KEY HIGHLIGHTS

• The applicability of Section 137 of the Companies Act.
• Under the doctrine of share transmission, upon the death of a shareholder, their shares immediately pass to their personal representatives by operation of law without awaiting further transfer.
• Distinction between a “shareholder” and a “member” under Tanzanian company law

On 25 January 2024, the High Court delivered its decision in the case of Mary Deogratias Magubo (formerly known as Mary Boniface Fungo) & 2 Others v. The Registrar of Companies, Misc Commercial Cause No. 192 of 2023, 2024 TZHCComD1 with respect to share ownership and membership after the death of the shareholder.

1.0. OVERVIEW OF THE CASE

In this case, the High Court of Tanzania, Commercial Division, addresses critical issues concerning company governance, quorum requirements and the distinction between shareholders and members in the wake of a shareholder’s death. The case was brought by three applicants against the Registrar of Companies as the Respondent.

The 2^nd Applicant company was incorporated on 22 July 2016 by the 1^st Applicant and her late husband, who were the only shareholders, members and directors. The husband held 800 shares and the wife held 200 shares out of a total of 1000 shares. Upon the death of the husband on 21 June 2023, the wife (1^st Applicant) was appointed as the administratrix of his estate.

Following her husband’s death, the 1^st Applicant found it impracticable to conduct meetings of shareholders and directors of the 2^nd Applicant Company due to a lack of the requisite quorum. This operational impediment affected the company’s ability to conduct its business, including operating bank accounts and signing contracts. Consequently, the applicants sought a court order under Section 137(1) and (2) of the Companies Act, Cap 212 of the Laws of Tanzania, to allow the 1^st Applicant, acting alone, to hold meetings and constitute a quorum. The Registrar of Companies did not file a counter-affidavit or appear for the hearing, leading the court to proceed ex parte.

2.0. LEGAL ISSUES ADDRESSED

The primary legal issues before the Court were:

1. Whether the death of a shareholder and director, leading to only one remaining shareholder/director, rendered it “impracticable” to conduct company meetings as per Section 137(1) of the Companies Act.
2. Whether the appointment of an administratrix of the deceased shareholder’s estate automatically cured the quorum deficiency by making her a member of the company.
3. The distinction between a “shareholder” and a “member” under Tanzanian company law and its implications for quorum requirements.

3.0. COURT’S REASONING AND PRINCIPLES ESTABLISHED

• Applicability of Section 137 of the Companies Act

The Court affirmed that Section 137(1) and (2) of the Companies Act allows the court to order a meeting to be called, held, and conducted in a manner that it deems fit if it is impracticable to do so as prescribed by the articles or the Act. This section is intended to enable a company to overcome practical difficulties arising from its articles of association, shareholder agreements, or the Companies Act, thereby ensuring the viable governance of the company. The Court adopted an interpretation of a similar provision in the UK Companies Act (Section 306) from the case of Wheeler v. Ross (2011) EWHC 2527, highlighting that the court’s power is discretionary and fact-sensitive.

• Doctrine of Share Transmission v. Membership

A crucial aspect of the Court’s reasoning revolved around the doctrine of share transmission and its impact on membership. The Court initially inquired whether the appointment of Mary Deogratias Magubo as the administratrix of her late husband’s estate automatically supplied the requisite quorum. The counsel for the applicants argued that an administratix only looks after the affairs of the deceased and does not ipso factobecome a shareholder until the shares are transmitted to lawful heirs.

However, the Court disagreed with this submission, clarifying that under the doctrine of share transmission, upon the death of a shareholder, their shares immediately pass to their personal representatives by operation of law, without awaiting further transfer processes. This means Mary Deogratias Magubo, as an administratrix, automatically became a shareholder in place of her deceased husband. Thus, the 2^nd Applicant company, in law, always had two shareholders: Mary Deogratias Magubo in her personal capacity (200 shares) and Mary Deogratias Magubo as administratrix of the estate of the late Deogratias Alphonce Magubo (800 shares). The Court emphasised that these are, in law, two different persons capable of transacting business.

• Distinction Between Shareholder and Member

Despite finding that the company had two shareholders, the Court made a critical distinction between a “shareholder” and a “member” of a company. The Court found that while Mary Deogratias Magubo, in her capacity as an administratrix, was a shareholder, her name as such was not yet entered into the company’s register of members.

The Court elucidated that: Members of the company are persons whose names are in the company’s register of members.

Shareholders have an investment interest, while members have a legal interest in the company’s management and operation, including voting rights and the ability to appoint or remove directors.

While nearly all members are shareholders, not all shareholders are members.

Membership can be acquired in two ways: by subscribing to the memorandum of association or by being admitted to membership by the company’s directors. There is no membership by operation of law.

Section 78 of the Companies Act allows a legal personal representative to transfer shares of a deceased member even if they are not a member themselves, further illustrating this distinction.

Section 233(2) of the Companies Act also protects persons who become shareholders by operation of law but are not members, reinforcing that a shareholder is not automatically a member.

Therefore, the Court concluded that although the company had two shareholders, it only had one member (Mary Deogratias Magubo in her personal capacity) whose name was on the register of members. Despite holding shares, the administratrix was not admitted as a member by the directors. This created a practical difficulty for the company to meet the quorum requirements of two members for general meetings and directors’ meetings, as stipulated in Articles 11 and 46 of the company’s Articles of Association and Sections 136(c) and 186 of the Companies Act.

The Court found that this constituted “impracticability” under Section 137, justifying judicial intervention. The applicants’ prayers were deemed relevant not because of a lack of a second shareholder but because of the absence of a second member to constitute a quorum.

4.0. SIGNIFICANCE IN THE TANZANIAN LEGAL FRAMEWORK

This ruling is highly significant for company law and corporate governance in Tanzania for several reasons:

1. Clarification on Share Transmission v. Membership: The decision unequivocally establishes that while shares are automatically transmitted to a legal personal representative upon the death of a shareholder (making them a shareholder by the operation of law), this does not automatically confer membership status. This distinction is crucial for understanding the rights and responsibilities within a company, particularly regarding participation in management and voting.
2. Emphasis on the Register of Members: The ruling reinforces the importance of the company’s register of members as the definitive record for determining who qualifies as a “member” with voting and management rights. Shareholders by transmission must take active steps to be admitted as members by the directors and have their names entered in the register to exercise full membership rights.
3. Practical Application of Section 137: The judgment provides a clear precedent for the application of Section 137 of the Companies Act, demonstrating that it can be invoked not only in cases of literal numerical deficiency, but also when practical difficulties arise because of the distinction between shareholders and members, preventing the company from meeting quorum requirements for valid meetings. It highlights that the court’s power under this section is to overcome genuine practical impediments to the company’s viable operation.
4. Guidance for Private Companies: This case is particularly relevant for private companies, often characterized by a limited number of shareholders and directors. The death of a key individual can easily disrupt their operations owing to quorum issues. The ruling offers a legal pathway for such companies to continue functioning by seeking court intervention to bypass strict quorum rules when genuine impracticability exists.
5. Corporate Succession Planning: The ruling implicitly underscores the importance of robust articles of association that address share transmission, membership admission, and succession planning to avoid such practical difficulties. Where articles are silent, the Companies Act and general principles of company law will apply, but proactive measures can prevent operational paralysis.

5.0. CONCLUSION

To conclude, this ruling provides significant clarity on the often-confused concepts of shareholding and membership, affirming that legal personal representatives, while becoming shareholders by operation of law, do not automatically become members. It serves as a vital precedent for the application of Section 137 of the Companies Act in addressing practical governance challenges, particularly those arising from the death of key personnel in companies with limited membership.

AUTHORS

Benedict Ishabakaki, Executive Partner

Kasimu Mussa Ititi, Associate

Joseph Isaac Masangula, Associate Trainee