Nature and Classification of Companies

Meaning of Company Law

According to CL TOPIC 1, company law is the study of the rules and principles that govern and regulate the affairs of a company or corporation. In simple terms, it explains how companies are formed, controlled, and managed, and the legal rules that apply to them.

Major Types of Companies

CL TOPIC 1 identifies several types of companies and corporations. These include:

• Chartered corporations
• Statutory corporations
• Registered companies
• Limited companies
• Unlimited companies
• Companies limited by shares
• Companies limited by guarantee
• Public companies
• Private companies
• Holding and subsidiary companies
• Foreign companies

For this lesson, the main focus is on public, private, registered, statutory, holding, subsidiary, and foreign companies.

Public Company

From CL TOPIC 1, a public company has the following core attributes:

• It must have at least 2 directors.
• It can issue a prospectus.
• Its shares are freely transferable.
• It can only commence business after obtaining a certificate of trading.
• It must publish annual accounts.
• It must have a company secretary.
• Its name should end with the words Public Limited Company (PLC).

CL TOPIC 1 also indicates that public companies traditionally had a statutory meeting requirement for companies created before 2015.

Private Company

According to CL TOPIC 1, a private company has these features:

• Members are a minimum of 1 and a maximum of 50 persons, excluding employees.
• It requires at least 1 director.
• It restricts the right to transfer shares.
• It does not invite the public to subscribe for its shares, so it cannot issue a prospectus.
• It is not mandatory for it to publish its accounts.
• It can commence business after receiving the certificate of incorporation.

This shows that a private company is more restricted than a public company, especially in relation to public share offers and transfer of shares.

Difference Between Public and Private Companies

CL TOPIC 1 gives a direct comparison between public and private companies:

• Prospectus: A public company can issue a prospectus, while a private company cannot.
• Directors: A public company requires at least 2 directors, while a private company requires at least 1 director.
• Transfer of shares: Shares in a public company are freely transferable, while a private company restricts transfer of shares to members only.
• Commencement of business: A public company begins business after a certificate of trading is issued, while a private company begins after the certificate of incorporation is issued.
• Publication of accounts: A public company must publish its accounts, while a private company has no such requirement.

Registered Company

As stated in CL TOPIC 1, a registered company is a company incorporated under the provisions of the Companies Act. It is governed by directors and can only engage in transactions stipulated in its memorandum and articles of association.

This means a registered company derives its existence from registration under company law.

Statutory Company

According to CL TOPIC 1, a statutory company is created by an Act of Parliament. It is owned by the government and can only engage in transactions set by the statute creating it.

The key distinction is that, unlike a registered company which is formed under the Companies Act, a statutory company is established directly by legislation.

Holding and Subsidiary Companies

CL TOPIC 1 explains that a holding company exists where one company has control over another company. A company is regarded as a holding company in relation to another if:

• It controls the majority of the board of directors of the other company.
• It owns more than half in nominal value of the equity share capital of the subsidiary, meaning more than 50% of the share capital.
• The other company is a subsidiary of its own subsidiary.

A subsidiary company is therefore a company controlled by another company, known as the holding company.

Foreign Company

According to CL TOPIC 1, a foreign company is a company incorporated outside Kenya but having a place of business in Kenya. The source further notes that such companies are ordinarily known as multinationals because they operate in many countries outside their country of origin.

The main idea is that the company is formed in another country but carries on business within Kenya.

Related Idea: Legal Personality of a Company

Although the main lesson is on classification, CL TOPIC 1 also explains an important feature of a company: upon incorporation, a company becomes a separate legal entity distinct from its members. This separate legal existence is one of the most important characteristics of a company and helps explain why companies are treated as independent legal persons.

Lesson Summary

• Company law is the study of rules and principles governing the affairs of companies or corporations.
• Major company classifications include public, private, registered, statutory, holding, subsidiary, and foreign companies.
• A public company can issue a prospectus, has freely transferable shares, must publish accounts, and needs a certificate of trading to commence business.
• A private company restricts transfer of shares, cannot invite the public to subscribe for shares, and can begin business after incorporation.
• A registered company is incorporated under the Companies Act.
• A statutory company is created by an Act of Parliament and is limited by the statute creating it.
• A holding company controls another company, while a subsidiary company is the company being controlled.
• A foreign company is incorporated outside Kenya but has a place of business in Kenya.