2 min read381 words
This article answers two questions: "My co-founder is mismanaging the company and I can't get him out. What can I do?" Or conversely: "The majority shareholders are squeezing me out. Is that legal?"
Kenya's Companies Act 2015 has specific mechanisms for both situations.
The unfair prejudice remedy
A member of a company may petition the High Court on the ground that the company's affairs are being conducted in a manner that is unfairly prejudicial to the interests of its members generally, or of some part of its members, including the petitioner.
This is the primary tool for minority shareholders. Courts have granted relief where majority shareholders paid themselves excessive remuneration, excluded a minority from management contrary to a quasi-partnership understanding, failed to pay dividends while accumulating cash or diluted the minority through unauthorised share issues.
What the court can order
Under Section 780, the court has wide discretion, including ordering the company to refrain from an act, requiring the company to do something, authorising civil proceedings on behalf of the company and most commonly, ordering that the petitioner's shares be purchased by the majority at a fair value determined by the court.
The derivative action
A member may apply to court for permission to bring or continue a derivative claim i.e. a claim brought on behalf of the company in respect of an act or omission involving negligence, default, breach of duty, or breach of trust by a director.
This is different from unfair prejudice. A derivative action is brought on the company's behalf for example where a director has stolen from the company or paid themselves unauthorized bonuses and not on the shareholder's approval. Courts apply a threshold test before granting permission to proceed with a derivative action.
Many of these disputes could be avoided or would be significantly easier to resolve if the company has a properly drafted shareholders' agreement covering deadlock mechanisms, drag-along and tag-along rights, pre-emption rights on share transfers, exit valuation methods, and dispute resolution procedures. The Act provides minimum rights and your shareholder agreement can do much more. If yours is silent on these issues, now is the time to update it.
Facing a shareholder dispute?
Whether you are a majority or minority shareholder, early legal advice can prevent significant damage. Contact us today.
Talk to Gallant before you make the decision
If this raises a question specific to your situation, we are glad to talk it through.
This article is general legal information, not legal advice, and does not create a lawyer–client relationship.