changing the name the company must within fourteen days give notice of its change of name to the register of companies. The registrar will make the change and publish the fact in the official Kenya Gazette. b) Presentation of documents The following have to be prepared and presented to the registrar of companies 1. Memorandum of Association Contains conditions upon which the company is allowed to be incorporated. It defines and sets the limits of the powers of the company. The memorandum also sets the objects of the company. 2. Articles of Association Contains the rules, regulations, by laws for the internal management of the affairs of a company. Articles enable the company operate in a way to achieve the aims and objectives set out in the memorandum of association. 3. A statement of the companys nominal capital. Nominal capital is the maximum amount of capital that a company aims to raise. 4. A declaration that all the requirements of the companies Act and other formalities relating to registration have been complied with. The declaration has to be signed by an advocate, a person named as director or company secretary. 5. A list of the company directors and their written consent to become company directors. Immediately after registration, the following true documents are required: (i) (ii) Notice of the situation of the registered office. Particulars of directors and the secretary.

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The registered office cant be changed but if it changes notice of change must be given to the registrar within 14 days. Particulars of the directors and the secretary need to be filed with the registrar within fourteen days of their appointment. c) Issuance of a certificate of incorporation On receipt of necessary documents the registrar opens a file for the particular company. If all requirements of the Act have been complied with, he will register the company and place, its name in the register of companies. A certificate of incorporation will be issued where upon the registrar shall certify under his hand that the company is incorporated. The original copy is given to the promoters and a copy will be left in the companys file (s. 12). It should be noted that presentation of documents does not mean automatic registration of the company. The registrar of companys powers to refuse registration are inherent. If the registrars reasons for refusal to register a company are not valid the promoters can seek order of mandamus from the high court to compel the registrar to issue the certificate. In R vs. registrar of joint stock companies (1913) 2k B 197; the promoters of the company sought mandamus to issue the registrar of the joint stock companies on grounds that he had without reasonable cause refused to register their company. It was held that where promoters are aggrieved by the decision of the registrar they can apply for order of mandamus to issue against the registrar. However where the registrar is justified in law and infact not to issue the certificate the order of mandamus shall not be issued. In the above case the promoters failed in their attempt because issuing the certificate would mean allowing an English company commit an illegality. Section 17(1) once the certificate is issued it acts as conclusive evidence that the company was properly formed in accordance with all the requirements of either the companys Act or the company practice. If it is later found that the granting of the certificate was made in ignorance of some irregularity on the part of promoters; it cannot be withdrawn.

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Incase in this point is Barnards Banking company Re Poels case (1867) L.R.2 ch. 674. it was held by Lord Cairns in this case that: When once the memorandum is registered and the company holds out to the world as a company undertaking business willing to receive shareholders and ready to contract engagements then it would be of most disastrous consequences if at all that has been done, any person was allowed to go back and enter into examination of the circumstances attending original registration and the regularity of the execution of the documents. The certificate cannot be disputed on any grounds and cannot be challenged even: a) Where the memorandum is altered after signatories put their signatures on memorandum but before it is registered with the registrar. b) When memorandum is signed by only one person for all the seven. c) Where all the signatories are minors. d) Signatures to the memorandum are forged. Other case law relation to incorporation is Jubilee cotton mills Ltd vs. Lewis (1924) AC 958. Circumstances when incorporation can be withdrawn: (i) Where it is discovered that the company was formed with blasphemous objectives. This is the case in Bowman and others vs. the secular society limited (1917) AC 406 where the company thought against Christianity and urged its members to stop Salvation Army members from attending their Sunday worship. This was found that the activities of this company were blasphemous to the doctrines of that religion and the certificate was withdrawn and cancelled. However on technical grounds the action failed. (ii) Where the objects of the company are found to be immoral. In R vs. Registrar of joint stock companies (Ex-parte the A.G) (1980) QBX a firm of Accountants sought to register a company on behalf of their client. They intended to register the company in the name prostitutes but the name was rejected and the reserved another Hooker Ltd, which was also refused by registrar. The accountants then submitted the name Lindi St. Claire French Lessons Ltd. The registrar accepted the name and registered the company issuing a certificate. Later it was discovered that the companys sole Page 5 of 8

purpose was to enable clients either alone or with others provide prostitution service for gain. Judge Ackner LS stated that though prostitution per se was not unlawful under the English law it was contra Moros bonus. Hence the registrar was entitled to quash registration and with draw the certificate. (iii) Where the entity that was registered as a company is not a company in nature. In Salomon vs. Salomon and company Ltd (1897) AG 22 Lord Parker in the course of his judgement suggested that courts would be ready to go behind the certificate and nullify the registration of a company on the grounds that the entity which was not corporate body with the status and capacity conferred by the Act. (iv) Where the company to which the certificate has been issued turns out to be an enemy of the state. A company becomes an enemy if persons controlling it defacto are resident in an enemy country or wherever resident are adherent of taking instruction from or acting under the control of the enemy Lord Parker. A company becomes an enemy if it draws its membership from an enemy country. A case law relating the above is Daimler company Ltd vs. continental Tyres company (1916) 2 AC 307. d) Acquisition of legal personality Where a company is registered it becomes a legal person by the name contained in its memorandum of association. S 16 (2) incorporation of a company as a legal person was established in the case of Salomon vs. Salomon and company Ltd (1897) AC 22. In this case it was held that upon incorporation and in essence of any fraud on the part of the promoters the company becomes a legal person separate and distinct from its members, however closely it may be controlled by those members. Another cases supporting the separate entity are tulstail vs. Stegmann (1962) 2 QB 593. In Lee vs. Lee Air farming company Ltd (1960) WIR 758, Lee formed a company and he secured a job in his company. He died while on duty and it was held that a company being a legal person separate and distinct from its members is capable of employing and dismissing workers. As an employer, the company is subject to amongst laws, the workmans compensation law and must compensate an injured or deceased

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worker (employee) accordingly. However the case failed on a procedural technically since the widow sued on her own name. Another case in support of separate entity is the Mc Aura vs. Northern Assurance company Ltd 1925 AC 619. in this case MC Aura formed a company and transferred his timber estate to it and he also owned the company. He affected an insurance policy on the timber in his own name with several companies. The timber was destroyed by fire but he was not compensated for he had no insurable interest in the timber. 3. CAPITAL SUBSCRIPTION This involves steps taken to raise capital for the company. Promoters are the first directors of the company. To raise capital directors will be called to deliberate on the following: a) Appointment of secretary and fixing the terms and conditions of this appointment. b) Appointment of bankers, brokers, solicitors and Auditors. c) Adoption of preliminary contracts entered by promoters on behalf of the company in the per-incorporation stage. d) Securing underwriting contracts in order to secure minimum subscription. e) Adoption of the draft prospectus or statement in lieu of prospectus. f) Appointment of managing director or manger and other officers. g) Approval of the design of the common seal of the company and the authorizing the custody thereof. h) Listing of shares on the stock exchange. If the directors wish to invite the public to subscribe for its shares, they will file a copy of the prospectus with the registrar of companies. On the advertised date, the prospectus will be issued to the public investors can obtain the prospectus from the registered office or from the bankers. Investors then forward their applications for shares along with application money to the companys bankers mentioned in the prospectus. The bankers will then forward all applications to the company and the directors will consider the allotment of shares. If the share applications meet a minimum subscription as disclosed in the prospectus, directors will allot shares to the applicants. Allotment letters are then sent to those given Page 7 of 8

shares and regret letters to those who are not. If applications fall below the minimum subscription as in the prospectors within 120 days after prospectus issue, no allotment is made and all money will be refunded. When a public company does not intend to raise money from the public the company will file a statement in lien of prospectus with the registrar at least 3 days before allotment of shares. 4. COMMENCEMENT OF BUSINESS. Section 3 of the Act gives conditions and restrictions which a company must observe before it is allowed to start business. This includes issuance of prospectus, and whether the minimum subscription was raised. Form 211 which must be given to the registrar confirms the following: a) The minimum subscription has been raised. b) Every director of the company has paid the company or made the shares taken or contracted to be taken by him. Having given for 211 and 212 and the statement in lieu of prospectus the registrar shall certify that the company is entitled to commence business and issue it with a Trade certificate. If the company defaults on the above, contracts entered by it will be provisional only and not binding on it. Section 3 (b) provides a penalty for breaching the conditions (i.e. $1000 each day as contravention continues). Section 3 subsections 7 exempts private companies from the conditions and restrictions thus a private company can start business without the trading certificate.

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