Company’s Power to own Mailo & Freehold Land in Uganda

A. Introduction

In Biyinzika Enterprises Ltd, Samuel Mukasa and Milly Mukasa versus Biyinzika Farmers Ltd and Agro Business Development A/S, Civil Appeal No. 18 of 2017, the Court of Appeal has ruled that a company controlled by Ugandan citizens with Articles of Association thatdo not restrict the acquisition of shares by non-citizens cannot legally own mailo land.

The judgement handed down on the 22nd of July 2021 is an eye opener on how a company’s ownership rights over land can be affected by the possibility that a non-citizen may acquire shares in the company. While the dispute from which the decision arose involved other legal questions which were adjudicated upon by the Court, this Alert focuses on the court’s reasoning and ruling in regards to a company’s power to acquire mailo and by extension freehold land.

B. Summary

In the above decision, the court has held that it is not sufficient that a company’s control lie with Ugandan citizens for it to be considered a Ugandan company. The company’s memorandum and articles must include a clause prohibiting the transfer of shares to non-Ugandans alongside the fact that its control is with Ugandans for it to be considered a Ugandan company.

This is important because, at law, if a company is not considered a Ugandan company, it cannot hold any other land tenure except leasehold. This also means that all companies which do not have a clause prohibiting transfer of shares to non-Ugandans are considered foreign companies, and if they presently hold any land under freehold or Mailo tenure, they do so wrongly. Companies which lie in this category should take steps to regularise their proprietorship.

The decision does not affect Ugandan and non-Ugandan companies owning land under leasehold arrangement, regardless of whether the landlord’s title is freehold or Mailo.

C. Background

Biyinzika Enterprises Ltd (BEL) under the control of Samuel Mukasa and Milly Mukasa (The Mukasa’s) and Agro Business Development A/S (ABD) owned 88% and 12% shares respectively in Biyinzika Farmers Ltd (BFL). BFL was incorporated in 2004 to carry on the business of production of broiler chicken for both local and international market. It’s Articles of Association permitted it to own land under any form of tenure.

ABD is a foreign company incorporated in Denmark while BEL is a Ugandan company controlled by citizens of Uganda. ADB availed money to BEL to acquire land for BFL. Subsequently, Mailo land comprised in Kyaggwe Block 118 plot 7 measuring 24.3 hectares at Budo, Kyaggwe County (The land) was acquired and registered into the names of BFL as the registered owner.

At the time, majority of the shares (88%) in BFL were owned by BEL, a Ugandan company. However, BFL’s Articles of Association did not contain a restriction on transfer of shares to non-citizens.

Subsequently, ADB and BFL started developing structures for production of broiler chicken on the land, unknown to them, the land had been sold and transferred by the Mukasa’s, purportedly on behalf of BFL to a one Emmanuel Bwanika. Bwanika forcefully evicted BEL and ABD from the land and destroyed all the infrastructure initially put up by BEL and ABD.

D. Litigation in the High Court

Aggrieved by the eviction and destruction of infrastructure, BFL and ABD sued BEL, the Mukasa’s and Emmanuel Bwanika in the High Court Commercial Division seeking to recover among others, the market value of the land or its recovery in physical form, money spent on the destroyed infrastructure, general damages and interest on all monetary claims.

The question before the High Court was whether the land was legally owned by BFL and if so, whether the land had been illegally and fraudulently sold to Emmanuel Bwanika by BEL and the Mucosa’s.

At the time, majority of the shares (88%) in BFL were owned by BEL, a Ugandan company. However, BFL’s Articles of Association did not contain a restriction on transfer of shares to non-citizens.

The High Court ruled that the land legally belonged to BFL. The Court also ruled that BEL and the Mukasas fraudulently sold the land to Emmanuel Bwanika and ordered BEL and the Mukasa’s to pay BFL and ABD the current value of the land, UGX 70, 895,000 being the money lost on construction and labour on the land, general damages of UGX 100,000,000 and interest on all sums.

Dissatisfied with the judgement and orders of the High Court, BEL and the Mukasa’s challenged the judgement and orders in the Court of Appeal vide Court of Appeal Civil Appeal No. 118 of 2017 on the ground that the High Court erred when it ordered BEL and the Mukasa’s to pay BFL compensation amounting to UGX 480,000,000 for the land whereas BFL was a non-citizen company that could not legally own Mailo land.

E. Arguments Before the Court of Appeal

The point of contention before the Court of Appeal was whether, BFL was a non-citizen company at the time it acquired the land and if so, whether BFL could acquire legal title to the land. In the Court of Appeal, BEL and the Mukasas argued that since BFL’s Articles of Association did not prohibit transfer shares to non-citizens, BFL was a non-citizen company under Section 40(7)(e) of the Land Act 1998 as Amended and therefore incapable of legally owning mailo and freehold land. BEL and the Mukasas appear to have based their argument on Article 237(2) (c) of the 1995 Constitution of the Republic of Uganda which allows non-citizens to acquire leases and Section 40(4) which expressly prohibits non-citizens from acquiring mailo and freehold land. BEL and the Mukasas asked the Court of Appeal to reverse the judgement and orders of the High Court.

For BFL and ABD, it was argued that since BFL was controlled by Ugandans (BEL owned 88% shares) at the time it acquired the land, the company was a citizen of Uganda pursuant to Section 40 of the Land Act 1998 and could therefore, legally acquire and own mailo land. It was further argued that when ABD, a non-citizen company acquired a 50% stake in BFL, the mailo land interest was converted into a 99-year lease in accordance with Section 40(5) of the Land Act 1998. BFL and ABD asked the Court of Appeal to uphold the judgement and orders of the High Court.

F. Court of Appeal’s Decision

The Court of Appeal ruled that at the time BFL acquired the land, it was a non-citizen company for purposes of land acquisition since at the material time, BFL’s Articles of Association did not have a restriction on the acquisition of its shares by non-citizens. Consequently, Court ruled that the purchase of the land by BFL was illegal since, as a non-citizen company, it is prohibited by the Constitution and the Land Act 1998 from acquiring Mailo or freehold land.

As a result, the Court of Appeal set aside the order of the High Court requiring BEL and the Mukasa’s to pay to BFL and ABD a sum equivalent to the current value of the land and general damages of UGX 100,000,000.

The Court of Appeal also set aside the orders of the High Court requiring BEL and the Mukasas to pay to BFL and ABD damages of UGX 70,895,000 representing the value of the infrastructure destroyed by Emmanuel Bwanika’s forceful eviction of BFL and ABD from the land.

Court reasoned that since BFL had illegally acquired the land, it could not derive any benefit from an illegal acquisition of land. Ordering BEL and the Mukasas to pay BFL the current value of the land had the effect of enabling BFL to benefit from its own illegal acquisition.

G. Implications

  1. For purposes of owning mailo and freehold land by a Ugandan company, it is not sufficient that the company is incorporated in Uganda with majority shares held by citizens of Uganda. Such a company must incorporate in its Articles of Association, a clause that restricts the acquisition of its shares by non-citizens.
  2. All Ugandan companies which acquired either mailo or freehold land at a time when their Articles of Association did not restrict acquisition of shares by non-citizens did so illegally. The fact that at the time of acquisition, Ugandan citizens held majority of the company’s shares is irrelevant if the above restriction is not contained in the company’s articles of association and memorandum. Such companies may not be able to enforce ownership rights over such land.
  3. The decision does not affect Ugandan and non-Ugandan companies owning land under leasehold arrangement, regardless of whether the landlord’s title is freehold or mailo. This is so because the Constitution and the Land Act 1998 expressly permit non-citizens to acquire leases over land in Uganda.

H. Way Forward

  1. Consider amending Articles of Association.
    Moving forward, companies which are controlled by citizens of Uganda and would like to acquire either mailo or freehold, with Articles that allow non-citizens to acquire shares, should consider altering their Articles to provide for a restriction on the acquisition of shares by non-citizens.
  2. Prioritize leasehold.
    Having Articles of Association that restrict acquisition of shares by non-citizens may seriously stifle equity financing with undesirable consequences especially in a market like Uganda, which heavily relies on foreign investment. It is therefore expected that some companies, may not be willing to restrict. Prioritizing leasehold tenure ensures that the company owns land without losing its capacity to attract equity finance from foreign investors.
  3. Legal advice on prior mailo or freehold acquisition.

    Companies which have acquired mailo or freehold without a restriction on the acquisition of shares by non-citizens in their Articles of Association face serious risks in regards to enforcement of ownership rights over such land. It is advisable that such entities seek legal advice on how best their rights can be protected and risks minimized.

I. Conclusion

Having Articles of Association that Prohibit non-citizens from acquiring shares is not desirable for most companies which may wish to attract foreign investment by way of equity finance. However, the law and now the Court decision have to be complied with, in that regard, companies seeking to acquire land in Uganda should prioritize leasehold tenure since the law expressly permits non-citizens to acquire leases.

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