KENYA Law and Practice Contributed by: Sammy Ndolo, Njeri Wagacha, Brian Muchiri and Deborah Sese, Cliffe Dekker Hofmeyr
company if they leave said company in “good” circumstances (eg, retirement); and • bad-leaver provisions – where the manager is obli - gated to sell their shares to the shareholders at a price below market value if they leave the company in “bad” circumstances (eg, gross misconduct). 8.4 Restrictions on Manager Shareholders Restrictive Covenants In Kenya, no restrictive covenants are provided to management shareholders. The restrictions agreed to by management shareholders are usually set out in the shareholder’s agreement and the employment contract. The typical restrictive covenants are outlined in the following. Non-compete clause This clause limits the business activity that the man - ager can undertake after leaving the target company. The limitation pertains to a particular jurisdiction and period. It is important to note that the limitation needs to be fair so as not to impede the manager’s ability to earn a living. If the clause is extensive, there is a risk that the courts in Kenya may deem it unenforce - able. Parties can negotiate for compensation to be provided on exit, in order for this clause to be binding and adhered to by the manager. Non-solicitation This clause prohibits the manager from soliciting the target company’s employees and clients for a certain period. There are no limits to enforceability. Confidentiality The manager will be bound not to disclose confidential information. Usually, the clause is extensively drafted, clearly highlighting what is deemed confidential. Non-disparagement clause The manager is bound not to disclose or say anything negative about the target company – either in private or public – that may damage the target company’s reputation. 8.5 Minority Protection for Manager Shareholders Management shareholders do not typically benefit from strong minority protection of any form. They do,
however, like other shareholders, enjoy some limited protection under the Companies Act, which man - dates majority (50%) and special (75%) shareholder approval requirements, as well as derivative actions in the event of oppressive behaviour against the target company. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights Private equity funds aim to ensure that their invest - ment is protected and that the target company per - forms so as to make the most out of their investment. In this respect, private equity funds aim to ensure that they are aware, or in control, of the day-to-day man - agement of the target company by instituting the fol - lowing in shareholder agreements. Board Appointment Rights Private equity funds usually aim to have control of the board by acquiring the rights to appoint board members, depending on their shareholding and usu - ally with veto rights. They will typically negotiate board observer seats at the minimum. Reserved Matters Reserved matters are mostly highly negotiated. The shareholder’s agreement clearly outlines what is a board-reserved matter and what is a shareholder- reserved matter. The voting threshold on reserved matters is also a point of negotiation, as the private equity fund will aim to ensure that they are included in all the decision-making process. Information Rights Private equity funds usually require certain documents, such as financial statements and director reports, to be submitted at set intervals. This ensures that the private equity fund is aware of the performance of the target company. 9.2 Shareholder Liability In Kenya, as a target company has a separate legal personality from its shareholders, shareholders are generally not liable for the actions of a limited liability company (in this case, the target company). However,
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