Duties of founders in joint stock companies

By DR. ABDELGADIR WARSAMA

As per the Company Law in Bahrain, there are many types of companies to enable interested investors to choose the type that suits them. Some companies are open for the public, a joint shareholding.

The idea of establishing a joint stock company starts by the founders. The first idea to establish a public joint stock company, as a matter of fact, starts in the mind of one or group of persons whom we could call or deem as pioneers or entrepreneurs in that particular project.

This is because they were the first people to think about starting a new venture through a public join stock company. Legally speaking, this group of persons constitutes the foundation for the new venture and this is why they are called, as the founders of the company.

The presence of the founders, for establishing a new public joint stock company is mandatory and we could say it is a must according to the Company Law. According to the law, any person to take a positive step towards establishing a public joint stock company shall sign the Initial Memorandum of Understanding and Articles of Association.

The signature signals the interest and shows the commitment as a founder member in the company to be established. The Company Law, in certain countries, requires the availability of at least 10 founders for the initial licensing of the Joint Stock Company and its incorporation.

I believe that this minimum number is required to ensure the commitment of reasonable number of certain persons who are eager and interested to put their heads together towards achieving their joint goal, however, in some instances the competent authority could be approached to reduce the number, which could be reduced based on the application submitted for this purpose.

It is important to mention that, in case the government or any other quasi-government agency wants to establish a public joint stock company, the requirement of having many founding members is waived.

The number of the founders, in some cases, is very big and it is neither possible nor practical for all of them to work together to incorporate the company and therefore they are allowed by law to form a committee from themselves to undertake and follow up the incorporation process.

This committee, normally, shall be composed of three to five members and they should be given the required legal authority to take all steps to incorporate the company. An interesting legal question arises here regarding the legality of the actions taken by the founders.

Legally speaking, the company (under the process of incorporation) has the legal entity only to the extent necessary for the incorporation. In other words, the company and the founders have limited legal authority and this authority is confined to the steps required for the incorporation process only.

If any step taken by the founders is not required for this particular purpose, then this step shall be deemed ultra vires and accordingly it shall fall outside the legal responsibility of the company. It has been observed, that some founders have exceeded their powers and limits and they performed some actions, which are not required for the incorporation of the company.

In such cases, the founders are personally responsible and they should be accountable for what they have done. As an example of the premature actions taken by some founders, we could mention, negotiating and signing contracts on behalf of (the supposed-to-be-company), incurring unnecessary expenses, investing money outside the country which puts the available money in great risk... etc. Legally speaking, the founders are not free nor allowed to do anything according to their wishes. They are guided at this stage by the law and the necessary directives issued, from time to time, by the competent authority.

All actions that are legally required for the process of incorporation of the company are binding on the company after its incorporation, and by all means, the founders are not personally responsible. This is a call for founders to understand their role and perform their duties in a legally acceptable manner.