CORPORATE GOVERNANCE V

Question 1

What is the legal authority for the doctrine of corporate sovereignty?

Answer 1

Foss v Harbottle

The proper plaintiff in an action in respect of a wrong alleged to be done against a company is the company itself

Codified in Section 299 CAMA which says that only the company itself can sue for any wrong done against it

Question 2

What is the rationale behind the doctrine of corporate sovereignty?

Answer 2

1. It prevents multiplicity of suits
2. The company has a separate legal personality
3. The general principle in corporate governance is that the majority is supreme so the decision taken by the majority should determine the court of action of a company

Question 3

What are the exceptions to the majority rule?

Answer 3

1. Members Direct Action
2. Derivative Action
3. Relief on the grounds of unfairly prejudicial and oppressive conduct
4. Investigation of a company
5. Winding up on just and equitable grounds

Question 4

When can a company be wound up by the Court?

Answer 4

If the court is of the opinion that it is just and equitable that the company be wound up

Section 408(e) CAMA

Question 5

Who appoints inspectors to investigate a company?

Answer 5

The CAC. Such inspectors are to report on their findings

Question 6

When does CAC appoint inspectors to investigate a company?

Answer 6

Upon an application by the company
OR
its members holding not less than 1/4 of the issued shares (Section 314 CAMA) OR on declaration of the court that the company be investigated

Question 7

What powers do inspectors have?

Answer 7

The power to request for all books and documents relating to the company

Examine officers/agents of the company on oath

Investigate the affairs of a subsidiary or holding company

Question 8

How can CAC act after receiving a report from inspectors that carried out the investigation?

Answer 8

The CAC may bring civil proceedings against the company, if it is in the public interest to do so

The AG Federation may also bring criminal proceedings against the directors/officers if necessary

Question 9

Section 311 CAMA

Answer 9

Application for relief on the ground that the affairs of the company are being conducted in an illegal or oppressive manner

Question 10

Who are the persons entitled to apply to court for relief on the ground that the affairs of the company are being conducted in an illegal or oppressive manner?

Answer 10

1. A member
2. A director/former director
3. A creditor
4. CAC
5. Any other person who is in the court’s discretion a proper person to make the application

Question 11

What is a member’s direct action?

Answer 11

Where a member institutes a personal action/representative action to enforce a personal right

Section 300 CAMA

Question 12

What is the relief that may be granted under a Members Direct Action?

Answer 12

A declaration

OR

Injunction restraining the company or directors from doing a particular act

THERE IS NO ENTITLEMENT TO DAMAGES

Question 13

When can A declaration

OR an Injunction restraining the company or directors from doing a particular act be applied for?

Answer 13

1. Illegal or Ultra vires Acts
2. Irregular procedure
3. Infringement of member’s individual rights
4. Fraud
5. Impracticability of calling company meeting or calling company meeting in time
6. Directors have derived profit/benefit or are likely to from their negligence or breach of duty

Question 14

What is an Illegal or Ultra vires Act?

Answer 14

An act done by the company which the MEMART does not authorise

Question 15

What is Irregular procedure?

Answer 15

Doing an act they are authorised to do under the MEMART but without the correct/appropriate procedure e.g. ordinary resolution when special resolution should have been used

Question 16

When is Infringement of member’s individual rights said to have occurred?

Answer 16

An act of the company particularly directed at an individual or class of members e.g. refusing to pay dividend to certain shareholders

Question 17

What can be done if it is Impracticable to call a company meeting or call a company meeting in time

Answer 17

Where the urgency of the situation requires a quick resolution and calling a company meeting is impossible or may cause delay that would result in serious loss or harm to the company, members may seek redress from the court by way of injunction/declaration

Question 18

What is a derivative action?

Answer 18

An application for leave of court to bring an action in the name or on behalf of a company or an application to intervene in an action in which the company is a party for the purpose of prosecuting, defending or discontinuing the action on behalf of the company

Section 303 CAMA

Question 19

What are the pre-conditions required for a derivative action?

Answer 19

1. Wrongdoers are the directors and they will not take the necessary action
2. The applicant has given reasonable notice to the directors of his intention to apply to court if they fail to act
3. The applicant is acting in good faith
4. Taking such action appears to be in the best interest of the company

Question 20

What is the majority rule?

Answer 20

The general principle in corporate governance is that the majority is supreme so the decision taken by the majority should determine the court of action of a company

Question 21

Who can apply for a derivative action?

Answer 21

1. a current or former register holder, beneficial owner
2. a current or former Director/officer of a company
3. The CAC
4. Any other person who in the court’s discretion is a proper person to make an application