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How a Company Can Help You Deal With The End

Many years ago, a close cousin of mine challenged me to write my will. We were in our early thirties then and she was waxing lyrical about how one needed to be organized regardless of what age one was, as long as one had assets. “It never ceases to amaze me how even my own friends who are lawyers have not written their own wills!” she exclaimed. Anyway, her exhortations fell on deaf ears. I only got to write my will eight years after my father died, using the same set of estate planning questions that my late father had been given to use by his lawyers.

Answering those questions about what I owned, where it was located and how it was owned really made me reflect on how we organize our assets during our lifetime. Actually a whole existential self-conversation emerged, because I had never really thought about why I was purchasing what I had and what I intended to do with it, or rather what the poor sods who had to deal with my untidy mess of a death would do with my assets barring any post mortem instructions from me. To be honest, that self-conversation was not an easy one because I had to  look my immortality in the face and give it a name. Actually, two names: The End.

This is the difficulty many of us face, whether young or old. Dealing with The End. But when we don’t, and many of us fall in this category, the repercussions are devastating to our children, spouses, side dishes and their children as well as the whole African kit and caboodle of multi-silent familial existence. A neater way of putting your affairs in order in your lifetime – The Glorious Middle – without having to write a will that makes you deal with that unpleasant formaldehyde flavored pill called The End can be to hold your real estate assets in a company. Whether it is undeveloped land or built up residential and commercial properties, placing them in the name of a company then allows you to name your preferred beneficiaries as the shareholders in the company. Your own shares will be what will make up your estate and be left to all kith and kin who wish to make a claim on the same.

I hasten to add that you should get competent tax advice before going this route as there are tax implications when property is held in a legally incorporated vehicle. But the attributes of taking this option is that you can make your spouse and your children (who have attained the age of 18 years) shareholders while remaining the majority shareholder for purposes of control. In the event of your death, your shareholding then becomes a part of your estate and, in the event you have died intestate – without a will – then it will be divided up by those who are granted the letters of administration to your estate or, in the worst case where there is massive disagreement, be adjudicated and decided upon by a court of law. The important thing is that the remaining shareholders can still carry on with the business of the properties as it now becomes a matter of company law.

If you’re interested in providing judicial entertainment, you can also set up your Side Dish as a shareholder in a different company where you jointly own property. In the event of your death, take a park bench in heaven and watch the sparks fly as your spouse and children now make a claim on your shares and they all begin a new life as shareholders joined at your memorial hip. But the important thing is, you will at least have provided for Side Dish within the legal construct of company law which offers protections to minority shareholders in the event you decided to do Side Dish dirty and only offer them something like a 10% shareholding. It is also imperative that your articles of association – which govern how a company runs – are well designed and begin with the end in mind: total chaos prevailing in the event of founder’s incapacitation (we shall not use the word death)! How directors will be appointed, who can be a director etc. are all important aspects of company continuity past The End. Anyway, I believe the point is made: companies can be used for doing business and can also be used as an efficient, death defying vehicle to hold one’s assets in a perpetual, separate legal entity that can sue and be sued. They can also be used to help all those disorganized mortals who die and leave this on their tombstone: “Chaos, panic and disorder: my work here is done!”

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Twitter: @carolmusyoka

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The Law is an Ass

“The law is an ass.” That opinion was expressed by Mr Bumble in Charles Dickens’ epic classic Oliver Twist, when he learned from Mr Brownlow that, under Victorian law, he was responsible for actions carried out by his wife. ‘If the law supposes that,’ said Mr Bumble, squeezing his hat emphatically in both hands, ‘the law is an ass – an idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is that his eye may be opened by experience – by experience.’

Company law governs the way companies are run within a legal jurisdiction. At the heart of company law is the premise that shareholders who create a company choose the manner in which they want that company to be governed through the establishment of memorandum and articles of association. The memorandum of association defines the objectives for which the company is being formed, while the articles of association define the manner in which that company will be governed including amongst other things how directors will be elected, annual general meetings will be convened, rights of shareholders etc.

So for a certain very large and prestigious city hospital in Nairobi that has been in the media for all the wrong reasons lately, looking at its articles of association happens to be quite an illuminating exercise. By way of background, the hospital has seen more CEO changes in the last couple of years than the filters on its medical waste incinerators have been replaced. The last CEO who was asked to leave has sued the institution for wrongful dismissal citing the reason for his sacking as due to his questioning of some improper procurement practices driven by some board members. I looked at the articles of association of the institution, which were extensively amended at a special general meeting in July 2020.

In the old articles of association, a fairly laid back culture was legislated around conflict of interest of board members. A member of the board, or a company or firm in which he was a shareholder, director or partner was allowed to contract with the institution for a profit and that contract was not deemed to be voided due to the board member’s relationship with the institution. However the board member was expected to disclose that interest at a board meeting and not expected to vote where that interest was being discussed. However if that member did go ahead and vote, then the vote was not supposed to be counted. It gets even more interesting as that prohibition not to count the conflicted director’s vote could be “suspended or even relaxed” at a general meeting of the company.

The new articles of association seem to have attempted to fix that loophole by expressly forbidding any board member or any firm or company in which he is a shareholder, director or partner to contract with the institution going further to state that such contract shall be voided. This is where it gets interesting though, hence the use of my words “an attempted fix”. In the same breadth, subsection (b) of the curative clause goes ahead to state that no board member shall vote in any contract or arrangement which he is directly or indirectly associated with and his interest must be disclosed and declared by him at the board meeting at which that contract is determined. So on the one hand, the first clause states thou shalt not contract with this institution, while the second clause states well actually, in case you do have a contract then you cannot vote at a board meeting discussing that contract and you must also disclose your interest.

As an avid user of this hospital’s services, I can attest without fear of contradiction that their propensity to heal me of my ailments is far better than their propensity to cure their constitutive documents of board member conflicts of interest. In next week’s column, I’ll delve a little bit deeper into the other corrective attempts that this institution has made in its attempt to remedy itself of its corporate governance malaise. One really gets a sense that the writers of the document shared the Dickensian character’s view that the law is an ass.

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Twitter: @carolmusyoka

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Shadow Directors

Maneno Ltd is a Nairobi Stock Exchange Listed company in the business of manufacturing consumer products. The founder, Michael Monga, was a well-respected businessman with multiple interests in various industries some of which interests have led to obvious potential conflicts. As Monga was quite alive to the effect of negative publicity on his business interests, he often appointed proxies to the boards of companies in which he was a substantial owner. Maneno Ltd had three such directors, who were senior employees in Monga’s other companies. Monga, being a very shrewd player, was also careful to select independent non-executive directors that could be prevailed upon to play ball where required.
Due to a fairly loose enforcement regime, cheap imports of the same consumer products that Maneno manufactured had started to flood the Kenyan market and management were spending valuable time firefighting with the relevant government agencies. Prudent past management had ensured that a significant amount of cash had been set aside and invested in money market instruments in anticipation of a strategic plant expansion that had been planned in the 5 year strategy. Monga instructed his three directors to support the Managing Director’s board paper recommending an interim dividend. That seemed strange as the financial projections indicated that the company was going to make a loss that year due to shrinking sales. The paper was approved and a special dividend was paid. The company went ahead to make losses and the following year a hefty final dividend was declared that essentially wiped out the healthy cash reserves that Maneno had been holding. As sordid stories go, within no time Maneno was bleeding cash, as management was unable to stem the effect of cheap imports versus their own locally manufactured products in an aging plant with high labor costs. The company filed for insolvency within two years of the final hefty dividend payout.
What potential remedies exist for the minority shareholders who were held at glorious ransom by the corporate shenanigans of Michael Monga? Both Kenya and Uganda have recently revamped their company laws from the archaic 1948 UK Companies Act that formed the basis of local company law. Uganda passed the Companies Act 2012 and Kenya followed suit with the Companies Act 2015 both of which laws essentially aligned company law with modern norms such as the concept of a shadow director. Company law defines a shadow director as someone who has not been formally appointed as a director but in accordance with whose directions or instructions the directors of a company are accustomed to act.
If you’re struggling to picture one, think of a multinational company in Kenya, whose board is regularly instructed by “group” via the managing director, on when to declare dividends or when to postpone making critical provisions on their financial statements. It can also be the finance director of a Kenyan company that has regional subsidiaries and demands the same financial behavior of the subsidiary boards. [It bears noting that the Tanzanian Company Act 2002 does not expressly define shadow directors.] It can be a cabinet secretary who regularly issues instructions to the board of a limited liability company with significant government ownership. In the Maneno Ltd example, Michael Monga is a classic example of a shadow director. Not only was he giving express instructions to the non-executive directors, but he also ensured that he indirectly controlled the board through the appointment process. For all intents and purposes, Monga was the board.
Company law recognizes that while de jure directors (directors by law) have fiduciary duties to the company including the duty to act in the best interests and promote the success of the company, de facto directors (directors in fact) also owe the company fiduciary duties and can therefore be held accountable for their acts in the same vein as the directors on record. This premise was established in the 2013 landmark United Kingdom case of Vivendi SA and Centenary Holdings Ltd versus Murray Richards and Stephen Bloch. In the case, as succinctly summarized on the Helix Law website, a shareholder of a company in trouble used his influence to make the sole director of the company pay him a salary and other money from the company, without providing any benefit or services back. These payments were made while the company was insolvent. The company went into liquidation and its receiver claimed compensation from the shareholder claiming that a) he was a shadow director b) a shadow director owed the company fiduciary duties as if he had been formally appointed as a full de jure director and c) the shareholder had breached those duties. A Burges- Salmon blog on the shadow director subject matter summarized the court’s findings thus: On the first issue, the court found that the sole director was accustomed to acting in accordance with the shareholder’s instructions and therefore the shareholder satisfied the test for shadow directorship. On the second issue it was found that in giving instructions to de jure directors, a shadow director assumed responsibility for a company’s affairs. However while a shadow director’s duties were not statutorily provided for, the consequences of being found to be a shadow director must evidence Parliament’s perception that a shadow director could bear responsibility for a company’s affairs. The court also observed that a shadow director’s role in a company’s affairs might be just as significant as a de jure director, and that public policy pointed towards statutory duties being imposed on shadow directors.
What does this mean for Michael Monga and many like him?
Company Law now provides extraordinary personal consequences to the shadow director including: a liability to contribute to the company’s assets following the company’s insolvency, disqualification from being a director of any company in Kenya following the company’s insolvency as well as criminal sanctions and personal liability for violations of director’s duties.
As a parting shot, while de jure directors may rely on Directors and Officers insurance cover, the shadow director is most definitely not covered under the same. If you sit on a Kenyan or Ugandan board, now would be a good time to look over your shoulder and find those shadows.
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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]