body corporate

When a body corporate owns a piece of another company

Among many ‘briefs’ a lawyer enjoys handling, ‘a Body Corporate’ experiencing complex legal issues may not be one of them. A body corporate is a legal entity with a name. It can be a company, firm, institution, etc., and the complex legal issues may come when the named legal entity owns shares in another company, acts as another company’s director or secretary. In performing the latter two duties, it is called a ‘corporate director or corporate secretary’, respectively.

Often, clients do not know or understand the boundary between a parent company and its body corporate member/shareholder/director/secretary but this article will delve into some of those boundaries.

Being an ‘artificial person’, a body corporate functions through its directors or persons obligated to act on its behalf. These directors are ‘natural’ persons who execute documents and handle a company’s operations on its behalf. Therefore, if the company acts as a corporate director or corporate secretary of another company, the former’s legal/natural directors will be responsible for performing its obligations in that other company.

A company can be a shareholder, director or secretary of another company.

When a body corporate is a shareholder, director or secretary, it has similar operations as if it were a natural person acting. It will only be called a corporate director or corporate secretary for purposes of its civic duties as the incorporated company’s representative. It will, however, retain its autonomy as a separate company/entity. The law imagines it is a human being!

Corporate bodies are legal persons with a registered name. They are formed, registered and given a ‘birth date’ by the Company Registrar whom the law gives powers to commission them into operation. The ‘birth date’ is the date of incorporation.

Because the process of incorporation has gone through several changes due to amendments of the Companies Law governing companies, especially in Uganda, this article will use scenarios/illustrations to explain the intrigue that body corporates pose when they assume the role of corporate directors/corporate secretaries; or become shareholders/members in another company.

Scenario I

If Apex Limited has 3 directors, one of whom is the secretary, any person will sign on its behalf. This is standard procedure for companies. This means that if Apex Limited opted to purchase shares in another company, its directors and secretary will execute all documentation necessary to create its shareholding in that other company. The directors/secretary may need a Board Resolution or Power of Attorney to notify the Registrar of the company’s intention and the actual signatory to perform the task.

Scenario II

Say Peter Maina and George Okello incorporate a company with a share capital of Ushs.3,000,000/= divided into 100 ordinary shares valued at Ushs.30,000/=; and call it Maillo Company Limited.  Under the company’s shareholding, Peter Maina has 30 shares and George Okello has 30 shares. The balance of shares available is obviously 40 shares. These 40 shares are what Maillo Co. Limited has to offer to any person or entity to purchase. The assumption is that both are directors and one of them is a secretary of the company they have formed.

Supposing Maillo Co. Limited has a directorship to be filled and Freddy Kipsang is willing to take it up. Peter Maina and George Okello will sit as members/shareholders and/or directors of Maillo Co. Limited and appoint Freddy Kipsang as a director, with or without shares.

If Maillo Co. Limited wishes to sell shares, it will sell some or all of the remaining shares to a natural person like Freddy Kipsang or to an artificial person like Area Code Limited, another company. Freddy Kipsang will be an individual shareholder and Area Code Limited becomes an artificial shareholder/corporate shareholder.

If at one point Maillo Co. Limited resolves to appoint Area Code Limited as a director or secretary, Area Code Limited will therefore become a corporate director or corporate secretary. The directors or secretary of Area Code Limited will be the ones to sign on Area Code Limited’s behalf since the company functions through them.

Scenario III

A company ceases to operate if it is wound up. Even during bankruptcy proceedings, its operations are monitored by court and handled by an appointed court receiver or agent.

Qn: What happens to its shares in another company?

A shareholder, whether natural or artificial, does not lose his/her/its shares unless;

  1. He/she/it forfeits the shares;
  2. Sells the shares to another person/entity;
  3. The company where shares are held winds up.

Using our example above, if Area Code Limited winds up or is declared bankrupt, its legal assignees/beneficiaries (like creditors) or court receiver will handle its operations until final winding up. Therefore, until its matters are concluded and Area Code Limited ceases to operate, its shares remain intact and can be sold off to off-set the defunct company’s debts. If another company buys it, that company also buys these shares. In case of merging, the merger entity takes the shares.

Scenario IV

Where Area Code Limited was a corporate director or secretary, say in Apex Co. Limited, winding up or bankruptcy automatically ends its directorship or secretary position.

Courts hesitate to impose restrictions on companies whose shareholding involve body corporate as members but will treat them as natural persons. Legal entities operating legitimate businesses have the protection of the law to contract with and appoint whomever they wish to, as long as they have ‘legal clearance’ to do so.

In any situation, body corporates tend to cloud the operation of a main company, especially where the members/directors therein are the same in both entities. For instance, if the directors of Apex Co. Limited are directors/shareholders in Area Code Limited, it can be difficult to separate the entities. This scenario will attract financial forensics to unveil the corporate company and establish whether or not some fraudulent activities occur in either company.

However, since companies are sole entities with capacity to contract, they also enjoy the autonomy to buy shares in another company, be appointed corporate directors or corporate secretaries.

N.B: Each case is different for every intending corporate shareholder, director or secretary. For a precise advice on similar situations, seek legal advice from a lawyer before the taxman runs you out of business.

BY ATUHAIRWE AGRACE

This article appears in our digital law newsletter, The Deuteronomy Vol 4, Issue 1 of April 6th 2017

To receive The Deuteronomy in real time, click HERE

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