KENYA Law and Practice Contributed by: Sammy Ndolo, Brian Muchiri, Nicholas Owino and Valere Nyaboke, Cliffe Dekker Hofmeyr
4. Shareholders 4.1 Companies and Shareholders Individuals become members of a company by sub - scribing to shares by: • incorporation; or • the creation of new shares; or • a transfer of shares from an existing shareholder. Shareholders provide equity/financial backing to a company and are generally liable only for the amount of their unpaid shares. The Companies Act provides that a company’s con - stitution binds the company and its members to the same extent as if the company and its members had covenanted with each other to observe the constitu - tion, making the relationship contractual in nature. The company’s constitution (articles of association) governs the relationship between the company and its members, including the rights attached to the respec - tive members’ shares. In some cases, members may opt to enter into a private shareholders’ agreement to govern the relationship amongst themselves. Generally, a company is a separate legal entity from its shareholders. This separate personality is not with - out limits and courts may allow piercing the corporate veil in cases of fraud and serious misconduct. The concept of piercing the corporate veil is recognised under Kenyan law and courts will do so if satisfied that there has been serious misconduct or fraud. In doing so, the individuals behind the company who have committed a wrong using the company will be held personally liable. The Companies Act requires a company to maintain a register of its shareholders, which must include their names, addresses, shareholding details, dates of becoming and ceasing to be shareholders and any distinctions between classes of shares. The register must be kept at the company’s registered office and a copy must be submitted to the Registrar of Compa - nies. Although the Companies Act does not expressly provide for public access to this information, certain shareholder details may be obtainable through a for -
interests or those of a third party at the company’s expense; • misfeasance and/or breach of trust – similar to a breach of fiduciary duty, this applies when directors or officers misuse company property or assets for personal gain or purposes outside the company’s interests; and • statutory violations – specific laws such as the Companies Act, the Capital Markets Act or the Competition Act may impose liability on directors and officers for breaches of their provisions. The Companies Act in Kenya restricts attempts to shield directors and officers from liability and voids any clause in the company’s articles, contracts or other documents that seeks to exempt directors from liability arising from negligence, default, breach of duty or breach of trust. Companies can, however, obtain directors and offic - ers insurance to cover liabilities incurred while act - ing in the company’s best interests. This insurance wouldn’t protect directors from intentional wrongdo - ing or gross negligence. 3.10 Payments to Directors/Officers Directors’ service contracts that extend beyond two years require the approval of company members. This requirement does not apply to companies not regis - tered under the Companies Act or wholly owned sub - sidiaries of other corporate entities. Where a director’s service contract is entered into in contravention of the provisions of the Companies Act, the contract is void to the extent of the contravention and the company is entitled to terminate the contract with reasonable notice. Directors of a company (excluding companies sub - ject to the small companies regime) are required to include details of the benefits they have received in that financial year in the notes to the company’s indi - vidual financial statement. The directors of a listed company shall prepare a directors’ remuneration report for each of the compa - ny’s financial years. A quoted company is one whose equity share capital is included in the official list of a stock exchange or other regulated market in Kenya.
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