Kenya's Companies Act and the protection of minority shareholders

Sankalp Africa Summit

Delegates attend the 7th Sankalp Africa Summit at the Kenya School of Monetary Studies (KSMS) in Nairobi on February 27, 2020. 

Photo credit: Diana Ngila | Nation Media Group

When minority shareholders of Express Kenya and Unga Group Plc halted takeover attempts in 2018, they marked a turning point in the running of corporates in Kenya, after many years of dominant shareholders forcing through virtually every policy decision.

Many investors had watched helplessly as their money went down the drain because of poor decisions by dominant shareholders but the Companies Act established in 2015 and amended in 2017 came to their rescue.

Fast forward to 2020 and Kenya is ranked the best globally in protecting minority shareholders. This mean it is the best country for one to own as few shares as possible in a company while having a say in the running of the business.

In the report on the ease of doing business, Kenya tops all countries in the world in protecting the rights and stakes of people holding minority shares.

“This indicator examines the strength of minority shareholder protection against the misuse of corporate assets by directors for their personal gain, along with shareholder rights, governance safeguards and corporate transparency requirements that reduce the risk of abuse,” the report states.

The survey measured the extent of disclosure, director liability, shareholder rights, ownership and control and corporate transparency and ease of shareholder suits.

“Kenya has strengthened minority investor protections 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,” the report says.

Amendments to the Companies Act in 2017 also protected shareholders from undue board control and entrenchment, while ensuring their involvement in major corporate decisions.

This was besides the requirement of corporate transparency on ownership stakes, compensation, audits and financial prospects.

Major improvement

In 2014, Kenya was ranked 98th in protecting minority shareholders globally but has come to overtake all other countries over  six years, as per the World Bank’s 2019 ranking.

The report shows improvements in  the extent of disclosure among companies, the extent of director liability and shareholders rights as well as corporate transparency.

With the new law, companies have been making public their financial statements and annual reports every year and half year, informing shareholders of happenings.

“There is now greater corporate transparency, which has led to significant interest in Kenya's stock market from large global equity investors,” the report states.

The Companies Act - the catalyst to the new reforms - further requires that companies clarify ownership and control structures, introduce stronger requirements for disclosure of related-party transactions to the board of directors, simplify the process to sue directors in cases of prejudicial related-party transactions and introduce means to improve disclosure in transactions where directors have a conflict of interest.

The law also requires shareholders to approve the election and dismissal of an external auditor.

One of the other main gains for Kenya is the requirement to make public the salaries of CEOs of listed companies.

In March, the law 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).

“The Companies Act of 2015 has greatly improved corporate governance in listed and non-listed companies, especially on disclosures for majority shareholders, protection of minority interests and dispute resolution," said East African Community Cabinet Secretary Adan Mohamed.

pmburu@ke.nationmedia.com

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