Corporate Law and

Corporate Governance
LECTURE 3
Ummar Ziauddin
LLM Berkeley, Barrister of Lincoln’s Inn
Relevant reading
• Dignam, Chapter 13
Agenda
• Introduction to Corporate Management
• Directors
• Powers of the Board
• Emergence of Professional Managerial Organ
• Separation of ownership from Control
• Listed Companies
• Pakistan Stock Exchange Limited
• Virtual tour of PSX
Introduction
• Company, created by legal fiction, operates through human organs.
• In private companies individuals perform several functions.
• In large companies the roles are clearly specified.
• Corporate Management: focus on decision makers.
• Corporate management is carried out by those who are at the helm of
the company.
• Members of the Board.
2(14) Of the Companies Act
• (14) ―chief executive‖, in relation to a company means an individual
who, subject to control and directions of the board, is entrusted with
whole, or substantially whole, of the powers of management of affairs
of the company and includes a director or any other person occupying
the position of a chief executive, by whatever name called, and
whether under a contract of service or otherwise;
Directors
• 154. Minimum number of directors of a company.—(1)
Notwithstanding anything contained in any other law for the time being
in force,
• (a) a single member company shall have at least one director;
• (b) every other private company shall have not less than two directors;
• (c) a public company other than a listed company shall have not less
than three directors; and
• (d) a listed company shall have not less than seven directors:
Provided that public interest companies shall be required to have
female representation on their board as may be specified by the
Commission.
• (2) Only a natural person shall be a director.
Term
• 161. Term of office of directors.—(1) A director elected under sections
159 or 162 shall hold office for a period of three years unless he earlier
resigns, vacates office due to fresh election required under section 162 as
the case may be, becomes disqualified from being a director or
otherwise ceases to hold office:
Provided that the term of office of directors of a company limited by
guarantee and not having share capital may be a period of less than three
years as provided in the articles of association of a company.
(2) Any casual vacancy occurring among the directors may be filled up by
the directors and the person so appointed shall hold office for the
remainder of the term of the director in whose place he is appointed.
Who cannot be a director

•153. Ineligibility of certain persons to become director.—A person shall

not be eligible for appointment as a director of a company, if he —
• (a) is a minor;
• (b) is of unsound mind;
• (c) has applied to be adjudicated as an insolvent and his application is
pending;
• (d) is an undischarged insolvent;
• (e) has been convicted by a court of law for an offence involving moral
turpitude;
• (f) has been debarred from holding such office under any provision of
this Act;
• (g) is lacking fiduciary behaviour and a declaration to this effect has
been made by the Court under section 212 at any time during the
preceding five years;
• (h) does not hold National Tax Number as per the provisions of
Income Tax Ordinance, 2001 (XLIX of 2001):
Provided that the Commission may grant exemption from the
requirement of this clause as may be notified.
Powers of the Board
• 183. Powers of board.—(1) The business of a company shall be managed
by the board, who may exercise all such powers of the company as are
not by this Act, or by the articles, or by a special resolution, required to
be exercised by the company in general meeting.
• (2) The board shall exercise the following powers on behalf of the
company, and shall do so by means of a resolution passed at their
meeting, namely:—
• (a) to issue shares;
• (b) to issue debentures or any instrument in the nature of redeemable
capital;
• (c) to borrow moneys otherwise than on debentures;
• (d) to invest the funds of the company;
• (e) to make loans;
• (f) to authorise a director or the firm of which he is a partner or any
partner of such firm or a private company of which he is a member or
director to enter into any contract with the company for making sale,
purchase or supply of goods or rendering services with the company;
• (g) to approve financial statements;
• (h) to approve bonus to employees
• (i) to write off bad debts, advances and receivables;
• (ii) to write off inventories and other assets of the company; and
• (iii) to determine the terms of and the circumstances in which a law
suit may be compromised and a claim or right in favour of a company
may be released, extingu
• (m) to take over a company or acquire a controlling or substantial
stake in another company;
• (n) any other matter which may be specified. ished or relinquished.
Emergence of Professional Managerial Organ
• Partners are agents of the Firm.
• 19th Century view, borrowing from agency principle, too advocated
that Directors are agents of shareholders.
• Historically the primacy was given to shareholders from the two
corporate organs.
• Often the society propels the laws.
• The change in primacy of shareholders/general meeting began to
peter away in the 20th Century.
• It was not due to the legislation but changing customs and practices
in the market.
• Shareholders widespread and more focused on returns of their
investments.
• Don’t care much about regulating the conduct of the directors.
• Voting is made through different forms of proxies.
Separation of ownership and control
• This shift in the trends was first identified by Berle & Means.
• Study of largest 200 US corporations in 1929-1930
• The owners were no longer or did not wish to exercise control.
• One Consequence: shareholders would no longer able to control the
direction of the company.
Berle & Means
• Economic power in terms of control over physical assets, is apparently
responding to a centripetal force, tending more and more to
concentrate in the hands of a few corporate managements. At the
same time, beneficial ownership is centrifugal tending to divide and
subdivide, to split into even smaller units and to pass freely from hand
to hand, In other words, ownership continually became more
dispersed: the power formerly joined to it becomes increasingly
concentrated.
Evolving focus
• Shareholders: return on investment
• Directors: power over the enterprise.
Listed Companies
• It is about raising money to enable businesses to meet their funding
needs.
• Either you can borrow money from the banks or venture capitalists.
Or try and raise money from a wider group of investors through stock
market.
• Listing means registration of a company on a stock exchange for
trading and display of its name on the official list of the stock
exchange.
BENEFITS OF LISTING
• (i) Additional avenue for fund raising.
• (ii) Improvement in the company's credentials:
• (a) Listing raises company's public profile with customers, suppliers, investors
and the media. As a result more business opportunities become available.
• (b) A listed company is included in the stock exchange's Index Series, thus
creating additional exposure for the company both locally and internationally
and, therefore, may be covered by the analysts in their reports.
• (c) A listed company may also be considered for awards like stock exchange
top 25 companies awards that bring credibility and investors' confidence in
the company.
• (d) Listed companies are benefitted of the general perception that after listing
financial and business strength of the companies is improved.
• (e) A listed company can use its shares to fund acquisitions through mergers
as shareholders of the merged entity might be more interested in listed
shares.
• (iii) Shares of listed companies can be sold easily at a fair price
through secondary offering by the company or by the
sponsors/promoters.
• (iv)Listing helps in offering of Employees Stock Option Schemes to
retain hardworking professionals and gain their loyalties.
• (v) Listing helps in attracting institutional and professional investors as
business partners.
MAJOR LEGAL REQUIREMENTS
APPLICABLE TO LISTING
• (1) Application for Listing to the Stock Exchange: An issuer that
intends to list any of its security on a stock exchange shall make an
application to such stock exchange under section 9 of the Securities
and Exchange Ordinance, 1969.
• (2) Eligibility for Listing: Any public limited company or body
corporate having minimum paid up capital of two hundred million
rupees (Rs.200 million) may apply for listing on a stock exchange in
Pakistan.
• (3) Disclosures requirements: The prospectus to be issued, circulated
and published for information of the general public should contain
atleast all those information, reports and material as required under
section 53 read with part-I of the Second Schedule of the Ordinance
Pakistan Stock Exchange Limited
• The Exchange was incorporated in 1949 as a company Limited by
Guarantee.
• As a result of demutualization, the Exchange stood corporatized and
demutualized as a public company limited by shares under the name
of ‘Karachi Stock Exchange Limited’, with effect from August 27, 2012.
• Subsequently, the three stock exchanges namely Karachi Stock
Exchange, Lahore Stock Exchange & Islamabad Stock Exchange were
integrated into Pakistan Stock Exchange Limited (PSX) on January 11,
2016.
• PSX provides a reliable, orderly, liquid and efficient digitized market
place where investors can buy and sell listed companies’ common
stocks and other securities.
• For over 60 years, the Exchange has facilitated capital formation,
serving a wide spectrum of participants, including individual and
institutional investors, the trading community and listed companies.
Visit the website here
• https://www.psx.com.pk/
Information on Listed companies
• https://www.psx.com.pk/index.php
Legal framework
• https://www.psx.com.pk/
CHEERS!!!