University of Ghana

Business School

TERM PAPER

Shareholder protection in the 21st century: A review of the

Companies Code 1963, (Act 179)

By

WMBA Group 1

November, 2016
 Table of Content

Table of Content...............................................................................................................................i
List of Tables...................................................................................................................................ii
List of Figures................................................................................................................................iii
Abbreviations..................................................................................................................................iv
Abstract............................................................................................................................................v
1 Background...................................................................................................1
1.1 Problem Statement......................................................................................1
1.2 Purpose and research questions......................................................................2
1.3 Significance of the study...............................................................................2
2 Literature review............................................................................................3
2.1 Shareholder protection index.........................................................................3
2.2 Shareholder protection in the 21st century.........................................................5
3 Methodology..................................................................................................6
3.1 Sources of information and reasons.................................................................6
3.2 Interview..................................................................................................6
3.3 Coding variables on shareholder protection.......................................................7
4 Results and discussion.....................................................................................8
4.1 Explanations / References.............................................................................8
4.1.1 Liquidity right index.................................................................................8
4.1.2 Information rights index.............................................................................9
4.1.3 Information rights index.............................................................................9
4.1.4 Self-dealing index..................................................................................11
4.1.2 Dilution protection index..........................................................................11
5 Conclusion and recommendation.....................................................................11
References........................................................................................................12

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 List of Tables

Table 1: Coding variables on shareholder protection.7

Table 2: Scoring of SPI variables...8

2
 List of Figures

Figure 1: Histogram of Shareholder Protection Index.5

Abbreviations

GNA - Ghana News Agency

UK - United Kingdom
USA - United States of America
AGM - Annual General Meeting
GSE - Ghana Stock Exchange

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 Abstract
The aim of this study is to examine the provision in the Companies Code 1963, (Act 179) in
providing adequate protection to shareholders. By using Acheson et al (2016) Shareholders
Protection Index (SPI) and interview with lawyers trained, and practicing or teaching Corporate
Law, we have investigated how the Companies Code helps or otherwise, in protecting
shareholders. The result of the overall index suggests ( out of a maximum score of 20) that the
Companies Code 1963, (Act 179) provides adequate level of legal protection of shareholders.

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1 Background
An economy's health has inseparably been linked with how responsive its company's law is to
the dynamics and rapidly changing business environment (Owusu-Dapaa, 2007). Law and
business are not mutually exclusive; they are complimentary. Therefore, the companies' code
must respond to the realities of the changing dynamics of Ghana's economic and business
environment. Many industry experts have bemoaned the once lauded provisions in Ghanas
Companies Code, 1963 (Act 179) as old and have lost their relevance in the 21st century
business environment (Owusu-Dapaa, 2007). Business environment in the 21st century enjoys a
much more fluidity given that change is constant in the very way businesses are operated
warranting a coherent re-examination of the whole. In line with these growing complexity in
doing business in the 21st century, countries around the world have adapted their company and
business law to sustain the rudiments of the ever changing business environment and competition
for external finance. This illustrates the point that a good law in 1963 might not necessarily be
good enough in the 21st century business environment due to the rapid changes in Ghanas
emerging free market economy. But, what is really obsolence about the country's companys
code? Issues such as protection of companies in distress, change of External Auditors, the need
for auditor's report from every entity incorporated, among others have been cited as some of the
reasons why the countrys companies code is unfriendly and outdated in addressing modern day
business needs (Dowuona, 2013). As a developing economy that wants to see local business
grow in spite of the difficulties, there is the need to ensure that the country's companies' code
provide adequate monitoring mechanisms, transparency and accountability (GNA, 2016). This
paper examines the provisions in the companies' code in relation to shareholders protection in
the 21st century.

1.1 Problem Statement

For about a decade, the private sector has been cited as the engine of growth in the Ghanaian
economy (Adjabeng, 2012). This overwhelming focus on the sector brings to mind very
important issues such as how organizations are run and how management interest is aligned with
that of the shareholders (Adjabeng, 2012). This; according to Becht et al. (2007) is attributable to
(1) worldwide privatization wave; (2) reforms in pension funds and growth in private savings;
(3) the 1980s takeover wave; (4) deregulation and integration of the capital market worldwide;

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and (5) crises. In Ghana, issues of shareholder protection are a matter of the Companies Code,
1963 (Act 179) and other industry specific laws, rules and regulations. There has, however, not
been any major study examining the provisions of the companies' code against shareholder
protection of the 21st century. Though, Adjabeng (2012) examined the corporate governance
architecture of Ghana but in respect of dispute resolutions. This current study is different as it
examines the provisions in the companies' code in providing adequate protection to shareholders.

1.2 Purpose and research questions

The purpose of this study is to examine the provisions in the companies' code in providing
adequate protection to shareholders. By this, we will investigate how the Companies Code, 1963
(Act 179) helps or otherwise, in protecting shareholders interest. This will be done answering
the following question:

1. Does the Company Code 1963 (Act 179) provide adequate shareholder protection against
boards and management?

1.3 Significance of the study

An examination of the provisions of the Companies Code 1963 (Act 179) in providing legal
protection of shareholders against boards and management illustrates the rigor of the Act to
handle changes in the complexity of governance and management of businesses in the 21st
century. It is also hoped that this study will provide an indication of where we are and what we
need to do in terms shareholder protection provisions in corporate and business laws of this
country that will increase investors' confidence and position Ghana at the forefront of the
investors community preferred destination for business in the sub region.

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2 Literature review
Accordingly, under common law, directors are obliged to act honestly in the interest of the
company. This philosophy was demonstrated in the precedent set in the 1883 case of Hutton v
West Cork Railway where the court held that: the test... is not whether [the action] is bona fide,
but whether as well as being done bona fide, it is reasonably incidental to the carrying on of the
company's business for the company's benefit. The court went on to say that the law does not
say there are to be no cakes and ale, but there are to be no cakes and ale except such act are
required for the benefit of the company.

Following this decision, courts both in UK and USA, interpreted the benefit of interest of the
company to mean the long term interest of members or shareholders as a whole. This settled the
very important question of what constituted the interest of the company as early as 1902.
Consequentially, the interest of the company has generally been said to represent the interest of
the members.

La Porta et al. (1996) amplifies the importance of law in matters of shareholders protection.
They posit that increase in legal protection of shareholders is critical; leading to a suggestion that
Civil Law countries work toward an Anglo-Saxon approach. On the trend in shareholder
protection across time, Lele and Siems (2007) report findings that suggests that legal shareholder
protection has been increasing in Germany, France, UK, USA and India. Specifically, the authors
noticed an enhancement in shareholder protection in the last five years between 2000 and 2005.

By using strength of investor protection index calculated by World Bank and data from 46
developing countries between 2006 and 2010, Komijani and Ahmadi (2012) investigated whether
levels of legal protection of shareholders. The authors confirmed that a more legal protection of
shareholders underpins a more expanded stock market.

2.1 Shareholder protection index

The groupings of countries according to their legal families strongly underpins the design of
shareholder protection. In their scholarly article Law and Finance La Porta and Lopez-de
Silanes (1998) conclude that Common Law countries provide favourable environments to
shareholders. Law and Finance examines 49 countries as per their legal families in respect of
shareholder protection, creditor protection and law enforcement. In order to judge the level of
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shareholder protection, the authors coded the following categories: One Share - One Vote, proxy
by mail allowed, shares not blocked before meeting, cumulative voting / proportional
representation, oppressed minority, pre-emptive right to new issues and the percentage of share
capital to call an Extraordinary Shareholder Meeting has to be less or equal to 10% of the votes.
The authors used binary coding (1 or 0). This was done in order to perform statistical
regressions. The authors reported findings that suggested that good shareholder protection leads
to more dispersed shareholders ownership, which can be seen as a proxy for developed capital
market. This approached has received a fair share of criticism by authors such as Siems (2008);
Lele and Siems (2007); Braendle (2006); just to mention a few. Critics have cited coding errors,
U.S. bias and failure to capture a meaningful picture of the law (Siems, 2008) as reasons why the
findings of La Porta and Lopez-de Silanes (1998) are inaccurate.

In 2008, Lele and Siems tabled argument for Leximetrics Index of shareholders protection. The
authors use 10 core variables on shareholders protection. That is, powers of the general meeting
for de facto changes, agenda setting power, anticipation of shareholder decision facilitated,
prohibition of multiple voting rights, independent board members, feasibility of directors
dismissal, private enforcement of directors' duties, shareholder action against resolutions of the
general meeting, mandatory bid and disclosure of major share ownership. In the study, the
authors used non-binary coding (1/2, 1/4, 3/8, 3/4, etc.)

Following the criticism that the law and finance hypothesis has generated in recent years,
Acheson et al. (2016) developed a more comprehensive shareholder protection index (SPI) based
on the articles of association. The authors suggest that SPI is a complete measure of the set of
protection afforded to shareholders. This index moves away from the more rigid and mandatory
requirements of shareholders protection and inculcate voluntary requirements. The SPI is
organized into five sub-indexes and set a minimum score of 0 and a maximum score of 20.
Scoring of the individual variables in each sub-indexes was done in a binary manner with the
exception of one (in the case of self-dealing index). The sub-indexes include: liquidity right
index; information right index; voice right index; self-dealing index; and dilution protection
index.

Acheson et al. (2016) posit that companies, via their article of association, commit to high levels
of protection for their shareholders in a legal environment that is laissez-faire. In the study, the

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authors reported findings they suggest that protection voluntarily offered by the majority of
companies was slightly higher than that afford today under statutory law. Again, they found a
negative correlation between liquidity right index and voice right index.

2.2 Shareholder protection in the 21st century

As the private sector is taking its rightful place in the development agenda of Ghana, the issues
of shareholders protection has gradually taken center stage on business platform. The
Organisation for Economic Co-operation and Development (OECD) in its Principles of
Corporate Governance emphasizes that the corporate governance framework should be based on
the protection and facilitation of the shareholders rights.

La Porta and Lopez-de Silanes (1998) suggest six shareholder rights which are critical for
shareholder protection and they sum these six rights to create they call anti-director rights index
(ADRI). The six rights are as follows: (a) shareholders are allowed to attend AGMs without
having to deposit shares before hand; (b) the capital needed to call an extraordinary meeting is
less than or equal to 10 per cent; (c) shareholders absent from shareholders meetings can vote
via a proxy; (d) shareholders have pre-emption rights, i.e., the first right to buy new stock; (e)
shareholders holding 10 per cent or more who object to fundamental changes by directors have
the right to challenge decisions in court or require company to buy their shares; (f) minority
shareholders have cumulative voting or proportional representation, whereby they can elect
board members.

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3 Methodology

3.1 Sources of information and reasons

Primary and secondary sources were used to gather information. The primary and secondary
sources were used to strengthen each other, through conveying different kinds of information in
practice as described by Holme and Solvang (1997). Due to the fact that different authors may
use the secondary data to answer their purpose, we used it with caution as it could be biased
(Bryman, 2000). Secondary data was used in this research report because it assisted to obtain
information which otherwise could have been difficult to assess such as literatures, information
on companies' code and its provision for shareholders' protection. Secondary data was collected
to investigate what shareholders' protection provision exist in the companies' code. The primary
source of data that we used was interview.

3.2 Interview
This approach was meant to collect primary data and to provide more and specific information
needed to make analysis of this research. Again, as we intended to study a specific case, an
interview with lawyers trained, and practicing or teaching could not be underestimated. Bearing
this in mind, we contacted AB & David Law at North Ridge with the aim to obtain a personal
interview with the Lead Partner on corporate law. This meeting was fruitful so we booked an
interview appointment. We also sent the interview guide (see appendix I for interview questions)
through the e-mail so that the respondent could prepare if any question may be difficult to
answer. Denscombe (2000) states that there are three approaches to choose from when
conducting an interview; structured, semi-structured and unstructured. A semi-structured
interview allows flexibility. The unstructured interview has an emphasis on the thought of the
individuals being interviewed. This type of interview does not follow any guidelines and
intervene as little as possible. We decided to conduct a structured interview as this type of
interview is characterized by strong control over questions and answers. We consider this
important in order to tailor the response to the predetermined factors already identified for
testing. We conducted the interview on October 28th 2016. The interview conducted was face-to-
face and lasted for approximately 30 minutes. Basically, this was a satisfactory time for the
respondent since he had to live for a meeting. However, the interview was not recorded.

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3.3 Coding variables on shareholder protection
The criteria below were consulted for the judgement of shareholder protection.

Table 1-: Acheson et al. (2016) Shareholder protection index (SPI)

1. Liquidity Liquidity rights index (Max = 3) is based on ability of shareholders to liquidate their holding during normal operations and when firm is in
rights index financial distress
- Approbation of transfer when fully paid: 0 if it exists, 1 if not
- Number of days transfer book is closed: 1 if =0; 0 if 1
- Capital loss triggers an automatic general meeting to decide whether to liquidate firm: 1 if exists, 0 if not

2. Information Information rights index (Max = 4) is based on ability of shareholders to access credible information on company
rights index - Shareholders have access to company books: 1 if yes, 0 if no
- Shareholders entitled to have company accounts mailed to them before AGM: 1 if yes, 0 if no
- Audited accounts: 1 if yes, 0 if no
- Auditor required to be shareholder (interests of shareholders and auditors aligned): 1 if yes, 0 if no

3. Voice rights Voice rights index (Max = 7) is based on the ability of minority shareholders to influence and vote on corporate decisions
index - Frequency of general meetings: 1 if >1, 0 if =1
- % shares needed to call extraordinary general meeting: 1 if 10%, 0 otherwise
- Number of shareholders required to force a poll or ballot at general meeting and there is no requirement in terms of how much capital those
shareholders own: 15, 0 otherwise (5 is Table A default)
- Proxy voting: 1 if yes, 0 if no
- Supermajority (i.e., 66.6% or more) not required to remove director = 1, 0 otherwise
- An upper limit on the number of votes for any one shareholder: 1 if exists, 0 otherwise
- Graduated voting scale which weights voting in favour of minority shareholders: 1 if exists, 0 otherwise
4. Self-dealing Self-dealing index (Max = 4) is based on checks upon the ability of directors to self-deal
index - Limits on directors profiting from contracts with firm where they are director: 2 if exists, 0 otherwise
- Director cannot vote on an issue where they are personally involved (e.g., a company shareholder) or has a personal relationship (usually
family) with a party entering a contract with the company: 1 if exists, 0 otherwise
- Ban on directors using company funds to purchase company shares: 1 if it exists, 0 otherwise (after 1887 this was illegal so every company
is scored as a 1 after that date)
5. Dilution Dilution protection rights index (Max = 2) is based on the protection afforded shareholders with regards to dilution of their rights
protection - Shareholders have pre-emptive rights on new share issues: 1 if yes, 0 if no.
index - Limits on directors borrowing powers: 1 is yes, 0 if no

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4 Results and discussion
We scored the default set of articles contained in the Companies Code, 1963 (Act 179) using
Acheson et al (2016) SPI. Table 2 reveals that SPI of the default articles in the Companies Code
1963 (Act 179). Notably, only 14 out of the 20 possible score was attained. This suggests a rather
encouraging level of shareholder protection on the back that the Companies Code 1963 (Act
179) was last amended in 2002 by the Companies Code (Amendment) Act 627.

<INSERT TABLE 2>

A look at the relative score of each sub-index (i.e. each sub-index equated to 1) reveals that the
companies code provides shareholder protection in a highest to lowest order: dilution protection
(1.00); voice right (0.86); liquidity right (0.67); information right (0.50); and self-dealing (0.50).

Figure 1: Histogram showing relative score of SPI Sub-index

Dilution protection 1

Voice rights 0.86

Liquidity rights 0.67

Information rights 0.5

Self-dealing protection 0.5

From the figure 1, we argue that based on Acheson et al. (2016) SPI, all five indexes play a
meaningful role in shareholders protection in Ghana. The results also reveal that priority is
placed on dilution protection rights. The dilution protection rights index is an important right for
minority shareholders as it ensures their cash-flow rights is not diluted or run the risk of creditors
assuming control of the company (Acheson et al., 2016). Again, according to the scoring results,
the Companies Code 1963 (Act 179) offers a more legal voice rights to shareholders, followed
by liquidity rights. However, the performance of the Companies Code 1963 (Act 179) in areas

8
such as information rights and self-dealing protection rights average what its protection offerings
in the case of dilution protection rights. Overall, we argue that the Companies Code helps in
providing adequate levels of legal protection to shareholders of Ghanaian companies.

4.1 Explanations / References

4.1.1 Liquidity right index
The ability of shareholder to liquidate the investment is a critical concern for shareholder and
anything which impinges on this could work counter to their interest.

Approval of transfer of shares when full paid: score =1

This index is concerned with the ability of director to approve share transfer in companies with
limited liability and fully paid shares. Section 95 (1) of the Companies Code, 1963 (Act 179)
provides for the transfer of shares without restriction except expressly stated in the companies
regulations. This then makes shares more liquid as shareholders face no risk of having their
shares transfer blocked by directors.

Number of days transfer book is closed: score =1

This index is concerned with whether shareholders were restricted in their ability to trade shares
around the dates of AGMs because the share transfer register of the company were closed for a
fixed period of time. Although, shares trading on the GSE have a maximum of 3 working days
for the transfer book of companies to be closed, the Companies Code, 1963 (Act 179) makes no
provision.

Capital loss triggers an automatic general meeting to decide whether to liquidate firm: score= 0

This component of the index is concerned with the right and abilities of shareholders (investors)
to liquidate the firm once a certain proportion of capital has been lost. In the current Companies
Code, 1963 (Act 179), there is no article or provision on this.

4.1.2 Information rights index

Shareholders have access to company books: score 0

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Section 123 (4) states that the books of account shall at all times be open to inspection by the
directors, secretary and auditors of the company, rather than members or shareholders.
Shareholders entitled to have company accounts mailed to them before AGM: score 1

Section 124 (1) stipulates that the directors of every company shall, at some date not later than
eighteen months after the incorporation of the company and subsequently once at least in every
calendar year at intervals of not more than fifteen months, cause to be prepared and sent to every
member of the company and to every holder of debentures of the company a copy of each of the
companys accounts.

Audited accounts: score =1

Section 124 (1) states that the companys account must be accompanied by an auditors report.
Thus, the accounts must be inspected by an independent auditor and a reasonable assurance
given as to the true and fair view of the companys account.

Auditor required to be shareholders (interest of shareholders and auditors aligned): score 0

This component is to ensure that shareholders and auditors interest are aligned. Currently, there
is no provision in the companies code that require auditors of companies to be shareholders.

4.1.3 Information rights index

Frequency of general meeting: score = 1

Section 149 (1) stipulates that every company shall in each year hold a general meeting as its
annual general meeting in addition to any other meetings in that year. This mean that the
frequency of general meetings any given year is greater than 1. This allows greater voice to be
exercised by shareholders.

% of shares needed to call extraordinary general meeting: score = 1

Section 297 (1) states that the directors of a public company, notwithstanding anything in its
Regulations, shall, on the requisition of members of the company holding not less than one-
twentieth of the shares of the company, or, in the case of a company limited by guarantee,
members of the company representing not less than one-twentieth of the total voting rights of all

10
members of the company, forthwith proceed duly to convene an extraordinary general meeting of
the company.

Number of shareholders required to force a poll or ballot at general meeting and there is no
requirement in term of how much capital those shareholders own: score = 1

Section 170 (1b) states that a poll shall be forced by at least three members present in person or
by proxy.

Proxy voting: score =1

Section 163 (1) states that any member of a company entitled to attend and vote at a meeting of
the company shall be entitled to appoint another person, whether a member of the company or
not, as his proxy to attend and vote instead of him and such proxy shall have the same rights as
the member to speak at the meeting.
Supermajority (i.e. 66.6% or more) not required to remove director: score =1

Subject to the provisions of section 300 of this Code and to the following subsections, a
company may by ordinary resolution at any general meeting remove from office all or any of the
directors notwithstanding anything in its Regulations or in any agreement with any director. That
is to say a simple majority.

An upper limit on the number of votes for any one shareholder: score =1

Section 50 (1) states that notwithstanding any provision in the Regulations, any equity shares issued
after the date of the commencement of this Code shall, carry the right on a poll at any general
meeting of the company to one vote, and to one vote only, in respect of each share.

Graduated voting scale which weights voting in favour minority shareholders: score = 0

Currently, there is no provision in the companies code that require auditors of companies to be
shareholders.

4.1.4 Self-dealing index

Limits on directors profiting from contract with firm where they are directors: score = 0

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Section 207 (1) states that unless otherwise provided in the company's Regulations, a director,
notwithstanding section 205 of this Code, shall be entitled to enter into a contract with the
company and, subject to compliance with section 203 of this Code and with subsections (2) to
(7) of this section, such contract or any other contract by the company in which any director is in
any way interested shall not be liable to be avoided nor shall any director be liable to account for
any profit made thereby by reason of such director holding that office or of the fiduciary
relationship thereby established.

Director cannot vote on an issue where they are personally involved (e.g. a company
shareholder) or has a personal relationship (usually family) with a party entering a contract
with the company: score = 1

Section 207 (7) states that a director shall not vote in respect of any contract or arrangement in
which he is materially interested.

Ban on directors using company funds to purchase company shares: score = 1

Section 205 paragraph (a) stipulates that a director shall not use for his own advantage any
money or property of the company or any confidential information or special knowledge
obtained by him in his capacity as director.

4.1.2 Dilution protection index

Shareholders have pre-emptive rights on new share issues: score =1

Regulation 10 (1) of tables A and B of the Companies Code, 1963 (Act 179) ensures that new
share issues are offered in the first instance to all existing shareholders to afford protection from
the dilution of their cash-flow rights.

Limits on directors borrowing powers: score = 1

Section 204 states that the directors shall not, without the approval of an ordinary resolution of
the company, exceed the powers conferred upon them by this Code and the company's
Regulations or exercise such powers for a purpose different from that for which such powers
were conferred notwithstanding that they may believe such exercise to be in the best interests of
the company.

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5 Conclusion and recommendation
This study examines the provisions in the companies code in providing adequate protection of
shareholders. Empirically, strong shareholders protection is associated with effective corporate
governance; which at industry level are matters of laws and regulations.

An important implication of this study is that the Companies Code 1963, (Act 179) is able to
handle the changing complexity and demand of shareholders in the 21 st century. Though,
marginal reforms in the areas of information rights and self-dealing protection rights are
necessary and could be regarded as a positive act towards expanding shareholders protection.

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References

Acheson, G. G., Campbell, G., & Turner, J. D. (2016). Common law and the origin of
shareholder protection (No. 16-03). eabh Papers.
Braendle, U. C. (2006). Shareholder Protection in the USA and Germany-Law and Finance
Revisited. German LJ, 7, 257.
Bryman, A. (2015). Social research methods. Oxford university press.
Denscombe, M. (2000). Furskningshandboken-fr smskaliga forskningsprojekt inom
samhllsvetenskaperna. Lund: Studentlitteratur.

Holme, I. M., Solvang, B. K., & Nilsson, B. (1997). Forskningsmetodik: om kvalitativa och
kvantitativa metoder. Studentlitteratur.

La Porta, R., & Lopez-de-Silanes, F. (1998). Capital markets and legal institutions. Beyond the
Washington consensus: Institutions matter, 73-92.
Lele, P. P., & Siems, M. M. (2007). Shareholder protection: a leximetric approach. Journal of
Corporate Law Studies, 7(1), 17-50.
OwusuDapaa, E. (2007). Reforming the Companies Code of Ghana: Which Way to Go?.
Commonwealth Law Bulletin, 33(2), 209-216.
Porta, R. L., Lopez-de-Silane, F., Shleifer, A., & Vishny, R. W. (1996). Law and finance (No.
w5661). National Bureau of Economic Research.
Siems, M. M. (2008). Shareholder Protection Around the World (Leximetric II*). Delaware
Journal of Corporate Law (DJCL), 33(1).

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