GROUP 3A.

LAW OF BUSINESS ASSOCIATION.

SHAKINAH ONDITI MORAA LAW/M/0916/09/23

HURSTON MOTURI MOTOKI LAW/M/0896/09/23
DISNEY OMENGE MANDERE LAW/M/1015/09/23
MWAHANGA PURITY MAPENZI LAW/M/1028/09/23
MARGARET BILHA NYONGESA LAW/M/1019/09/23
WALELA SHERATON NAFULA LAW/M/0968/09/23
OWEK FAITH VALENTINE LAW/M/0923/09/23
PEREZ AWOUR LAW/M/0998/09/23
KEZIAH WACHIRA LAW/M/1017/09/23
JOY RABERA LAW/M/0755/09/23
ROSE KANAGA LAW/M/2735/09/22

LEGAL CONSEQUENCES OF INCORPORATION.

1. Limited Liability.
 Incorporation provides shareholders with limited liability, meaning their financial
responsibility for the company’s debt is limited to their unpaid shares. (The
shareholder’s personal property or assets are safe from the company’s debts.)

Salomon v Salomon & co Ltd (1897).

FACTS.

Mr. Salomon was a successful boat manufacturer who incorporated his business under the
Company’s Act 1862, forming Salomon & co ltd. He transferred his sole proprietorship
to this newly formed company, receiving shares and debentures in return. Salomon had
20,001 of the 20,007shares, with the remaining shares held by family members to meet
the statutory requirements of having at least seven shareholders.

Shortly after incorporation, the company faced financial difficulties and was placed into
liquidation. The liquidator sought to hold Salomon personally liable for the company’s
 debt, arguing that the company was merely a façade for Salomon’s business interests and
had used it to defraud creditors. The liquidator contended that because Salomon
controlled the majority of the shares and was the sole director, the company should not be
treated as a separate legal entity.

ISSUES.

a. Whether Salomon & co ltd was a legitimate company.

b. Whether Salomon could be held liable for its debts despite his majority
ownership.

RULING.

The house of lords ruled in favor of Salomon, affirming that A. Salomon & co ltd
was indeed a separate legal entity from its shareholders, including Salomon himself.
The court emphasized that the law recognized the company as an independent body
with its own rights and obligations, regardless of who owned or controlled it.

ANALYSIS.

The doctrine of corporate personality established in this case ensures that individuals
can invest in companies without risking their personal assets, provided they adhere to
legal standards in forming and operating those companies.

2. Perpetual Succession.
 Incorporated companies enjoy perpetual succession, allowing them to exist
indefinitely regardless of changes in ownership or management. (Their existence
is not affected by changes in ownership or the death of shareholders or directors,
they continue to operate until legally dissolved.)

JUBILEE COTTON MILLS (NO. 2) v LEWIS (1920).

FACTS.

Lewis was a promoter of the Jubilee cotton mills, which was established to purchase and
operate a cotton mill. The memorandum and articles of association were submitted to the
Registrar on January 1, 1920 and the company was officially registered on January 8,
 1920. However, the certificate of incorporation bore the date of January 6, 1920, which
on that date, a significant number of shares were allotted to individuals who sold the mill
to the company, with many of these shares transferred to Lewis.

The liquidator of Jubilee Cotton Mills later sought to challenge the validity of these share
allotments, arguing that since the company was not officially registered until January 8,
any transactions conducted before the date were invalid. The liquidator contended that
Lewis’s actions were not legitimate because they occurred before the formal
incorporation, raising questions about whether such transactions could be recognized
legally.

ISSUES.

a. Whether the allotment of shares was valid as it was executed “from the date of
incorporation.”

RULING.

The court interpreted section 16(2) of the Company’s Act to mean that all actions
taken on the date of incorporation are recognized as legitimate. This ruling asserted
that a company continues to exist independently regardless of changes in ownership
or management. Thus, even if shares were allotted before formal registration, they
were valid because they occurred within the context of a legally recognized entity as
established by its incorporation.

3. Capacity to own property.

 An incorporated company can own property in its name, independent of its
shareholders or directors which enables companies to acquire assets essential for
their operations.

MACAURA v NOTHERN ASSUARANCE CO. LTD (1925).

FACTS.

Mr. Macaura sold timber from his estate to a company, Irish Canadian Sawmills Ltd, in
exchange for shares. He subsequently insured the timber in his own name. When the
timber was destroyed by fire, Northern Assurance refused to pay out on the insurance
 policy, arguing that Macaura had no insurable interest since the timber belonged to the
company, not to him personally.

ISSUES.

Whether Mr. Macaura had an insurable interest in the timber he insured, which was
owned by Irish Canadian Sawmills ltd after selling it.

RULING.

The house of lords ruled that Macaura could not claim insurance for the timber as he had
no legal or equitable interest in it. The court determined that upon incorporation, the
company becomes a separate legal entity, distinct from its shareholders which means that
shareholders may hold shares in the company but do not possess direct rights over its
assets.

4. Ability to sue and to be sued.

 Incorporated companies have the legal standing to initiate lawsuits or be sued in
their own name, facilitating legal accountability and protection of rights.

KENYA COMMERCIAL BANK LTD v TATU CITY LTD (2014).

FACTS.

The plaintiffs, Nyaga and Vimal, were directors of Tatu city ltd and Kofinaf Ltd, both
public liability companies. They alleged that their fellow directors, Jennings, Holliday
and Horn acted unlawfully by unilaterally removing Nyaga as chairman and altering the
bank signatories without proper board approval.

This led to a series of legal actions aimed at reversing the changes made to the board and
restoring the company’s operations amidst claims of financial management. The situation
escalated when the foreign partners outvoted the local partners in Kofinaf’s board
meeting, resulting in decisions that were contested by Nyaga and Vimal which made
them seek legal redress in the high court arguing that the actions taken by Jennings and
others constituted a breach of fiduciary duty and fraud.

ISSUES.
 Whether Nyaga had the standing to sue on behalf of Tatu City Ltd and Kofinaf Ltd given
their roles as directors and shareholders.

RULING.

The court ruled that both Tatu City Ltd and Kofinaf Ltd had the capacity to sue and be
sued as separate legal entities, independent of their shareholders or directors.

The court recognized that incorporation confers upon a company its own legal
personality, allowing it to engage in legal proceedings without necessitating direct
involvement from its members.

5. Regulatory Compliance Obligations.

 Incorporated companies must comply with various statutory requirements,
including filling annual returns and maintaining proper financial records, which
ensures transparency and accountability.

KENYA POWER & LIGHTING CO. LTD (2008).

The plaintiff, a customer challenged the utility of the company’s practice of

disconnecting electricity supply due to unpaid bills. The plaintiff raised concerns
regarding the accuracy of their electricity bills claimed that Kenya power had
disconnected their service without providing adequate notice or following the proper
procedures as outlined in the relevant regulations.

The plaintiff therefore argued that the company had not followed due process as
required under the applicable regulations, specifically regarding notice and the
opportunity to settle outstanding bills before disconnection.

ISSUES.

Whether Kenya Power had complied with its regulatory obligations regarding
consumer disconnections.

RULING.

The court concluded that Kenya Power had failed to comply with its regulatory
obligations by not providing sufficient notice prior to disconnection. It emphasized
 that as an incorporated entity, Kenya Power was bound by both its internal policies
and external regulatory frameworks.

Differences Between Holding and Subsidiary Companies

A hypothetical example will clarify the relationship between a holding and subsidiary company.

Example:

ABC Investments Ltd. (Holding Company): ABC Investments Ltd. is a large holding
company that focuses on strategic investments across various sectors. It does not engage directly
in any operational activities. Instead, ABC Investments Ltd. owns shares in different companies
across diverse industries. Its income is derived primarily from dividends, interest, and capital
gains from these companies.

ABC Investments Ltd. has ownership stakes in the following companies:

1. XYZ Manufacturing Ltd. (Subsidiary)

2. Green Energy Solutions Ltd. (Subsidiary)
3. GlobalTech Innovations Ltd. (Non-Subsidiary Investment)

Structure:

 XYZ Manufacturing Ltd.: ABC Investments Ltd. owns 70% of the shares in XYZ
Manufacturing Ltd., giving it the ability to control the composition of the board of
directors and influence major decisions within the company. XYZ Manufacturing Ltd.
produces consumer electronics and operates in its own right, with a separate management
team handling day-to-day operations.

Although ABC Investments Ltd. has significant control over XYZ, it does not interfere
with operational decisions such as product design, employee management, or sales
strategy. Instead, it provides strategic oversight, ensuring that the subsidiary aligns with
ABC's overall financial and business objectives.

 Green Energy Solutions Ltd.: ABC Investments Ltd. owns 100% of the shares in Green
Energy Solutions Ltd., making it a wholly-owned subsidiary. Green Energy Solutions
Ltd. specializes in renewable energy projects and operates in the green energy sector.
Despite being wholly-owned, Green Energy Solutions Ltd. has its own management
team, which handles project execution, regulatory compliance, and client relationships.

ABC Investments Ltd. periodically reviews Green Energy's performance through its
board but leaves operational decisions to the subsidiary's management team.

 GlobalTech Innovations Ltd.: ABC Investments Ltd. holds 15% of GlobalTech

Innovations Ltd., a technology startup. Since ABC holds less than 50% of the shares, it is
 not considered a subsidiary but an investment. ABC cannot control the board of
GlobalTech, nor does it have voting control, meaning it cannot dictate major decisions
within GlobalTech Innovations Ltd.

Control, Liability, and Financial Reporting:

 Control: ABC Investments Ltd. controls XYZ Manufacturing Ltd. and Green Energy
Solutions Ltd. as subsidiaries because it owns more than 50% of their shares. In the case
of GlobalTech Innovations Ltd., ABC has no control, only an investment stake.
 Liability: If XYZ Manufacturing Ltd. or Green Energy Solutions Ltd. incurs significant
debts or faces a lawsuit, ABC Investments Ltd. is not automatically liable for these debts,
as both subsidiaries are separate legal entities. However, should ABC Investments Ltd. be
proven to have directly involved itself in wrongful activities, liability might extend to the
holding company.
 Financial Reporting: ABC Investments Ltd. must consolidate the financial statements of
XYZ Manufacturing Ltd. and Green Energy Solutions Ltd. into its own financial reports.
This means that ABC's financial statements will reflect both the profits and losses of
these subsidiaries. GlobalTech Innovations Ltd., being a non-subsidiary investment, will
not be consolidated but may be reported as an investment in ABC’s financial statements.

Risk Management and Operations:

 Risk Management: By holding diverse investments in sectors like consumer electronics

and renewable energy, ABC Investments Ltd. reduces its risk. For example, if the
electronics market faces a downturn, losses in XYZ Manufacturing Ltd. could be offset
by gains in Green Energy Solutions Ltd., which operates in a booming renewable energy
market.
 Business Operations: ABC Investments Ltd. does not engage in the daily operations of
XYZ Manufacturing Ltd. or Green Energy Solutions Ltd. Each subsidiary operates
independently, producing goods and services within its own sector, managing its
workforce, and dealing with industry-specific risks. ABC’s role is to provide governance
and strategic guidance from a high-level perspective.

This hypothetical example demonstrates how a holding company exercises control over its
subsidiaries, manages risks through diversified investments, and limits its liability, while its
subsidiaries retain operational independence.

The relationship between holding companies and their subsidiaries is critical in the corporate
structure, where a holding company exercises control over another company (subsidiary).1 This
relationship carries distinct legal, financial, and operational characteristics that shape how each
entity functions, with implications for corporate governance, liability, risk management, and
financial reporting. Below is a substantive analysis of these distinctions.
1
Daems, Herman P. The holding company and corporate control. Vol. 3. Springer Science & Business
Media, 2012.
1. Control and Ownership

Holding Company: A holding company exerts significant control over its subsidiary 2by
controlling the composition of the subsidiary's board of directors, holding more than half of its
voting rights, or owning more than half of its issued share capital. The holding company
typically does not engage in the day-to-day management of the subsidiary but retains the power
to influence major decisions, including strategic direction.3

The control that a holding company exercises can come through either full or majority ownership
of the subsidiary’s shares. The legal structure of a holding company allows it to be the parent
entity, and its control can be exercised indirectly or directly, depending on how the ownership of
shares is structured.

Subsidiary Company: A subsidiary, on the other hand, remains a distinct legal entity that
operates under its own management structure, even though its ownership is controlled by the
holding company. 4The holding company’s control does not alter the fact that the subsidiary is
responsible for its own operations and must function within its jurisdiction's regulatory
framework. Therefore, the subsidiary retains its legal independence in matters of governance and
operational management.

2. Liability

Holding Company: One of the significant distinctions in this relationship pertains to liability. A
holding company enjoys limited liability, which means that it is generally not liable for the debts,
obligations, or liabilities incurred by its subsidiaries. The limited liability structure ensures that
the holding company’s exposure to the subsidiary's losses is limited to the capital invested in the
subsidiary. However, this general rule has exceptions. In cases where it can be demonstrated that
the holding company was involved in wrongful conduct or if there is substantial overlap in the
operations of the two entities, courts may “pierce the corporate veil” and hold the holding
company liable for the subsidiary’s debts.

In cases of wrongful trading, fraudulent trading, or significant mismanagement, where the

holding company actively participates or engages in the business operations of the subsidiary in a
way that blurs the lines of independence between the two entities, liability can extend to the
holding company. Nevertheless, the principle of corporate separateness ensures that the default
position is limited liability unless specific legal grounds exist to override that presumption.

2
Daems, Herman P. The holding company and corporate control. Vol. 3. Springer Science & Business
Media, 2012.
3
Mudambi, Ram, and Pietro Navarra. "Is knowledge power? Knowledge flows, subsidiary power and rent-
seeking within MNCs." The Eclectic Paradigm: A Framework for Synthesizing and Comparing Theories of
International Business from Different Disciplines or Perspectives. London: Palgrave Macmillan UK, 2015.
157-191.
4
Blumberg, Phillip I. "The corporate entity in an era of multinational corporations." Del. J. Corp. L. 15
(1990): 283.
Subsidiary Company: A subsidiary, being a separate legal entity, is directly responsible for its
own liabilities and obligations.5 This means that if a subsidiary incurs debt or faces legal claims,
the creditors or claimants must seek redress from the subsidiary itself, not the holding company.
The subsidiary's independent legal status ensures that its liabilities remain separate from the
parent company unless there are exceptional circumstances warranting the extension of liability
to the holding company.

3. Financial Reporting

Holding Company: A holding company is required to consolidate the financial statements of its
subsidiaries into its own financial reports6. This means that the assets, liabilities, income, and
expenses of the subsidiary are included in the holding company's financial statements, providing
a comprehensive picture of the group’s financial performance. Consolidated financial reporting
ensures that stakeholders, such as shareholders and regulators, can assess the overall health and
financial standing of the entire group of companies.7

Consolidation is necessary under various accounting standards, such as the International

Financial Reporting Standards (IFRS), where it is required to give a true and fair view of the
holding company’s financial position. The financial performance of the subsidiary, whether
positive or negative, is reflected in the holding company’s consolidated accounts.

Subsidiary Company: A subsidiary maintains its own financial records and prepares separate
financial statements. 8These financial reports reflect the subsidiary's operations, revenues, and
liabilities independent of the holding company. Despite its inclusion in the holding company’s
consolidated financial reports, the subsidiary's own financial reporting remains crucial for
regulatory and operational purposes. It is a legal requirement in many jurisdictions for
subsidiaries to file their financial statements with local authorities, ensuring transparency and
accountability.

4. Management

Holding Company: The holding company generally does not engage in the day-to-day
management of the subsidiary’s operations9. Instead, it provides oversight and strategic guidance
to ensure that the subsidiary’s operations align with the broader goals of the holding company.
The level of involvement in management can vary depending on the subsidiary’s importance to
the group’s overall objectives, but direct involvement is usually limited to governance issues
rather than operational matters.

5
Blumberg, Phillip I. "The corporate entity in an era of multinational corporations." Del. J. Corp. L. 15
(1990): 283.
6
Kracke, Edward A. "Consolidated financial statements." Journal of accountancy 66.6 (1938): 4.
7
Biancone, Paolo, Silvana Secinaro, and Valerio Brescia. "Popular report and Consolidated Financial
Statements in public utilities. Different tools to inform the citizens, a long journey of the
transparency." International Journal of Business and Social Science 7.1 (2016): 111-124.
8
Shah, Paresh. Financial accounting for management. Oxford University Press, 2013.
9
Douglas, William O., and Carrol M. Shanks. "Insulation from liability through subsidiary
corporations." The Yale Law Journal 39.2 (1929): 193-218.
The holding company may, however, influence the subsidiary through its representation on the
board of directors, but it typically leaves the operational decision-making to the subsidiary’s
management team. By focusing on oversight and long-term strategy, the holding company
ensures that it benefits from the subsidiary’s performance without micromanaging its day-to-day
activities.

Subsidiary Company: A subsidiary has its own management team responsible for handling its
operational activities. It functions as an independent entity and operates within its industry sector
or market segment. The subsidiary's management team is responsible for meeting the business
objectives set by the company and ensuring compliance with industry regulations and standards.

The level of autonomy a subsidiary enjoys can depend on the holding company’s policies, but in
most cases, subsidiaries are left to manage their operations within the framework established by
the parent company.

5. Business Operations

Holding Company: A holding company typically does not engage in operational activities10. Its
role is primarily that of an investor or owner of other companies. It derives its income from
dividends, interest, or other financial returns from its subsidiaries or other investments. The
holding company’s lack of operational involvement means that its risk exposure is more limited
compared to entities actively involved in daily business transactions.

This passive approach allows the holding company to focus on managing its investments and
ensuring that its portfolio of subsidiaries performs optimally. By not being operationally
engaged, the holding company also avoids direct exposure to market risks or industry-specific
challenges that may affect the subsidiary.

Subsidiary Company: In contrast, a subsidiary is directly involved in the operational activities

of its business. It manufactures products, provides services, or engages in commercial
transactions that generate revenue. Its performance is subject to the market conditions and risks
associated with its specific industry. This operational focus means that a subsidiary faces more
immediate challenges and opportunities compared to its holding company.

6. Risk Management

Holding Company: A holding company benefits from the ability to spread its investment risk
across multiple subsidiaries operating in various industries or regions. By diversifying its
investment portfolio, the holding company reduces its overall risk exposure. If one subsidiary
underperforms or faces financial difficulties, the holding company can offset those losses with
gains from other subsidiaries, thereby managing risk more effectively.

This diversified approach also allows holding companies to capitalize on opportunities in

different sectors without becoming overly reliant on the performance of a single subsidiary.

10
Kumar, Anjali. "The state holding company." World Bank Discussion Paper l87 (1992).
Subsidiary Company: A subsidiary faces the risks specific to its industry and geographic
location. It is directly affected by external factors such as market volatility, regulatory changes,
or competition within its sector. While it may benefit from the strategic guidance of the holding
company, the subsidiary bears the brunt of industry-specific risks.

7. Regulatory Requirements

Holding Company: A holding company must comply with the legal framework established by
the Companies Act and other relevant regulations governing corporate governance and financial
reporting. These regulatory requirements ensure that the holding company operates transparently
and in accordance with the law.

Subsidiary Company: A subsidiary is subject to the legal and regulatory requirements of its
jurisdiction and industry. It must comply with specific industry regulations, labor laws, tax laws,
and other legal obligations to operate legally. The subsidiary's compliance with these regulations
is critical for maintaining its legal standing and avoiding penalties.

In conclusion, while holding and subsidiary companies are legally distinct entities, their
relationship is characterized by the holding company’s control and oversight over the subsidiary,
without engaging in direct operational activities. The subsidiary remains responsible for its day-
to-day business, liabilities, and industry-specific risks, whereas the holding company benefits
from limited liability, diversified risk management, and consolidated financial reporting.

Conversion of companies from private to public

The process of converting a private company to a public company in Kenya involves several
steps, including legal, financial, and regulatory requirements. The relevant laws guiding this
process include the Companies Act, 2015, the Capital Markets Act (Cap 485A), and the NSE
Listing Rules. Below, is a breakdown of each aspect of this transformation.

1. Preparation Phase

Financial Records and Corporate Restructuring

The company must prepare by ensuring its financial records are up-to-date and meet the
transparency standards required for a public company. Typically, the company will engage
investment banks, auditors, and legal advisors to oversee this preparation. The financial health of
the company is critically assessed by these professionals to confirm that it is stable and can
attract public investors.
Amendments to Company Documents

The Articles of Association must be amended to align with the requirements of a public company
as stated in section 10 of the Companies Act, including removing clauses that restrict the transfer
of shares or limit the number of shareholders. Amendments to the Articles must be approved by a
special resolution of the shareholders.

2. Approval by the Board of Directors and Shareholders

A board resolution is required to approve the decision to go public. This is followed by a special
resolution, where at least 75% of the shareholders must approve the transition.

Filing with the Registrar of Companies

Conversion Application

The company must file an application with the Registrar of Companies to officially convert from
a private to a public entity. The application must include:

 a copy of the name reservation

 a copy of the special resolution approving the conversion of the company to a public
company;
 a copy of the amended articles of association;
 a copy of the relevant balance sheet;
 a copy of the auditor’s written statement
 a copy of the auditor’s unqualified report
Change of Company Name

The company’s name is changed to include the term "public limited company (PLC)" to signify
its new status.

3. Approval from the Capital Markets Authority (CMA)

Preparation of the Prospectus

A prospectus is a key document that provides potential investors with comprehensive

information about the company's business, financial condition, risks, and the use of the funds to
be raised. Section 30A (4) and section 30BThe Capital Markets Act mandates that the company
file this prospectus with the Capital Markets Authority (CMA) for approval. The CMA
scrutinizes the document to ensure transparency and adequate information for protecting
investors.

Due Diligence and Approval

The CMA undertakes a due diligence exercise, including background checks on the company’s
financial statements, business operations, and the credibility of directors. Once the CMA is
satisfied that the company meets all regulatory requirements, it grants approval for the IPO.

4. Listing on the Nairobi Securities Exchange

Application to NSE

The company must apply to the Nairobi Securities Exchange (NSE) to list its shares for public
trading. The NSE evaluates whether the company meets its listing requirements, which include
minimum capital thresholds, profitability, governance standards, and other specific conditions.
Compliance with NSE Listing Rules is mandatory, which includes having a sufficient number of
shareholders and issuing a minimum number of shares to the public.

Appointment of Underwriters and Advisors

The company often appoints underwriters to help guarantee the success of the IPO by buying any
shares that are not sold during the public offering. Legal advisors and stockbrokers also play
significant roles in facilitating the listing process.

5. Public Offering and Trading

Initial Public Offering (IPO)

Once the CMA and NSE have approved, the company issues share to the public through an IPO.
Investors, including individuals and institutions, can purchase shares. The Capital Markets
(Securities) (Public Offers, Listing, and Disclosures) Regulations, 2002 specify the details that
must be disclosed to potential investors during this phase.

Listing and Commencement of Trading

After the IPO, the company is officially listed on the NSE, and its shares can be traded on the
exchange. The NSE provides a platform for the shares to be freely bought and sold by investors.

6. Post-Listing Compliance

Continuous Disclosure Requirements

After listing, the company must comply with NSE’s continuous reporting requirements, which
include publishing quarterly and annual financial reports, holding annual general meetings
(AGMs), and ensuring all shareholders are informed of significant decisions.

Section 275(a) of the Companies Act, 2015 now requires all public companies to hold AGMs,
and failure to do so can lead to fines.

Corporate Governance Standards

The company must adhere to corporate governance guidelines, ensuring transparency,

accountability, and protecting minority shareholders’ interests. Compliance with the Code of
Corporate Governance Practices for Issuers of Securities to the Public, 2015 is crucial, covering
board responsibilities, ethical practices, and risk management.

Motivations for Going Public

Access to Capital: Going public allows the company to raise substantial funds from the public,
which can be used for expansion, reducing debt, or other corporate purposes.

Increased Visibility and Prestige: Listing on the NSE increases the company's visibility and
credibility, making it easier to attract partners, customers, and further investments.

Liquidity for Shareholders: Shareholders, including early investors and founders, can sell their
shares in the public market, providing liquidity.

Safaricom PLC is a prominent example of a private company that went public successfully. It
issued shares through an IPO in 2008, attracting a significant number of retail and institutional
investors. Its IPO was instrumental in enabling rapid growth and infrastructure investment.
Kenya Airways also underwent a public offering, allowing the Kenyan public and government to
own a part of the national airline.
Conversion of public companies to private companies

While public companies enjoy funding from the public, they sometimes end up facing challenges
in handling their large compliance requirements. This leads some public companies to convert
them into private limited companies. The Companies act of 2015 and the companies’
incorporation rules of 2014 dictate the conversion of these companies.

Below are the procedures followed in the conversion of the company.

1. Board meeting
The company shall send a notice of seven days alerting the board members of the
meeting to be held.

In the meeting, the board shall take into consideration the following for approval;

i) The conversion from public to private.

ii) Approval for amendment of the memorandum of association and articles of
association.
iii) To fix a time and date for a general meeting.

2) General meeting
A meeting shall be set 21 days after a notice is sent according to section 278 of the
Companies act.
The directors must create a copy of the proposed resolution of the conversion in the notice
sent.
In the meeting, the members shall approve the conversion of the company and the
amendment of the necessary documents.

3) Filling of theMGT-14
This form is signed after 30 days of the general meeting where the special resolution passed
with the required documents attached shall be filed by the Registrar of Companies.

4) Form INC 25A

 The company at least 21 days before the date of application for the conversion, shall make an
advertisement in the Form INC 25A.
The same notice shall be served to the creditors, debenture holders of the company and the
regulatory authorities.

5) Drafting of an application
An application shall be drafted and given to the Registrar of Companies.It shall contain the
amended memorandum of association, the articles of association, the resolutions passed by
the shareholders and other documents.
It shall also contain the effect of the conversion on the shareholders, creditors, debenture
holders and other related parties.
The company shall also change its name to include (Pvt) to signify its new status in respect to
section 63 of the companies act.
The registrar may ask for resubmission of the applications if certain information is unclear or
unsatisfactory.

6) Approval
If good, the conversion process after the required inquiry, shall be instituted to the applicants.
The registrar shall file the receipts of approval.

7) Post compliances of conversion

All necessary changes shall be made in all documents, advertisements, books and other
items.
Changes shall be made to banks, the income tax department, insurance and other regulatory
authorities.

Advantages of the conversion

a) It is easier to exercise greater control over a private company.
b) Various provisions in the company act do not apply in private companies.
 c) No requirement of statutory meetings or statutory reports.
d) No undesirable shareholders.
e) Absolute Control and Management of the company
f) No restriction on remuneration.

RESIDENCE OF A COMPANY

Residence of a company is defined as the jurisdiction that covers the place where a body is
registered and carries on business.11

Resident, when applied in relation to a body of persons, means that the body is a company
incorporated under a law of Kenya or that the management and control of the affairs of the body
was exercised in Kenya in a particular year of income under consideration; or that the body has
been declared by the Minister by notice in the Gazette to be resident in Kenya for any year of
income.12

A company is considered resident in Kenya if it is incorporated under Kenyan Law or if the

management and control of its affairs are exercised in Kenya for any given year of income. It is
also considered resident if the Cabinet Secretary, National Treasury & Planning declares the
company to be tax resident, for a particular year of income in a notice published in the Kenya
Gazette.13

The Registrar of Companies is responsible for business registrations in Kenya. He/she issues
certificates of compliance for foreign companies, certificates of incorporation for local
companies and certificates of registration for sole proprietorships and partnerships. 14 Companies
incorporated outside of Kenya can do business in Kenya by registering a branch. The registrar of
companies issues a certificate of compliance once all the requirements have been met.

11
Black’s law dictionary, https://thelawdictionary.org>finance
12
Income Tax Act(of 2021), section 2
13
Margaret Gachina , ’ understanding corporate income tax’ KRA
14
eRegulations Kenya https://eregulations.invest.go.ke
Documents Required for Incorporation

1. Company registration form (Form CR1)

2. Application for reservation of a company name (Form CR14)
3. Particulars of the directors and secretary (Form CR2and Form CR10)
4. Statement of the company’s nominal capital
5. The company’s articles of association.
6. The residential address of directors and company secretary (Form CR8 and CR12)
7. A copy of the Kenyan national identification of each director and/or secretary or, copy of
the Kenyan foreigner certificate, or in the case of a director who is not a Kenyan citizen
and is not resident in Kenya, a copy of that director’s passport.15
8. A passport-sized photograph of each director and/or the company secretary (where
applicable)

Obligations of a company that is incorporated in Kenya in terms of tax

There are various tax obligations that companies that are residents of Kenya should meet. These
are:

1. corporate income tax -This tax is payable by both resident companies at the rate of 30%
and non-resident companies at the rate of 37.5%.16
2. Value Added Tax- mandatory under section 34 of the VAT Act No. 35 of 2013.
3. Annual returns- this is clearly stipulated in the Company’s Act under section 705(1)
(Duty of company to lodge annual returns with the Registrar.) 1) Every company shall

15
KIOI & co Advocates https://www.kioi.co.ke>incorporation-of-companies
16
Margaret Gachina , ’ understanding corporate income tax’ KRA
submit to the Registrar successive annual returns each of which is made up to a date not
later than the date that is from time to time the company's return date.