Shareholder Agreements for Foreign Majority Owners in Kenya

A common structure for foreign investment in Kenyan consumer businesses is a foreign majority with a Kenyan minority partner: for example, a foreign investor holding seventy percent of a restaurant company and a local operator holding thirty. The foreign investor usually provides most of the money and expects to control the business. The Kenyan partner provides local knowledge, relationships and often day-to-day management. A shareholder agreement for this structure has a different job from a founders’ agreement between equals. It has to turn a majority stake into real control, protect the investment against the practical risks of operating at a distance, and keep the minority partner committed without handing them a veto over everything.

Map what your percentage actually buys

Start with the statutory thresholds in the Companies Act, 2015. An ordinary resolution needs a simple majority (section 256). A special resolution needs not less than seventy-five percent (section 257), and special resolutions are required for key steps, including amending the articles (section 22) and reducing share capital (section 407).

So a seventy percent holder controls ordinary resolutions, including removing a director (section 139), but cannot amend the articles or pass any other special resolution without the minority. A partner holding more than twenty-five percent has a statutory blocking stake. If the commercial deal is that the investor controls everything except a short list of protected matters, either the shareholding must reach seventy-five percent or the agreement must deal with the gap, for example by obliging the minority to vote in favour of specified changes.

The ninety percent threshold matters only for the statutory squeeze-out after a takeover offer (section 611), which rarely helps in a two-party company. Contractual drag-along rights do that job instead.

Control the board, not just the shares

Day-to-day control sits with the board. The agreement and the articles should give the investor the right to appoint a majority of directors and the chair, with a casting vote if appropriate, and should define the quorum so that the minority’s directors cannot stall the board by staying away. Our article on resident and nominee directors explains how to staff the board of a foreign-owned company where some directors live abroad.

Remember that the board will often include the Kenyan partner as managing director. Separate the two roles clearly. A management or employment contract should set out the partner’s duties, authority limits, pay and how the role ends, so that removing them as manager does not depend on buying back their shares.

Keep a short, deliberate list of minority protections

A minority partner will reasonably ask for some protections. The investor’s interest is to keep the list short and precise. Typical minority-protected matters include changes to the nature of the business, issuing new shares other than pro rata, related-party transactions with the investor, and winding up. Matters such as budgets, hiring and pricing should usually stay with the board. Our article on reserved matters and deadlock clauses explains how to draft the list and what happens when the parties disagree.

Giving the minority a fair, defined set of protections also reduces litigation risk. A member may apply to court where the company’s affairs are conducted in a manner that is oppressive or unfairly prejudicial to their interests (section 780), and the court has wide powers, including ordering the purchase of shares (section 782). A majority that acts within a clear, agreed framework is far better placed to resist such a claim. Our article on shareholder disputes and minority oppression covers these petitions.

Protect the foreign majority’s investment from a distance

Foreign majority investors often live outside Kenya, and many disputes arise from practical control rather than legal rights. The agreement should cover:

• Licences and assets in the company’s name. Business permits, tourism and liquor licences, the lease and supplier contracts should be held by the company, not by the local partner personally.
• Bank mandates. Require dual signatures above a set limit, with the investor or its appointee as a mandatory signatory.
• Information rights. Monthly management accounts, access to the accounting system and the right to appoint auditors.
• Company records and filings. Control of the company’s online registry and tax portal access, the statutory registers and the company seal if one is used.
• Non-compete and confidentiality. Reasonable restrictions on the partner opening a competing restaurant nearby while they are a shareholder and for a period after they leave.

Plan the exit both ways

Include a drag-along right so the investor can sell the whole company to a buyer, a call option over the partner’s shares if they leave the business or breach the agreement, and a valuation method for each case. In return, the minority will expect a tag-along right so that they can join any sale on the same terms. Our article on buying out a joint venture partner explains why these provisions decide how smoothly a split goes.

Make it enforceable

Align the articles with the agreement, because the company and third parties follow the articles. Choose a workable dispute resolution route. Many foreign investors prefer arbitration. Under section 6 of the Arbitration Act, 1995, a Kenyan court must, on a timely application, stay court proceedings brought in a matter covered by an arbitration agreement and refer the parties to arbitration, unless one of the statutory exceptions applies. Our checklist of common gaps in DIY shareholder agreements lists the other points to check before signing.

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.