Introduction
Companies conduct their business by holding general and special meetings pursuant to Part XIII of the Companies Act 2015. These meetings are generally conducted by congregating an assembly of members. The COVID-19 crisis has necessitated social distancing measures to safeguard public health. Kenya passed the Public Health Act and the Public Health Act (Prevention, Control and Suppression of COVID-19) Regulations 2020 to further regulate the spread of the pandemic. Therefore, companies can no longer hold meetings as previously envisioned by meeting at a physical place.
Meetings are not only a question of decision taking by members but they are required by law as a form of compliance and reporting. Under Section 310 of the Companies Act 2015, public companies must hold an Annual General Meetings and file the annual returns to the Registrar of Companies.
Further, for public listed companies, paragraph 1.8 of Capital Markets Act Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya requires annual reports where they must disclose their activities and accounts for the financial year in question. Private companies, however, are bound by their Memorandum and Articles of Association, therefore the mode of holding minutes may be by physical meeting or by written resolutions.
Notably however, the scope for passing written resolutions is limited, as under section 262 (2) of the Companies Act, written resolutions may not be passed with respect to removal of company directors and company auditors. In the circumstances, holding physical meetings is inevitable to companies to conduct their daily business.
In this article we seek to highlight the legal issues surrounding decision making by companies during the COVID-19 pandemic: (1) the nature of the company constitution; and (2) the powers of the Court.
Company Constitution
A company conducts its business by the rules and regulations contained in the articles of association, for instance, how and when to conduct meetings. The Articles of Association and the resolutions are collectively known as the Constitution of the company. A company may have its own Articles of Association, customize the Model Articles of Association under the Companies Act 2015 or adopt the Model the Articles of Association.
Under Section 21 of the Companies Act 2015 the model articles will apply to the company if the company does not register its own articles or if it registers articles that do not exclude or modify the application of the model articles to the company.
A company’s Memorandum and Articles of Association operate as a ‘statutory contract’ under Section 30 of the Companies Act 2015. This means that the constitution binds the company and the members to the same extent as if the company and its members had entered into a personal covenant to fulfill its provisions (Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881).
Thus, the COVID-19 pandemic frustrates the obligations of members because the members can only make decisions regarding the company business in the manner prescribed under the Articles of Association. Indeed, many companies had not contemplated a situation where physical meetings would be a health risk and thus hampering business operations.
Private and Public Companies
Private companies are bound by their Articles of Association which provide leeway for the companies to amend their articles in order to hold virtual annual general meetings. Under Section 22 of the Companies Act, a company may amend their articles of association by way of a special resolution. A special resolution for purposes of the Act is a resolution passed by at least seventy five percent (75%) of the members (Section 257 (1) and (2) of the Companies Act).
Where the special resolution is by a private company and by way of written resolution, it must be proposed as a special resolution and be specifically passed as such. Private companies can therefore amend their Articles of Association by way of written resolutions, to provide for the company to hold their annual general meetings virtually.
Written resolutions
A written resolution, under Section 262 of the Companies Act 2015, is a document containing proposed actions and changes and on which members of a private company can signify agreement by communicating with the company. Such a resolution however, cannot be passed for the removal of a director or an auditor from office before their term in office expires.
The written resolution may be passed at a meeting of the company or may be circulated among the members by electronic means and in turn, the members can intimate their support or opposition to the content of the resolution by voting (Section 263 of the Companies Act 2015). A change through a circulated written resolution would allow them to hold meetings virtually if the articles did not contemplate the situation, we are in.
Pursuant to Section 255 of the Companies Act, resolutions for a public company can only be passed at a meeting of the members. Further under Section 275, such resolution will only be validly passed if notice of the meeting and the resolution is given and the meeting is conducted in accordance with the Companies Act 2015 and the Articles of Association. Public companies therefore, cannot make decisions by way of written resolutions.
Powers of the Court
As noted above, there are certain constraints in obtaining special resolutions by way of a written resolution. Large private companies whose members are scattered around the country may not have the opportunity to pass written resolutions.
In the recent High Court case of Bharat Kumar Thakar v Capital Marketa Authority, Miscellaneous Application No. E680 of 2020, the High Court being moved under section 280 of the Companies Act, granted companies the freedom to hold meetings without strict compliance to their Articles of Association due to the current impracticability. However, the freedom to hold meetings is conditional on the company obtaining approval from the Capital Markets Authority. The companies may hold virtual meetings and vote in other electronic means but they must also adhere to the other requirements of the Companies Act 2015, for example, issuing proper notice to members and observing quorum restrictions.
The order, however, did not apply to unlisted public companies and private companies. Therefore, unlisted public companies and private companies, ought to make an application under section 280 of the Act to the court for similar orders.
It is important to note that the issuance of an order to hold the annual general meeting under section 280 of the Companies Act is a discretion of the Court. The following are some of the factors that the Courts will consider in making the order.
- The Court will not allow its discretion to be used to infringe on the rights of shareholders (Harman v BML Group Ltd [1994] 2 BCLC 283);
- The court will not make the order without considering the right of a majority shareholder to remove or appoint a director (Union Music Ltd v Watson [2003] EWCA Civ 180);
- The court will not order a meeting if there is a possible but untried method to hold the meeting as per the articles of the company despite disagreements among the members (Might SA v Redbus Interhouse plc [2003] EWHC 3514 (Ch);
- The court will refuse to order the meeting if the effect of the order is to override quorum requirements of the shareholders’ agreement (Ross v Telford [1998] 1 BCLC 82, CA) and;
- Where the company is using the order to resolve a deadlock between two equal shareholders or to affect substantive voting rights or to shift the balance of power between the shareholders.
Further, as held by the Court in Njoroge Macharia & another v Registrar of Companies & another Ex-Parte & another [2017] eKLR), an order directing a company to convene and hold a general meeting will only issue where the court is satisfied that it is not possible for the company to convene the meeting in accordance with the Act or the Articles of the Company. An order of Mandamus will only be issued as a last resort where there is no other equally effective remedy to achieve the objective. For an order of mandamus to issue it must be shown that there is a specific and determinable duty to act and that the body mandated to so act has refused to act despite requests made to it to do so.
Conclusion
The pandemic has presented opportunities for inventive methods to continue with company business and to fulfill regulatory obligations. Companies are well advised to consider the pandemic as a teachable moment to draft articles that can anticipate various forms of impracticability that may prevent smooth running of operations especially in decision taking by members.
This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary as set out in the article should be held without seeking specific legal advice on the subject matter. If you have any query regarding the same, please do not hesitate to contact the following: Melanie Munyori or Wamuyu Mathenge vide melanie@wamaeallen.com or wamuyu@wamaeallen.com respectively.
About the author
Melanie is a transactional advocate specializing in real estate, securitization, banking and finance
