When do you need Articles of Association in your business?

The use of corporate structure in conducting business in Rwanda is on the rise so much so that even small enterprises and traders are starting to adopt it, which is a good thing. Nowadays, you rarely see business persons registering their businesses as sole proprietorships.

The use of corporate structure in conducting business in Rwanda is on the rise so much so that even small enterprises and traders are starting to adopt it, which is a good thing.

Nowadays, you rarely see business persons registering their businesses as sole proprietorships.

Indeed, the mass appeal of corporate structure is not without justification as it does offer a number of advantages that cannot be enjoyed by doing business as sole trader. These include the fact that a company is separate from its shareholders and therefore their liability is limited to their commitment to the company in terms of share subscription or otherwise.

Corporate structure is also characterized by perpetual succession whereby shareholders may come and go but the company continues to conduct business in its own stead.

In spite of the advantages of carrying on one’s business through a corporate structure, the company is an abstract person that derives its existence from the law and its objectives are achieved through its shareholders, directors, and officers who are the decision makers on a day-to-day basis.

This clearly suggests that the relationship between the company as an abstract person and various stakeholders (shareholders, directors and officers) must be strictly regulated in order for the corporate structure to achieve its business objectives.

The life of companies is regulated under the laws governing companies, and in Rwanda’s case, Law n°27/2017 of 31/05/2017 governing companies (the Companies Act).

Understandably, the Companies Act cannot cover everything that may arise in the course of the company’s interaction with its shareholders, directors as well relationship among shareholders and directors inter se, and if such aspects are not dealt with elsewhere, disputes may emerge between the company and its shareholders and/or directors or between shareholders and directors or even among shareholders themselves.

This then rationalizes the need for Articles of Association (Articles) which comprise a document that, among other things, defines the responsibilities of the directors and how their powers can be exercised, the kind of business to be undertaken, share capital structures and the means by which the shareholders exert control over the board of directors.

Unlike some other jurisdictions where Articles are a pre-requisite for registration of a company, this is not the case in Rwanda. Having Articles is optional. Indeed, preparing Articles may not be an easy task and this was perhaps made optional in the context of easing business registration.

Nonetheless, Articles remain relevant to the life of a company and the cost of not having them cannot be downplayed, as they regulate issues likely to be faced by companies which are not envisaged under the Companies Act or any other law.

Some important aspects on which the Companies Act is not prescriptive, hence causing unease to companies without Articles, shall be considered.

Firstly, the Companies Act is silent about the conduct of board meetings. The board of directors being the governing body of the company in all matters other than those reserved to shareholders, the conduct of its meetings in terms of quorum, how often they should be held, required majorities in making decisions should be detailed somewhere.

In the absence of clear provisions in the Companies Act, they should be embodied in the Articles.

Secondly, while it is not required under the Companies Act that the company’s share capital be fully paid up, the same Act does not have any provision about what would happen in case some of the shareholders do not pay up shares subscribed for in the company’s share capital.

Here, the recent ruling of the Supreme Court in KNC v NJL affirmed that the failure by a shareholder to pay up shares subscribed for does not deprive them of their rights as a shareholder in the company, but the difficulty in this case would have been avoided if Radio One Limited had clear provisions in its Articles in respect of remedies available to the company and other shareholders in case of non-payment of shares subscribed for.

The case involved local media personality Kakoza Nkuriza Charles and his former partner, Nyagatare Jean Luc on the proprietorship of the company that own Radio One and TV One.

The remedies may include non-payment of dividends on those shares and/or forfeiture of shares that are not fully paid up. Furthermore, under the Companies Act there is no single provision about pre-emption rights in case of departure by one of the shareholders, yet this is very important as existing shareholders may not like to have new shareholders in the company unless they were given a chance to buy shares of the departing shareholders and fail or they may find particular incoming shareholders ‘undesirable’ and hence need to be able to thwart their entry.

For companies with Articles, pre-emption rights are usually provided for either in the form of first refusal or offer rights. Lastly, the fate of the company’s affairs in case of misunderstanding and failure to agree (deadlocks) is not dealt with under the Companies Act yet this is likely to happen in companies with 50-50 ownership.

However, with Articles, the shareholders can beforehand lay down mechanisms to break such deadlocks. These are just few examples of matters not dealt with under the Companies Act and yet are likely to cause issues.

Companies, especially those having more than one shareholders should know that despite the fact that Articles are not required under the Companies Act, companies without Articles are likely to face untold difficulties in handling various matters not regulated under the Companies Act or any other piece of legislation.

 

The writer is an associate at ENSafrica.

dnzafashwanayo@ensafrica.com

ADVERTISEMENT