Reserved Matters and Deadlock Clauses in Kenyan Companies

Two clauses decide whether a shareholder agreement works when the parties disagree: the reserved matters, which list the decisions that need a particular shareholder’s consent, and the deadlock clause, which says what happens when that consent is refused. In Kenyan companies with a foreign investor and a local partner, these are the provisions most often left vague, and the ones that cause the most expensive disputes. This article explains how to draft reserved matters and deadlock clauses so that they protect the parties without paralysing the business.

What reserved matters are for

Under the Companies Act, 2015, most decisions are taken by the board or by ordinary resolution, which needs a simple majority (section 256). Only certain decisions need a special resolution of at least seventy-five percent (section 257), such as amending the articles (section 22). Reserved matters fill the space in between. They are a contractual list of decisions that cannot be taken without the consent of a named shareholder, or of a stated majority higher than the law requires.

For a minority partner, reserved matters are the main protection against being outvoted on decisions that change the nature of their investment. For a majority investor, the list defines exactly where the partner can say no, and everywhere else the majority governs.

Drafting the list

A reserved matters list for a small or medium Kenyan company, such as a restaurant or service business, typically includes:

• amending the articles or changing the share capital;
• issuing new shares or granting options, other than pro rata to existing holders;
• changing the nature of the business or opening new outlets or locations;
• borrowing or giving security above a set amount;
• transactions with a shareholder or its related parties;
• approving the annual budget, or departing from it by more than a set percentage;
• appointing or removing the chief executive or managing director;
• selling the business or a material part of it;
• starting or settling litigation above a threshold;
• winding up, administration or a voluntary arrangement.

Three drafting points make the difference. First, set monetary thresholds so that routine operations do not need consent. Second, decide whether each matter needs shareholder consent or board approval with a named director’s vote, because the board level is faster. Third, provide a deemed-consent mechanism: if a shareholder does not respond to a written request within a set number of days, consent is treated as given. Without it, silence becomes a veto.

Keep the list proportionate. A minority partner with fifteen percent and a veto over the budget, hiring and pricing effectively controls the company. A foreign majority investor should resist that. Our article on shareholder agreements for foreign majority owners covers how to balance control and protection.

Defining deadlock

A deadlock clause should start with a precise trigger. Typical triggers are a reserved matter refused twice within a set period, a board unable to reach a quorum at two consecutive properly called meetings, or a tied vote on a matter where neither side has a casting vote. Vague wording such as “a fundamental disagreement” invites a separate dispute about whether a deadlock exists at all.

Breaking the deadlock: how deadlock clauses escalate

Good deadlock clauses escalate in stages:

1. Cooling off and escalation. A short period for the parties’ principals to meet in person, often the investor’s senior executive and the local partner.
2. Mediation. A time-limited mediation with a named body or mediator. It is confidential and keeps the relationship intact more often than litigation does.
3. Expert determination. For technical or financial disputes, such as the budget or a valuation, an independent expert’s decision can be made final and binding.
4. Buy-sell mechanism. If the deadlock persists, one party can trigger an exit. In a “Russian roulette” clause, one party names a price per share and the other must either buy or sell at that price. In a “Texas shoot-out”, both submit sealed bids and the higher bidder buys. A simpler alternative is a put or call option at a valuer’s fair market value.
5. Sale of the company. As a last step, the parties agree to sell the whole company and share the proceeds.

Buy-sell clauses favour the party with deeper pockets. A local partner who cannot raise funds quickly may be forced to sell at a low price named by a foreign investor. A mechanism that operates harshly also invites a challenge, so consider a longer timetable, an option to pay in instalments, or a valuation floor. Our article on buying out a joint venture partner explains how the purchase is then completed.

If there is no deadlock clause

Without a contractual route, the parties are left with the statutory remedies. A member can petition under section 780 of the Companies Act on the ground that the company’s affairs are being conducted in a manner that is oppressive or unfairly prejudicial to their interests. The court may order, among other things, the purchase of a member’s shares (section 782). Alternatively, a member can apply under the Insolvency Act, 2015 for the company to be liquidated on the ground that it is just and equitable (section 424(1)(g)). The court will not make that order if it considers that some other remedy is available and the applicants are acting unreasonably in seeking liquidation instead (section 427(4)). Both routes are slow, public and expensive, and neither lets the parties choose the outcome. That is the strongest argument for drafting a proper deadlock clause at the start. Our article on shareholder disputes and minority oppression covers the court route in detail.

Frequently asked questions

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.