The Widow, the Pre-emption Clause and the Ten-Day Notice
Kijabe Hardware Limited is a private company with 400,000 ordinary shares held equally by four families, 100,000 each. The articles provide that no share may be transferred to a non-member until it has first been offered to the existing members pro rata at a price certified by the auditors, and that general meetings require 21 clear days' notice. Following the death of Mr Otieno, his widow - who is not a member and has not applied for a grant of representation - says she will sell his shares to a Nairobi businessman. Separately, the board wants to alter the articles to remove the pre-emption right and to create a new class of preference shares. Because the auditors are slow, the company posted a 10-day notice for a general meeting; all four shareholding families signed a consent endorsing the meeting and the resolutions, but one family now says the meeting was invalid. The company's bank has asked for a certified copy of the resolutions before releasing a facility.
1. Advise the widow and the board on the status of Mr Otieno's shares and whether the businessman can acquire good title.
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On death, shares pass by transmission, not transfer
- The shares vest in Mr Otieno's personal representatives - an executor named in a valid will, or an administrator appointed by the court where he died intestate (the widow's position here).
- Until those representatives are registered, the widow has no legal title to the shares and no right to vote at general meetings; at most she may be entitled to the dividends declared.
- A contract of sale signed by the widow therefore transfers nothing. The businessman cannot acquire good title from her, and the company is entitled - indeed obliged under its articles - to refuse to register any transfer lodged on that basis. His remedy is against the widow personally for breach of contract, not against the company.
Correct sequence for the board
- Widow applies for a grant of probate or letters of administration.
- Application for transmission is lodged with the company, with the grant, the share certificate and proof of identity; the personal representatives are entered in the register of members.
- Any onward transfer to a non-member triggers the pre-emption clause: written offer to the three families pro rata at the auditors' certified price, with a stated acceptance period.
- Only if the members decline, or take up less than the whole, may the balance be transferred to the outsider - subject to board approval, instrument of transfer, stamp duty, cancellation and issue of certificates, and the updating of the register of members and the company's filings at the Business Registration Service.
Advise the widow that a conditional sale is possible, but completion must wait on transmission and pre-emption.
2. Was the general meeting and the resolutions passed at it valid, given the 10-day notice and the signed consent of all four families?
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The notice was irregular
Ten days is short of the 21 clear days the articles require. That is a procedural defect, so the meeting is not automatically void, but the resolutions passed at it are voidable at the instance of a member who did not consent - and objections can surface years later when the resolutions are relied on.
The unanimous consent may cure it
The settled principle is that where all members entitled to attend and vote signify their assent to a decision, with full knowledge of what they are assenting to, the decision is as valid as if it had been taken at a properly convened meeting. Here all four families - the entire membership - signed a consent endorsing both the meeting and the resolutions. That is a strong cure, and the subsequent objection by one family is weak precisely because they signed.
But the cure has limits to check before relying on it
- Did the consenting members know of the short notice and of the full terms of the special resolutions? Consent given in ignorance of the defect is not consent.
- Special resolutions require a 75% majority. Each family holds 25%, so any one family can block both alterations of the articles and the creation of the new preference class. Unanimity was therefore necessary, not merely convenient.
- A new class of preference shares: if existing shareholders' rights are varied, check whether the articles contain class-rights provisions requiring separate consent.
Safest course: treat the resolutions as effective in the meantime, but re-hold a properly noticed meeting and re-pass them. Re-passing costs two weeks and removes all argument; relying on a contested consent risks the bank facility and any future share issue.
3. Set out the practical steps and documents the company secretary should deliver to the bank to support reliance on the resolutions.
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Before delivery, close the procedural gap
The secretary should not certify into a financing transaction on a 10-day notice. Re-convene on 21 clear days, re-pass, and then certify. If commercial timing forbids it, obtain a fresh, informed consent in writing from all four families referring expressly to the short notice.
Package for the bank
- Certified copies of the special resolutions, each signed by the chair and countersigned by the secretary, with the date and the meeting at which they were passed.
- Certified extract of the minutes of the meeting, showing the notice given, the quorum, the votes cast and that all members were present or represented.
- A statutory declaration by a director and the secretary confirming the resolutions are valid, in force and not amended or revoked.
- Copies of the written consents relied upon, if short notice was cured by consent.
- An up-to-date extract of the register of members and a current statement of the company's registered particulars from the Business Registration Service.
- The altered articles as filed, and evidence of filing, since the bank will lend against the new share capital structure.
Points to flag to the board
The bank's request is a control event, not a formality: a defective resolution discovered after drawdown exposes the directors to a claim and the secretary to a professional-liability question. The secretary should also confirm the resolutions do not contravene the pre-emption clause or any shareholder agreement, and record the advice given in the board minutes.