What you need to know about your rights as a minority shareholder in Kenya

Imagine investing money for a minority stake in a promising startup or a friend's business, only to find yourself completely sidelined when the majority shareholders make decisions that harm the company or dilute your investment. In Kenya, minority shareholders are far from powerless. The Companies Act and other legislation provide a range of protections, and a savvy investor can negotiate additional rights through a shareholders' agreement and the company's articles of association before committing capital. Rights under law Perhaps the most significant protection is the requirement that certain decisions must be passed by a special resolution, which requires not less than 75 percent of the total voting rights. This means a shareholder holding more than 25 percent of voting shares can veto or block these decisions. Some of the decisions include amending the company's constitution, reducing the share capital, amending the share rights of the shareholders, disapplying rights of first refusal for a new issue of shares, and liquidation or winding up of the company. Secondly, the Companies Act entitles a shareholder to apply to the court, where they believe that the company's affairs are being conducted in a manner that is oppressive or unfairly prejudicial. Examples include the company unfairly withholding dividends or taking actions contrary to its constitution. If you are successful, the court may issue orders to regulate the company's future conduct, restrain the company from taking certain actions, or even order that your shares be purchased by the company or the majority shareholders. Thirdly, the Companies Act permits a shareholder to bring proceedings on behalf of the company in respect of wrongs committed by the directors that involve negligence, default, breach of duty, or breach of trust, subject to obtaining the court's permission through a process known as a derivative action. Ordinarily, where a director has breached their duty, the company itself is the wronged party and holds the right to sue. However, since it is more likely that the majority shareholder controls the company, they may prevent the company from taking action. The law allows a minority shareholder to obtain the court's permission to sue the director through a derivative action. Fourth, if a company issues new shares, every shareholder has a right of first refusal. This means that the company has to offer the new shares to all shareholders proportionately to their existing shareholding before offering those shares to someone else. This ensures that a shareholder can pay and subscribe for the additional shares to avoid being diluted. Lastly, the shareholders have the right to inspect the register of members without charge, require copies of company documents (including articles, certificates of incorporation, and statements of capital), inspect directors' contracts, and receive the company's annual financial statements and reports. The Companies Act therefore offers an array of statutory rights that protect minority shareholders, ensuring that smaller investors are not steamrolled by majority control. But the law is only the starting point. Generally, where there is more than one shareholder in the company, it is advisable for them to enter into a shareholders' agreement. A shareholders' agreement is a contract entered into by the shareholders and the company, that sets out how the company will be governed, including how decisions are made and the rights of the various shareholders. A minority shareholder can thus negotiate for various minority protections to be included in the shareholders' agreement. Contractual rights Firstly, it is important to note that the board of directors is vested with the management of a company. The board generally directs the operations of a company, and hence a key starting point is the involvement of a minority shareholder at the board level. A minority shareholder will ordinarily negotiate the right to appoint one or more directors to the board. While this will not give the minority control of the board, it ensures they have a seat at the table, enabling them to participate in discussions, access information, and influence decision-making on the board. If the minority shareholder is unable to obtain a board seat, another tool is negotiating a right to appoint a board observer. An observer does not vote at meetings but may speak and access the same information available to directors. For a meeting of the board to occur, it requires a quorum and a minority shareholder can negotiate such that any quorum of a board meeting must include the minority shareholder's director (this also applies to shareholder meetings). In addition, the agreement can provide for the circulation of all board papers to the shareholders. This ensures that the minority shareholder is fully apprised of the conduct and proceedings of the board, always. Secondly, and perhaps the most critical protection is the negotiation of what are called 'reserved matters', which is a list of key decisions that cannot be taken without the approval of the minority shareholder's board appointee or, where the decision requires shareholder approval, the minority shareholder itself. These would typically cover important decisions such as changes to the company's share capital, spending over certain amounts, entry into material contracts, appointment of key employees, approval of the budget and business plan, et al. This ensures that these very important decisions cannot be passed by the majority shareholder or majority board without the vote of the minority shareholder or their appointed director, respectively. Thirdly, as highlighted above, the Companies Act has entrenched rights of first refusal where a company issues new shares. Similarly, a minority shareholder can negotiate various protections when it involves the transfers of shares. The agreement can provide that before a shareholder transfers their shares, they should offer the other shareholders the right to buy those shares. This ensures that new parties cannot be introduced into the company without the existing shareholders having had the first opportunity to acquire the shares on offer. In addition, a minority shareholder can negotiate a tag-along right. If the majority shareholder decides to sell their shares to a third party and the minority shareholder does not wish to remain in the company with that new party, the tag-along right entitles the minority to require the buyer to purchase their shares on the same terms. It is, in effect, a right not to be left behind. Finally, it is important for the shareholders' agreement and the articles of association to be aligned. The agreement binds its parties, while the articles form part of the company's constitution and bind the company and its members. A minority stake does not need to be just a minority voice.