Company Law Question ONE.

Watu Ltd was incorporated in January 2018, with a nominal value of Kshs five million divided into 100,000 shares each worth KShs 50. The company has 2 directors, Boss and Mkubwa, each with 20,000 shares. Luka, a local parliamentarian has 40,000 shares and a few local investors own the other20,000 shares. Watu Ltd’s market value has substantially reduced since its incorporation and the stakeholders believe that this is due to mismanagement occasioned by Boss and Mkubwa. Luka believes that with new management, the company’s fortunes can be turned around thus increasing the market value. Luka believes that in order to ensure that hisintentions are met, needs to acquire as many shares as possible from the local investors. He therefore puts a plan in motion and starts making offersfor the purchase of the 20,000 shares held by the local investors. This is done with a view of ousting Boss and Mkubwa from office.

Boss and Mkubwa who are widely liked by the local investors, get tipped off of Luka’s activities and to mitigate this, they cause the company to issue 60,000 new shares which they intend to purchase via another company that they own as sole directors and shareholders, B&M Ltd (a Private Limited liability Company). However, in their haste they had gotten that B&M ltd does not have sufficient funds in their account to purchase the shares. Additionally, Boss and Mkubwa know that they have exhausted all other external resources. From past interactions with local financial institutions, Boss and Mkubwa know that their company has reached its threshold and is therefore barred from borrowing additional money from the Banks. B&M Ltd offers Watu Ltd some of its farm machinery worth Kshs 1 million which is enough to purchase 30,000 shares and the rest of the shares are paid for via a Kshs 1 million loan from Watu Ltd to B&M Ltd. Watu Ltd accepts this offer with a personal condition that B&M Ltd will use their voting rights to defeat any motions to remove Boss and Mkubwa from office.

Luka who had by now managed to purchase 10,000 shares, this plan is not going to work and instead decides to look for a buyer for his portion of the company. In order for Lika to cut his losses he agrees to sell off his share to Watu Ltd. Watu Ltd buys the share and subsequently cancels them. Having Gotten rid of Luka, Mkubwa and Boss recommend and subsequently declares that they pay themselves a dividend at the rate of Ksh5 per share.

Qn. With Aid of examples, discuss the validity of Boss and Mkubwa’s actions.

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