Many foreign investors arrive at a Kenyan law firm with a shareholder agreement they have already drafted with their local partner, often adapted from a template from another country or generated online. These drafts usually capture the commercial deal reasonably well. What they miss are the points where Kenyan company law overrides the contract, and the gaps that only matter when the relationship comes under strain. These are the issues we see most often when reviewing self-drafted shareholder agreements for Kenyan companies.
1. The articles of association say something different
A shareholder agreement binds the people who sign it. The articles of association bind the company and every member. Under the Companies Act, 2015, shares are transferable in accordance with the articles (section 326), and the articles can be amended only by special resolution (section 22). If the agreement says one thing and the company is still running on model articles that say another, the company and third parties will follow the articles. The fix is to adopt bespoke articles that mirror the agreement on the points that matter. Our article on shareholder agreements and articles of association explains how the two interact.
2. Board control the law does not deliver
Drafts often state that the foreign investor may appoint a fixed number of directors, and that directors may not be removed without both parties’ consent. Section 139 provides that a company may remove a director by ordinary resolution “despite anything to the contrary in any agreement between the company and the director”. A majority shareholder can therefore remove a director even if the agreement says otherwise. The agreement can still give the other party a contractual remedy, and well-drafted articles can protect appointment rights, but the protection has to be designed with section 139 in mind. Our article on shareholder agreements for foreign majority owners explains how.
3. Voting thresholds that do not match the shareholding
An ordinary resolution needs a simple majority and a special resolution needs at least seventy-five percent (section 257). A partner holding more than twenty-five percent can therefore block any special resolution, including changes to the articles, whatever the agreement says about “majority” decisions. Equally, an investor holding seventy percent cannot pass a special resolution alone. Good agreements list the reserved matters that need both parties’ consent, and set those thresholds deliberately against the actual shareholding.
4. No way out of a deadlock
In a two-party company, deadlock is the most predictable dispute and the one self-drafted agreements most often ignore. Without a deadlock clause, a stalemate over budgets, managers or new capital can only be broken by negotiation, sale or litigation. Build in an escalation step, mediation, and a final mechanism such as a buy-sell option or an agreed sale process. Our article on reserved matters and deadlock clauses sets out the options. Our article on buying out a joint venture partner covers the options.
5. Transfer restrictions and leaver terms missing
Look for pre-emption on transfers, tag-along and drag-along rights, a prohibition on transfers to competitors, and what happens to a shareholder’s shares if they stop working in the business, breach the agreement or die. A partner who received shares for running the restaurant and then walks away should not keep the same stake indefinitely. Good leaver and valuation provisions settle this in advance.
6. Vague funding obligations
“The investor shall provide the required capital” is not a funding clause. State the amounts, the form (share capital or shareholder loan), the timing, and what happens if a party fails to fund. Remember that existing shareholders have a statutory right of pre-emption on new share issues (section 338), which a private company can disapply only in the ways the Act allows. Our article on share capital versus shareholder loans explains the trade-offs.
7. Dividend promises the company cannot keep
Some drafts promise fixed annual returns to the investor. A company may make distributions only out of profits available for the purpose (section 486). A clause promising dividends regardless of profits cannot be performed lawfully. If the investor needs a fixed return, a shareholder loan with interest, or preference shares on properly drafted terms, is the better tool.
8. Hidden nominee arrangements
If any shareholder is holding shares for someone else, the arrangement must be disclosed. Regulation 4A of the Companies (Beneficial Ownership Information) Regulations, 2020 requires a nominee shareholder to disclose that status and the nominator’s particulars to the company. A side letter confirming that the “real” owner is the foreign investor, while the register says otherwise, creates exactly the risk these rules target. See our article on nominee shareholders in Kenya.
9. Dispute resolution in the shareholder agreement
Check that the company itself is a party where it needs to give undertakings, that the governing law is clear, and that the dispute resolution clause works: a named arbitral institution or seat, the number of arbitrators and the language. Foreign governing law is possible, but enforcing it against a Kenyan company and a Kenyan partner adds cost. Many investors are better served by Kenyan law with arbitration in Nairobi.
Institutional investors usually arrive with their own term sheet. Our legal checklist for DFI and private equity raises covers what they will expect to see.
How We Can Help
Clay & Associates Advocates reviews shareholder agreements prepared by investors and their Kenyan partners. We give a written comments memo and tracked changes, align the articles with the agreement, and flag where the draft needs rewriting, not just correcting. Our guide to opening a restaurant in Kenya as a foreign investor covers the wider set-up for hospitality ventures. Contact our corporate and commercial team to send us your draft.
Sources: Companies Act, 2015, sections 22, 139, 257, 326, 338 and 486; Companies (Beneficial Ownership Information) Regulations, 2020, regulation 4A.
Frequently asked questions
Is a shareholder agreement legally binding in Kenya?
Yes, as a contract between the parties who sign it. It does not bind the company or future shareholders unless they are parties, and it does not override the Companies Act. That is why the articles should be aligned with it.
Can I use a template from another country?
You can start from one, but it will need adapting to the Companies Act 2015, Kenyan beneficial ownership rules and Kenyan tax. Foreign templates commonly assume rules on director removal, resolutions and distributions that differ in Kenya.
Should my Kenyan partner have their own lawyer?
Yes. Each party should take independent advice. It protects the partner and reduces the risk that they later challenge the agreement as unfair.
How long does a review take?
A focused review with a comments memo usually takes a few working days once we have the draft, the company documents and the commercial background. Drafts that need substantial rewriting take longer.
Need advice on your own matter?
Tell us what you are dealing with. You will know what it involves and what it costs before you commit.
This article is general information on Kenyan law as at its publication date, not legal advice. Reading it does not create an advocate and client relationship.
