Surrendering of shares refers to the voluntary return of shares held in a company by the registered shareholder for those shares. Surrendering shares, is in effect, the same as transferring those shares in favour of the company that issued them.
The Companies Act, 2015 allows companies to accept surrendered shares, in accordance with their Articles of Association, for failure by any shareholder to pay any outstanding sums regarding those shares. Once shares are surrendered, the company that issued them has a duty to cancel them.
Cancellation of those shares can lead to a reduction in the company’s share capital by the nominal value of those cancelled shares. Furthermore, if the company’s share capital is reduced below the authorised minimum for public limited companies (i.e., KES 6,750,0000), such a company must convert to a private limited company and then apply to the Registrar of Companies for the registration of its conversion.
In order to avoid the reduction of share capital, the Companies Act does not prevent the directors of a company from transferring the surrendered shares to new buyers.
The Companies (General) Regulations, 2015 provide a model Articles of Association that can be adopted by prospective public companies limited by shares. The articles state that a member of a company may surrender shares in a company in the following scenarios, namely:
1. Where a notice of the intended forfeiture of those shares has been issued by the company directors for failure to pay a specified amount regarding them;
2. Where the directors may forfeit those shares; or
3. Where the shares have already been forfeited.
The effect of surrendering shares, as per the model Articles of Association, is that all interests, claims, rights and liabilities regarding those shares are extinguished. The person surrendering those shares ceases to become a member of the company with respect to those shares and is also required to surrender the share certificates for the surrendered shares for cancellation.
However, that person still remains liable for any outstanding sums at the date of surrender including any interests that accrued before or after the date of surrender.
The Companies Act does not prevent members from voluntarily surrendering their fully paid up shares as the Act allows companies to acquire their own shares upon paying the full amount of consideration for those shares. In short, a member can voluntarily surrender their shares to the company upon receiving the capital he invested into the company as consideration.
Any surrender of shares that would lead to the reduction of a company’s share capital will first need the passing of a special resolution by company members. The company will also have to comply with all the requirements that pertain to the reduction of share capital as seen in PART XV of the Companies Act.