Structuring Impact Capital: Legal Tools for Mission-Driven Businesses Operating in Kenya

Impact investing in Kenya raises a structuring problem that founders in the UK or US often do not face. We have not found a dedicated legal form for a social enterprise in Kenyan statute, nothing equivalent to a UK Community Interest Company or a US benefit corporation that writes a social mission into the constitution with legal force. A mission-driven business here must lock in its purpose, and protect it from dilution by later investors, using the ordinary tools of company and contract law, deployed more deliberately than usual.

Structuring mission lock-in without a special legal form

A founder who wants a durable social mission can build it into three documents: the company’s articles of association, a shareholders’ agreement, and the rights attached to different classes of share. Each has a different strength, and they work best together.

• Articles of association. State the company’s purpose and the matters that need a higher approval threshold. Articles bind the company and its members, and they are public.
• Shareholders’ agreement. Reserve specific decisions for the approval of designated impact-focused shareholders, or for a mission committee, rather than a simple majority by value. Typical reserved matters are a change to the beneficiary group, pricing policy affecting low-income customers, or the balance between grant-funded and commercial revenue.
• Class rights. A separate class of share, held by a founder or a mission-aligned trust, can carry enhanced voting rights limited to mission decisions, so a later commercial investor with a larger economic stake does not automatically gain control over the social purpose.

Draft these provisions to match, because an inconsistency between the articles and the shareholders’ agreement is a common source of dispute. A shareholders’ agreement binds only its parties, so every new investor should sign up to the mission provisions as a condition of investing. This is general drafting practice and not a statement of a particular section of the Companies Act, so confirm the entrenchment mechanics for your company before relying on them.

The capital stack: development finance and blended structures

Development finance institutions such as the International Finance Corporation, British International Investment, Proparco, DEG, FMO and Norfund invest in East African businesses, and are often the anchor investor in blended finance. A typical blended structure puts a grant or first-loss tranche from a foundation or donor beneath a concessional development-finance tranche, with commercial capital on top taking the least risk. This can make a higher-risk social venture financeable when commercial terms alone would not.

Expect more extensive environmental, social and impact reporting covenants than a local angel or venture fund would ask for, and build the data systems to meet them at the outset. Agree how impact metrics are defined, who verifies them, and what happens if a target is missed, since a vague metric can become a default trigger.

Two certificates that foreign investors confuse

Two separate certificates serve two separate purposes, and conflating them is a common and avoidable mistake.

The investment certificate. Under section 15(2)(a) of the Investment Promotion Act, the Kenya Investment Authority assists foreign and local investors by issuing investment certificates, assisting in obtaining licences and permits, and assisting in obtaining incentives or exemptions under tax and other legislation. The certificate is a facilitation tool. It does not, on its own, guarantee that profits can be sent abroad.

The certificate of approved enterprise. The Foreign Investments Protection Act is the source of the protection that matters most to a foreign impact investor. A foreign national who proposes to invest foreign assets in Kenya may apply to the Cabinet Secretary for finance for a certificate that the enterprise is an approved enterprise (section 3). The Cabinet Secretary may issue it in his discretion if satisfied that the enterprise would further Kenya’s economic development or benefit Kenya. Under section 7, the holder may transfer out of Kenya, in the approved foreign currency at the prevailing rate of exchange, the after-tax profits including retained profits that have not been capitalised, the capital specified in the certificate, and the principal and interest of any loan specified in it. Section 8 provides that an approved enterprise cannot be compulsorily acquired except under the constitutional provisions reproduced in the Schedule, with full and prompt compensation.

Two practical points follow. If foreign assets are not invested within the approved period, the certificate is deemed revoked (section 5). Increases in capital value from the sale or revaluation of assets are not treated as profit for transfer purposes (section 7), so model exit proceeds accordingly. A foreign investor relying on repatriation guarantees should confirm that it, or its portfolio company, actually holds the approved enterprise certificate.

Structuring an impact fund for impact investing in Kenya

An investor that wants a locally domiciled fund, rather than investing from an offshore vehicle, should look first at the Capital Markets (Alternative Investment Funds) Regulations (Legal Notice 170 of 2023). They define an alternative investment fund as a collective investment scheme that privately pools funds from at least two but not more than one hundred investors, in Kenya or outside it, under a defined investment policy statement. No person may operate or hold itself out as an alternative investment fund without applying for and obtaining Capital Markets Authority approval. The categories a manager may seek approval for include debt funds, equity and equity-linked funds, hedge funds, property funds and infrastructure funds. The manager pays a non-refundable application fee and an annual regulatory fee.

The fund may be constituted as an investment company, a trust or a limited liability partnership, and the choice determines who holds mission-related rights and how investors vote. We have not verified whether the older registered venture capital company regime has been repealed or still operates alongside the 2023 Regulations, so confirm the position with the Capital Markets Authority. Our financial services practice advises on fund structuring and approvals.

Exit and investor alignment

Impact investors and later commercial investors often have different time horizons and different tolerance for the trade-off between return and mission. A cap table that mixes both without addressing this in the shareholders’ agreement is a predictable source of conflict at a later round or exit. Check anti-dilution and information rights against the mission-lock provisions, because a standard anti-dilution formula copied from a commercial term sheet does not protect a mission commitment the way a dedicated reserved-matters clause does.