The rights of minority shareholders in Kenya

 

A minority shareholder is a shareholder who holds less than 50% of the shares in a corporation. A minority shareholder can also be defined as a shareholder who does not hold majority control over a company (less than 50%).

 

Minority shareholders in Kenya find it difficult to protect themselves from the excesses of majority shareholders and powerful boards of directors because of a number of reasons. First, there is a reluctance to enforce criminal and civil laws against directors who use their office to expropriate members’ investments. Second is the continued reliance on common law which places a high threshold on minority shareholders who wish to exercise their rights against majority shareholders. The third is the existence of a statute that lacks stringent enforcement mechanisms.

 

Although our courts have been reluctant to intervene in the internal management of companies (following Foss v Harbottle), there has been a tendency to attempt to strike a balance between excessive interference on the one hand and protection of minority shareholders’ rights on the other hand. The courts’ intention has been to find an appropriate balance between majority rule and the protection of minority shareholder rights and interests.

 

Rights of Minority Shareholders

 

While shareholders collectively own a company, they do not control the day-to-day running of the company; that is the role of the board of directors. In exchange for their investment, however, shareholders have a range of rights available and retain power over certain major company decisions.

 

In this regard, the Companies Act, 2015 (the Act) has significantly enhanced the
rights of minority shareholders by specifically enacting into law certain rights of shareholders and duties of directors and providing for an enforcement mechanism of
those rights and duties.

 

It is important to note that while shareholders’ rights are mainly from the Act, these may be modified or enhanced by the company’s articles of association, a shareholders’ agreement and possibly under the terms of a specific share issue. Different shareholders’ rights may also be attached to different classes of shares and some are only available to those holding certain share percentages.

 

Generally, minority shareholders possess similar rights as those of any other shareholder. However, there are rights that are tailored to benefit minority shareholders, given that they lack the voting power to enforce their will. We examine both these sets of rights below:

 

1. Rights Available to All Shareholders including Minority Shareholders

 

1. The right to attend a general meeting and vote

 

Under section 281 of the Act, all shareholders, including minority shareholders, have the right to receive notice of general of meetings. They also have a right to attend the said meeting or appoint a proxy to attend on their behalf. Another closely linked but distinct right is the right to vote. The right to vote on fundamental matters gives shareholders a voice in corporate affairs. As noted above, however, minority shareholders may not be able to utilize this right in the event the majority shareholders decide to impose their will on the minority. Nevertheless, minority shareholders can still attend general meetings and make their voices heard.

 

1. Right to Requisition a General Meeting

 

Section 277 allows shareholders to require directors to convene a general meeting. Minority shareholders may utilize this right so long as they together hold at least 10% of the issued share capital or 5% of issued share capital, as the case may be.

 

The directors are then required to hold the meeting within 21 days of the request and not more than 21 days after the date of the notice convening the meeting.  If the directors do not comply with the demand, section 279 gives the members who requested the meeting, or any of them representing more than one-half of the total voting rights of all of them, to convene a general meeting.

 

1. The Right to Sue on Behalf of the Company

 

There may be occasions where a wrong is done to a company, but the majority or those in control of the company decide to take no action in respect of the wrongdoing. Many times, such a wrong will have been perpetrated by either the majority shareholder(s) or the board of directors. Since the wrong is to the company, the general rule is that the claim has to be brought by the company and a minority shareholder will ordinarily have to abide by the decision of the majority shareholders or directors, who typically act on the whims of the majority shareholders.

 

Under certain circumstances, a shareholder, including a minority shareholder, may sue on behalf of the company for a cause of action vested in the company and seeking relief on behalf of the company. This is known as the right to take a derivative claim.

 

However, the right to institute a derivative claim is curtailed by a number of factors. First, section 239 of the Companies Act 2015 provides that a shareholder must seek the court’s leave before instituting a derivative claim on behalf of the company.  Secondly, a minority shareholder wishing to exercise the right to institute a derivative claim must meet certain conditions. These conditions have been summed up under section 241(2) of the Companies Act 2015 and in the case of Isaiah Waweru Njumi & 82 others v Muturi Ndungu {2016} eKLR to include:

 

1. Whether the shareholder is acting in good faith;
2. Whether the company has decided not to pursue the claim;
3. Whether the shareholder has pleaded particularized facts which plausibly reveal a cause of action against the proposed defendants. .
4. Whether the shareholder fairly and adequately represents the interests of the shareholders similarly situated;
5. Whether the action taken by the shareholder is consistent with one, a faithful director acting in adherence to the duty to promote the success of the company would take.
6. The extent to which the action complained against is likely to be authorized or ratified by the company in the future.
7. Whether the cause of a claim contemplated is one that the shareholder could bring as a direct as opposed to a derivative action.”

 

1. Right to Information

 

Each shareholder, including a minority shareholder, has the right to receive documents such as audited financial statements, minutes of general meetings, and special notices. They also have a right to receive a copy of any written resolution proposed by directors or any one or more shareholders.

1. Right of Pre-emption

 

Section 338 of the Companies Act provides for the existing shareholders’ right of pre-emption. This right gives existing shareholders, including minority shareholders, the right to purchase any new shares the Company may issue before they are offered to third parties. This requires shareholders of the company seeking to sell their shares to first offer them to existing shareholders. If they fail to purchase then they will be allowed to offer them to third parties.

 

1. Anti-dilution Rights

 

Dilution is a reduction in the percentage of ownership a shareholder has due to the issuance or allotment of new shares by the company. To guard against this, minority shareholders may include anti-dilution provisions in their shareholders’ agreement or in the company’s articles of association. This is typically achieved by requiring that whenever a company issues shares to additional shareholders, the company is bound to issue new shares to existing shareholders, including minority shareholders, to put them in the same percentage ownership position that they would have been had shares not been issued to the additional shareholders.

 

In addition, clauses on pre-emptive rights can provide some anti-dilution protection as they may be drafted to provide that existing shareholders will have a right to purchase the newly issued shares in proportion to their current shareholding therefore minority shareholders retain the same percentage shareholding after the new issue.

 

2. Rights Designed at Benefiting Minority Shareholders

 

1. Statutory rights

 

Kenya has strengthened minority shareholder protection by introducing greater requirements for disclosure, review and approval of related-party transactions to the board of directors. The law also makes provisions to sue and hold interested directors liable in cases of prejudicial related-party transactions and allows the rescission of related-party transactions that are shown to harm the company.

 

In March 2020, the Companies Act was amended further to provide for the right of minority shareholders, with a threshold of five per cent of a company’s paid-up capital, to introduce agenda items in annual general meetings (AGMs).

 

Section 780 of the Act grants minority shareholders the right to sue for oppressive conduct and unfair prejudice.

 

Minority shareholders also have the right to petition the High Court for winding up of the company under the fair and just rule as provided for under section 424 (g) of the Insolvency Act, 2015.

 

Lastly, minority shareholders in companies registered in Kenya are protected by the Business Laws (Amendment) Act 2020. The Act lifts the threshold for compulsory acquisition/sell-out rights for company shareholders involved in a take-over from 50% to 90%. Therefore, for companies listed at the Nairobi Securities Exchange, the new law will ensure the protection of minority shareholders.

 

1. Negotiated Rights

 

These rights are not expressly provided for under the law. They are typically a result of negotiated agreements amongst shareholders, such as Shareholders’ Agreements and Share Subscription Agreements.

 

Tag-Along Right

 

Tag along rights protect minority shareholders in a future merger or acquisition giving them the right to be included in a proposed share sale negotiated by one or more of the majority shareholders. It works to the benefit of minority shareholders by giving them an opportunity to benefit from the deal the majority shareholder negotiated (if the minority shareholders consider it to be a good deal). It also gives minority shareholders the opportunity to exit at the same time as a majority shareholder and to avoid having to deal with a new shareholder.

 

Conclusion

The Companies Act, 2015 has gone a long way towards protecting the rights of minority shareholders in Kenya. This has been done through the provision of statutory duties of directors and the codification of the rights of shareholders. Articles of association and shareholders’ agreements can also be used to protect the rights of minority shareholders.  Therefore, it is important for minority shareholders to have comprehensive shareholder agreements that provide for and protect their rights. Moreover, the Companies Act provides for derivative actions and the right to sue in case of oppressive conduct or conduct that is unfairly prejudicial as mechanisms of enforcing the rights of minority shareholders.