PROJECT WORK

BY
FIRM 19 CLASS F

CRITICAL ANAYSIS OF RIGHTS OF MINORITY SHAREHOLDERS IN KENYA AND

IN ALL COMMON LAW COUNTRIES
SUBMITTED TO

MR. FREDD WA KIMANI

JUNE 2019
DECLARATION
We, the Partners of FIRM 19 do declare that in answering the Commercial Law Project Work,
we have relied mainly on fine body of research that has been developed over the years about
shareholder and the law on incorporated entities. We have done little if any original or primary
research ourselves and we have been as comprehensive as possible in listing those sources that
we have relied on both as footnotes and a bibliography. We are extremely grateful for Kenyan
Legislatures, World Legal Scholars, Courts, and Commentators.

LIST OF MEMBERS OF FIRM 19

CLASS F

SERIAL NO. NAME OF PARTNERS ADMISSION NO. SIGNATURE

1. OKOTH BENARD ODHIAMBO 20191751

2 MWANZA BETTY MUENI 20190066

3 KAHIGA JOHN GITAU 20191793

4 MENGINYA ZAHRA SALIM 20190908

5 JEFF NDUKO BISIRE 20190974

6 MWEI SHARON CHEPKORIR 20190756

7 MBEGERA ASSA ONGUTI 20191766

8 ACHIENG YVONNE 20191445

9 WAWERU BENSON THUOO 20190823

10 SITUMA METRINE NELIMA 20191309

11 OGWEL ALPHONCE BARRACK 20191783

12 ODHIAMBO SUSAN AWUOR 20190539

13 TARUS CAROLYNE JEPKOSGEI 20191349

i
Table of Contents
LIST OF STATUTES CITED IN THE DECISIONS ................................................................................................ iii
LIST OF CASES USED ..................................................................................................................................... iii
LISTS OF BOOKS............................................................................................................................................. v
GENERAL INTRODUCTION ............................................................................................................................. 1
DIRECT CLAIMS.............................................................................................................................................. 1
DERIVATIVE CLAIMs ...................................................................................................................................... 2
TAG-ALONG RIGHT OF MINORITY SHAREHOLDER ........................................................................................ 8
RIGHT TO REQUIRE DIRECTORS TO CALL A GENERAL MEETING. .................................................................. 8
DEFINITION ............................................................................................................................................... 8
NATURE OF THE RIGHT ............................................................................................................................. 9
LAW APPLYING .......................................................................................................................................... 9
GROUNDS FOR CLAIMING THAT RIGHT .................................................................................................. 10
WHO HAS STANDING TO BRING IT? ........................................................................................................ 10
PROCEDURE FOR BRINGING THIS RIGHT ................................................................................................ 10
REMEDIES AVAILABLE ............................................................................................................................. 11
THE RIGHT TO HAVE THEIR NAME AND SHAREHOLDING ENTERED INTO THE REGISTER OF MEMBERS ... 12
Who is a Minority Shareholder? ......................................................................................................... 13
RIGHT TO CIRCULATION OF RESOULTION................................................................................................... 15
RIGHT TO RECEIVE DIVIDEND...................................................................................................................... 16
RIGHTS, TO ATTEND AND VOTE DURING MEETING AND THE RIGHT TO APPOINT A PROXY TO VOTE ...... 17
THE RIGHT OF MEMBERS TO RECEIVE NOTICE OF GENERAL MEETINGS.................................................... 19
RIGHT TO INSPECT COMPANY’S BOOKS AND RECORDS ............................................................................. 20
RIGHT TO RECEIVE THE FINANCIAL RECORDS AND REPORTS ..................................................................... 21

ii
LIST OF STATUTES CITED IN THE DECISIONS
The Companies Act, 2015.

LIST OF CASES USED

A

Agricultural Development Corporation of Kenya v Nathaniel K. Tum & another [2014] eKLR.

Altaf Abdulrasul Dadani v Amini Akberazi Manji & 3 others [2004] eKLR

Asia Pharmaceuticals v Nairobi Veterinary Centre Ltd HCCC No. 391 of 2000.

Charles Meto v Amos Kosgey & 3 others [2014] eKLR.

Cannon v Trask (1875) LR 20 Eq669.

Dadan v Manji & 3 Others (2004) 1 KLR.

Eveready East Africa Limited v Energizer Middle East and Africa Limited & another [2017]
Eklr.

Foss V. Harbottle (1843) 2 Hane 461

Ghelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & another [2017] eKLR.

Gitobu Imanyara & 2 Others v Attorney General Civil Appeal No. 98 of 2014; [2016] eKLR.

iii
In Re Engineering Manufacturers Limited [2007] eKLR

Isle of Wright Railway Co v Tahourdin (1883) 25 Ch D 320.

Jane Wambui Weru v Overseas Private Inv. Corp. & 3 Others 2012

Kusner v. First Pennsylvania Corporation, 395 F. Supp. 276.

Leo Investments Ltd V Trident Insurance Company Ltd [2014] eKLR.

Mohamed Dine Mohamed & 6 others v Safiya Ahmed Mohamed & 6 others [2018] eKLR.
[2018] Eklr

North-West Transportation Co. Ltd –v- Beatty [1887] 12 AC 589 PC.

Re Eryeza Bwambale & Co Ltd [1969] 1 EA.

Nilkunj Ratilal Dodhia v Shashikant Mepa Shah & 5 others [2018] eKLR.

Sultan Hasham Lalji and Others vs Ahmed Hasham Lalji and 4 others [2014] eKLR.

Sultan Hasham Lalji vs Diamond Hasham Lalji & 3 Others [2016] eKLR.

Tash Goel Vedprakash v Moses Wambua Mutua & another [2014] eKLR

iv
Wallersteiner v Moir (No.2) [1975] 1 All ER 849.

Wanjiru Njoya, Property in Work (Taylor and Francis 2016).

LISTS OF BOOKS
B

Balouziyeh J, A Legal Guide to United States Business Organizations (Springer 2013)

Boyle A, Minority Shareholders' Remedies (Cambridge University Press 2011).

Delaney PO Whittington, Wiley CPA Exam Review 2009: Business Environment and
Concepts (John Wiley & Sons 2008).

Ferrara RJ Pizzi, Shareholder Derivative Litigation: Besieging the Board.

Maisto G, Taxation of Intercompany Dividends under Tax Treaties and EU Law (IBFD 2012).

Porter GC Norton, Financial Accounting.

Tyagi MArun Kumar, Company Law (Atlantic Publishers and Distributors 2003).

v
GENERAL INTRODUCTION

In Kenya, a member can approach courts on matters related to the company with which he/she is
a member in two ways. Both ways are provided under section 780 of The Companies Act which
read:-

(1) A member of a company may apply to the Court by application for an order under section
782 on the ground—

(a) That the company's affairs are being or have been conducted in a manner that is oppressive
or is unfairly prejudicial to the interests of members generally or of some part of its members
(including the applicant); or

(b) That an actual or proposed act or omission of the company (including an act or omission on
its behalf) is or would be oppressive or so prejudicial.

The meaning of word member is not provided under the Act, holistic reading of the Act however
shows that the word member is unique in some sections of the Act. Under this provision member
the Act considered even person who is not a member of the company but is a person to whom
shares of the company, have been transferred; or have been transmitted by operation of law.1 Our
work will deal with types of claims a minority can approach the court with, as well as the
political, the financial and information rights of minority shareholders.

DIRECT CLAIMS

Direct claim which seems to be the antithesis of derivative suite may be defines as ‘shareholders’
actions against the company. 2 It consist of personal or individual shareholder suit and
representative (but not-derivative) suits.3In representative suits, frequently, minority shareholders
or small group of such are the parties of record.4Personal rights on the other hand, relates to
rights enjoyed by shareholders in respect of their status as members as well as property rights
attaching to their shares.5

NATURE OF DIRECT CLAIMS

1
Nilkunj Ratilal Dodhia v Shashikant Mepa Shah & 5 others [2018] eKLR.
2
A. J Boyle, Minority Shareholders' Remedies (Cambridge University Press 2011). P.50.
3
ibid, P.50
4
ibid, p.51.
5
Section 114(1) as read together with section 277(1), (2), (3) and (4), Companies Act, 2015.

1
Shareholder suing to redress an injury sustained directly to him or to a class to which such
shareholder belong and with the recovery going to that person or to a class of which he is a
member.6 The corporation in this case is a defendant rather than the beneficiary, 7and the remedy
is enforceable against the company. Advocates fee may be paid from shareholders’ recovery or
in a class action, from the common funds. In representative suits, applicant must prove majority
Shareholders are conducting the Business of the Company in a manner that is oppressive and
unfairly prejudicial to the interest of a Member (s) of the Company.

DERIVATIVE CLAIMS

INTRODUCTION

The golden thread running through the law of incorporations in nearly all countries is that, as a
general rule, a company is a separate legal entity, a person with a right to raise a claim of redress
whenever it suffers losses and damages caused by another person. 8 The judge in the case of
Sultan Hasham Lalji and Others vs Ahmed Hasham Lalji and 4 Others buttressed this point
holding that not even the majority shareholders could file a suit to claim redress for a wrong
done to the company.9 The proper plaintiff is the company and the appropriate agency to start
the action on the company’s behalf is the Board of Directors. 10 The rule of legal personality
however, do have exceptions which are believed to accrue to all shareholders. For minority
shareholders, it is available where the majority shareholders are controlling the company. It is the
law that where minority feels that wrongs have been done to the company which cannot be
rectified by the internal company mechanisms like meetings and resolutions and the directors are
beholden to the controlling majority shareholders. 11 They can bring an action by way of
derivative action.12

DEFINITION AND PURPOSE OF DERIVATIVE SUITS

6
Ralph C Ferrara and Julia D Pizzi, Shareholder Derivative Litigation: Besieging The Board.P.3
7
Ralph C Ferrara and Julia D Pizzi, Shareholder Derivative Litigation: Besieging The Board.
8
Gitobu Imanyara & 2 Others v Attorney General Civil Appeal No. 98 of 2014; [2016] eKLR.
9 Sultan Hasham Lalji and Others vs Ahmed Hasham Lalji and 4 Others [2014] eKLR.
See also Asia Pharmaceuticals v Nairobi Veterinary Centre Ltd HCCC No. 391 of 2000.
10 Mohamed Dine Mohamed & 6 others v Safiya Ahmed Mohamed & 6 others [2018] eKLR [2018] eKLR
11
Jane Wambui Weru v Overseas Private Inv. Corp. & 3 Others 2012.
12
Dadan v Manji & 3 Others (2004) 1 KLR.

2
A derivative claim under the Act means proceedings by a member of a company, in respect of a
cause of action vested in the company and seeking relief on behalf of the company.13

Nevertheless, Justice Onguto in the case of Ghelani Metals Limited & 3 others v Elesh Ghelani
Natwarlal & another, defined a derivative action as a mechanism which allows shareholder(s) to
litigate on behalf of the corporation often against an insider (whether a director, majority
shareholder or other officer) or a third party, whose action has allegedly injured the
corporation.14

The action is designed as a tool of accountability to ensure redress is obtained against all
wrongdoers, in the form of a representative suit filed by a shareholder on behalf of the
corporation.15 It places in the hands of the individual shareholders a means to protect the
interests of the corporation from the misfeasance of faithless director and managers. To
detect when a wrong has been committed to the company, some Companies use standard-
based strategies. It creates a duty on minority shareholders to obverse the conducts and
actions and where they violate the standards put in place, minority shareholders are free
to face the court for redress. In case the court agrees with minority shareholder(s),
liability will be imposed on the controlling shareholders and directors who watched the
wrong being done and failed to redress it.

LAW APPLYING TO DERIVATIVE CLAIMS

The scope of derivative claims and suits is governed by the Companies Act, 2015. This,
however, does not mean that it is the only document courts ought to refer to on matters to do
with derivative claims. The precedents from our courts show that other sources of law including
common law and precedents may be used to interpret or fill the lacunas in the statute. Ghelani
Metals Limited case, Justice Onguto interpreted the term member as used in relation to
derivative claims using common law to be limited to shareholders.16 He further stated in another
paragraph that, “in relation to factors to be considered in the exercise of judicial discretion,
there must be something new through statute, something old through factors which guided

13Ibid note 5 Section 238.

14
Ghelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & another [2017] eKLR. Par.37.
15
ibid, note2.
See also, Wallersteiner v Moir (No.2) [1975] 1 All ER 849.
16
See the judge’s definitions of derivative claim which explains who can continue a derivative claim.

3
common law exceptions to the rule in Foss v Harbottle and something borrowed from various
decisions in the United Kingdom which have interpreted and applied the Companies Act 2006
(UK) especially ss. 260-264 which are pari materia ss. 238-242 of the Act, 2015”.17

GROUNDS FOR BRINGING A DERIVATIVE CLAIM

The Companies Act 2015 sets out what sorts of company claims may be pursued under a
derivative claim as the followings; in respect of a cause of action arising from an actual or
proposed act or omission involving negligence, default, breach of duty or breach of trust by a
director of the company.18

THE PERSON WITH THE LOCUS STANDI TO BRING A DERIVATIVE CLAIM(S)

According to the Companies Act, a member has the locus standi to bring a derivative claim.19
The act defines derivative claim or claims as proceedings by a member of a company. A member
may be defined as a person who through a valid agreement, the person’s name has been entered
into the register of members. 20 The members are among other people, shareholders of a
company.

We are of opinion that, the term member as defined above was not the object of the statute. The
Act meant eligible member as per the history of the company law. A derivative claim is a right to
call managers and others injuring or who are likely to injure the company to account to the
company. It is our position that this right cannot be exercised by any member save for the
shareholders who from the jurisprudence in nearly all commonwealth countries, are allowed to
enter into the company’s shoes. It is only the real owners of the company (shareholders) that
ought to call directors to answer on their breach of duty to the company.21 Derivative claim as a
right of shareholders is an incident of property rights or an attribute of ownership and
accumulates to a person only by virtue of ownership of shares. 22In Brooks vs. Waiser, it was
stated that right to bring an indirect claim is entitled to a shareholder on the theory that such a
suit seeks to recover what belongs to the corporation because as a co-owner, it also belongs to

17
ibid
18
ibid, note 5.
19
ibid, Section 238 (1)
20
Madhu Tyagi and Arun Kumar, Company Law (Atlantic Publishers and Distributors 2003). p.187.
21
Wanjiru Njoya, Property in Work (Taylor and Francis 2016). p.105.
22
ibid p.106.

4
the plaintiff.23 This justifies another name of derivative claim which is an indirect claim. In the
indirect claim, the claimant/plaintiff may be said to be indirectly injured by the actions of the
defendant.

In Kusner vs. First Pennsylvania Corporation, the court established three principles which tend to
summarize the issue of locus standi in relation to secondary claims in company law. First, it
stated that shareholders right to bring a derivative action is based on the proprietary nature of
shareholders interest.24 Secondly, that only a proprietary interest in a business entity vests a party
with the requisite legal standing to prosecute a derivative action and thirdly, that only
shareholder has that unique interest (proprietary interest).25

The case analyzed above prohibited the trier of facts from looking beyond the requirement of
shareholders.26 It did not matter that applicant shareholder held unpaid shares or that the money
value of a plaintiff’s shares was lower than what a company owed a certain creditor.27 The right
was not based on economic interest, it is the shareholders alone that directors owe a duty to
account while the company is still a going concern.

PROCEDURE FOR PERSUING DERIVATIVE CLAIMS

Unlike before 2015 when the applicant was to satisfy himself and demonstrate to the court that
his claim was within the four exemptions provided in Foss v. Harbottle, the position is now
provided under the Companies Act that the shareholder apply to the courts which must be
satisfied that allegations meet the pre-derivative claim requirement to declare a claim a
derivative proceeding and grant permission to continue with it or them as such. 28 Before
derivative suit is filed, an applicant brings to court a plaint and an ex parte application for leave
supported by a detailed affidavit so as to demonstrate that he has locus standi to institute such an
action and that he has a prima facie case.29

23
ibid.
24
Kusner v. First Pennsylvania Corporation, 395 F. Supp. 276 (E.D. Pa. 1975).

25
ibid.
26
ibid.
27
ibid.
28
Ibid, note 5, Section 238(1).
See alsoTash Goel Vedrprakash vs Moses Wambua Mutua & Another HCCC No. 64 of 2014 on page 12 at paragraph
45, where the court granted leave for the suit to be held as a derivative suit.
29
Ibid, note 9.

5
THE FACTORS THE COURT OUGHT TO CONSIDER BEFORE APPROVING A
DERIVATIVE CLAIM.

The following are some of the factors which courts must be furnished with or must look into
before it can grant an applicant a go-ahead to prosecute a derivative proceeding;

FACTUAL FACTORS

 The existence of a company to which the plaintiff alleges to represent. The applicant
should give the name of the incorporation, the date of its incorporation among others.
 The plaintiff must prove that he has locus standi.
 It is impossible for the company to sue in its own name to redress the wrong or breach.
This would arise if the wrongdoers themselves are the directors or majority shareholders
in the company and will not allow it to file suit against themselves. Similarly, where there
was no majority shareholding which could overrule the directors, making it impossible to
institute the suit in the name of the company, if the directors fail to do so.
 Briefly, the harm alleged may be shown to have been suffered or likely to be suffered by
that shareholder in common with other shareholders of the corporation (proof of cause of
action). Individual injury and class injury are not within the territory of the indirect claim.
 The corporation whose interest is alleged to have been or likely to be injured must be the
beneficiary and must never be the defendant.
 In certain cases, the pre-suit demand must have been made by the applicant on the
company’s board of directors. This helps to prove that persons making decisions or
running the company are unwilling or are deliberately sabotaging redress thereof. It also
goes to prove that the shareholder who intends to institute and conduct ligation which
usually belongs to the company has exhausted all the means within his/her reach to obtain
within the corporation itself, the redress of his/her grievances or action in conformity
with his or her wishes.

LEGAL FACTORS

The court must first satisfy itself that there is a prima facie case on any of the causes of the action
noted under section 238 (3). 30 Section 239(2) of the Act provides that the application for

30
ibid.

6
permission will be dismissed if the evidence adduced in support “does not disclose a case” for
granting of permission.31 The essence of judicial approval under the Act is to screen out frivolous
claims.32 The court is only to allow meritorious claims. All that the applicant needs to establish,
through evidence, is a prima facie case without the need to show that it will succeed.33

The second stage entails consideration of statutory provisions and factors which ordinarily guide
judicial discretion albeit in the realm of derivative action.34 The Act does not exhaust all factors
to be considered in the exercise of judicial discretion under this circumstance. 35 Nevertheless,
legislatures cannot be blamed for this because it is not feasible for them to draw an exhaustive
list of factors to be considered in the exercise of judicial discretion.36

The statutory provisions to be met include the requirement under section 238(3) of the
Companies Act. The derivative action to be commenced only in respect of a cause of action
arising from an actual or proposed act or omission involving negligence, default, breach of duty,
breach of trust by a director of the company. It is also necessary to establish that the claimant is a
member of the company.

OPTIONS FOR THE COURT WHEN A DERIVATIVE ACTION APPLICATION IS

LODGED

If the application is made in the first instance, if satisfied that the application and the evidence
adduced by the applicant in support of it, disclose a case of giving permission, the court shall
proceed to declare it a derivative claim and grant applicant permission to institute and conduct it
as a derivative claim. 37 Otherwise, the court shall dismiss the application or make any
consequential order it considers appropriate.38

31 Sultan Hasham Lalji vs Diamond Hasham Lalji & 3 Others [2016] eKLR, where Judge Ogolla struck out a suit
which had no possibility of success having regard to the evidence contained in the witness statement that was to
be tendered at trial.
32
ibid.
33
ibid.
34
ibid.
35
ibid.
36
ibid, note2.
37
ibid, note 2. It is within the court’s jurisdiction to order that the suit continues as a derivative suit.
38
Section 239(2), Companies Act, 2015.

7
TAG-ALONG RIGHT OF MINORITY SHAREHOLDER

Among the first developments in company law was the rule in Foss vs. Harbottle. The rule made
by the majority was to stand against any view of the minorities.39 The majority shareholders had
the power to hold indoor or late night meetings that excluded the minority, agree with the
potential buyers to purchase their shares and controlling power of the company and drag-along
the minority to their decision to surrender the company for a takeover. 40 The minority
shareholders shares could be given out at any price the majority thought of, not actually what
was given to their majority counterparts. Players in the corporate world raised a complaint about
the inequity practice by the majority shareholders. Those who were trusted with making
decisions for the benefit of the entire class of shareholders were seen as selfish individuals.

As a response to minority complains, a regulation was developed in the form of a right to

minority shareholders. The tag-along right gave the minority investor a right to participate in a
sale orchestrated by, and on the same terms as the majority shareholders. 41 It effectively
burdened the majority shareholder with a duty to in include minority shareholders in the
negotiations and prohibited them (existing majority shareholders) from creating new majority
shareholder without the participation of the other shareholders.42

The law acknowledged that as rational men and women, the majority, in negotiating per value of
their shares, aiming for the highest value in the market. It then made it a rule that even where
majority shareholders do a deal away from other shareholders, the minority shareholders have
the right to join the deal and sell their stake at the same terms and conditions as would apply to
the majority shareholders.43

This right to date gives the minority shareholders the right to require the third party to buy all the
remaining shares for the same price.44

RIGHT TO REQUIRE DIRECTORS TO CALL A GENERAL MEETING.

DEFINITION

39 Foss V. Harbottle (1843) 2 Hane 461.

40
Wanjiru Njoya, Property in Work (Taylor and Francis 2016). p.105.
41
ibid
42
ibid
43
ibid
44
ibid.

8
Minority shareholders do have rights but are often overlooked. They have a right to require
directors to call a general meeting as stated in section 114 (3) (c) of the Companies Act 45 This
means that they have the ability to request for a general meeting to adopt resolutions about
matters required by law or by the company’s constitution.

NATURE OF THE RIGHT

The request for the meeting must state the general nature of the business to be dealt with and
may include the text of a resolution to be moved at the meeting46

The initiative for calling for a general meeting rests with the board, aside from the legally
required annual general meeting and the members' right to request the calling of a general
meeting. 47

LAW APPLYING
According to section 277 of the Companies Act, 2015 ‘the directors are required to convene a
general meeting as soon as practicable after the company has received requests to do so from

a) members representing at least the required percentage of such of the paid-up capital of
the company as carries the right of voting at general meetings of the company; or
b) in the case of a company not having a share capital, members who represent at least the
required percentage of the total voting rights of all the members having a right to vote at
general meetings’ 48

In the case of Cannon v Trask The directors are under no obligation to circulate resolutions
proposed by the shareholders and they must provide a statement in support of their decision not
to circulate any proposed resolutions.49 Directors are also not at liberty to call a meeting on a
date which is unsuitable for the members to attend and vote. According to the case of Isle of
Wright Railway Co v Tahourdin,50 if the directors convene a general meeting to consider only
some of the matters referred to in a requisition, the members would be within their rights to
ignore the meeting and convene their own

45
Ibid, note 5.
46
Ibid, section 277(5).
47
Stella Koukounis ‘Requisition of an extraordinary general meeting’ (18 th December 2017).
48
Section 277(2), Companies Act 2015.
49
Cannon v Trask (1875) LR 20 Eq669.
50
Isle of Wright Railway Co v Tahourdin (1883) 25 Ch D 320.

9
GROUNDS FOR CLAIMING THAT RIGHT
Minority shareholders can claim this right during financially difficult times or in the event of
miscommunication between the board of directors and the body of shareholders.51

A shareholder's right to request the calling of a general meeting overrides any contrary
provisions in the company's articles of association and applies to companies listed in a regulated
market.52

WHO HAS STANDING TO BRING IT?

According to the Companies Act,53 the directors are required to convene a general meeting as
soon as they receive requests to do so from members. The required percentage of the paid up
share capital they should have in order to bring up this right is 10% except in the case of a
private company where its 5% if

(a) more than twelve months has elapsed since the end of the last general meeting
convened or
(b) in relation to which members had, in accordance with an enactment or the company's
articles, exercised a right to require the circulation of a resolution in respect of the
meeting at their request.54

PROCEDURE FOR BRINGING THIS RIGHT

The request for a general meeting by the shareholders must state the purpose of the general
meeting which must be signed by those who requested it and deposited at the registered office of
the company. It may consist of several documents signed by one or more of the requisitioning
members.55

The board must call the requisitioned general meeting within 21 days from the date that the
requisition was deposited. If it fails to do so, any part of the members representing over half of

51
Stella Koukounis ‘Requisition of an extraordinary general meeting’ (18 th December 2017) <
https://www.internationallawoffice.com/Newsletters/Company-Commercial/Cyprus/Solsidus-Law/Requisition-of-
an-extraordinary-general-meeting> accessed 30th May, 2019
52
Ibid.
53
Companies Act,2015.
54
Ibid section 277 (3), (4).
55
Supra note 7.

10
the total members with a right to vote may call the general meeting within three months from the
date that the requisition was deposited.56

The directors have the power to review and consider whether the shareholders’ proposed
resolutions will be motioned to the general meeting for voting. This is because a resolution may
not be passed at a general meeting if it would, if passed, be void because of inconsistency with
any written law or the constitution of the company or otherwise, if it defames a person or if it is
frivolous and vexatious.

A request for the directors to convene a general meeting is not effective unless it is in hard copy
form or in electronic form and authenticated by the person or persons making it57

REMEDIES AVAILABLE
Shareholders of companies listed at the Nairobi Securities Exchange are allowed to sell their
shares when they disagree with the decisions of the board and majority shareholders.58

1. Legal action against the directors

According to the Companies Act 2015, provisions have been set under which minority
shareholders can find recourse by suing directors of the company.
Members have legal standing to bring actions on behalf of the company against directors for
breach of provisions of the memorandum and articles of association or breach of the directors’
duties as agents and fiduciaries of the company

2. Winding up
Some of the grounds available for minority shareholders in the Companies Act 59 in which the
Court may wind up a company include, (a) the company has by special resolution resolved that
the company be wound up by the court and (b) the court is of the opinion that is just and
equitable that the company should be wound up.

56
Ibid.
57
Ibid, note 5, section 277(6), (7)
58
Elijah Mwangi ‘Protection of the Rights and Interests of Minority Shareholders.

59
Ibid, note 5, section 219

11
Minority shareholders cannot easily arrange and effect the passage of a special resolution to
wind up the company.

Courts, however, rarely grant this remedy due to its drastic nature. When a company is being run
in a manner that is oppressive to some shareholders, the alternative remedy to winding up is
likely to be applied. This has been the case in In the Matter of Dynamics Engineering Ltd and
In the Matter of the Companies Act (Chapter 486)60 and Vadag Establishment –v- Yashvin
Shretta and Others61

3. Alternative remedy to winding up

Members of a company have the legal standing to sue where the directors, who are also
fiduciaries vis-à-vis the shareholders, owe the shareholders certain duties i.e if directors act in a
manner oppressive to, discriminatory of or detrimental to certain shareholders. Shareholders can
therefore bring an action against the directors and the company. Members who consider that the
affairs of a company are being conducted in a manner oppressive to them can make an
application for an order by the court.62

4. Specific remedies
Some of the specific remedies that a minority shareholder can seek include injunctions or
declarations, damages or compensation, summary dismissal of directors, restoration of the
company’s property, and rescission of contracts and account of profits.

THE RIGHT TO HAVE THEIR NAME AND SHAREHOLDING ENTERED INTO THE
REGISTER OF MEMBERS

Section 92 of the Companies Act63 provides that a person who subscribes to the Memorandum of
Association and the Articles of Association of a Company becomes a member upon its
registration. As soon as possible following such registration, the Company has a legal duty to
enter the names and addresses of the aforementioned members in its register of members along

60 In Re Engineering Manufacturers Limited [2007] eKLR

61
Vadag Establishment –v- Yashvin Shretta and Others Civil Appeal No. 83 of 2000
62
Supra note 14.
63
Ibid, note 5.

12
with the date on which they became members.64 Such a person is deemed to become a member
on the day their name is entered into a register.

There are prevalent threats to certain members of a company enjoying the right to be entered into
the register of members. One group that is susceptible to such fragrant breaches is the group of
minority shareholders.

Who is a Minority Shareholder?

The Companies Act does not directly define who a minority shareholder is much less a
shareholder. The Black’s Law Dictionary defines a minority shareholder as a shareholder who
owns less than half the total shares outstanding and thus cannot control the corporation’s
management or singlehandedly elect directors. 65 This can be better put with a look at the
Companies Act definition of a share which,

a. In relation to an undertaking with share capital means shares in the share capital

b. In relation to an undertaking with capital but no share capital means rights to share in the
capital of the undertaking

c. In relation to an undertaking without capital means interests:

i. conferring a right to share in the profits, or the liability to contribute to the losses
of the undertaking or

ii. giving rise to an obligation to contribute to the debts or expenses of the

undertaking in the event of liquidation.66

Why the Minority Shareholder is Vulnerable to Risk of not being entered in the Register of
Members?

Limited Success in AGM

The definition of a share in relation to its holder above reveals the holder as a person limited in
his right and his liabilities. It is no therefore no wonder that many minority shareholders seek
court orders against the companies due to the fact that they are inherently incapable of protecting
their interests through a vote at the AGM.

64
ibid, sec 92(2)
65
Bryan Garner, Black’s Law Dictionary, 8th Edition 2004, page 4292
66
Ibid note 5, sec 2

13
Limited Success of Derivative Claims

Further, courts have limited the access of minority shareholders to reliefs. A minority
shareholder whose name is not entered in the register of members has little chances of success in
getting reliefs from court. The approach by minority shareholders is ordinarily to bring a
derivative suit or claim. The High Court in Jane Wambui weru v Overseas Private Inv. Corp & 3
others67 in its ruling of 27th April 2012 quoted Mwera J (as he then was) in Altaf Abdulrasul
Dadani Vs. Amini Akberazi & 3 Others 68 where he held that derivative suits are available to
minority shareholders who are complaining of wrongs done to the company which cannot be
rectified by internal mechanisms. The derivative suits, Mwera J held, are not for the personal
benefits of the suing minority shareholders but for rectifying an illegality which the shareholder
perceives will place the company at a loss or damage.

In Charles Meto v Amos Kosgey & 3 Others69 the Court held that derivative actions are available
only where the wrong suffered was to the company and not an individual shareholder. Courts
have frequently applied a strict interpretation of the case of Foss v Harbottle70 in which the court
held in a precedent making decision that a right to derivative claim exists as an exceptionto the
general rule that where a wrong has been done to the company the proper claimant is the
company itself. Courts have severally restricted the application of this doctrine to wrongs done to
individual minority shareholders thereby casting doubt on their remedy in cases such as where a
company refuses or deliberately fails to include the shareholder in the register of persons who
have subscribed to the company’s constitution.

Reliefs to the Minority Shareholder

The Companies Act now provides that a member of a company may apply for the orders of the
court on grounds that the company affairs are being conducted in a manner that is oppressive or
unfairly prejudicial to him or a part of the members (emphasis mine).71 It is important to note
that at the time the High Court determined that derivative suits are limited to acts injurious to the
Company only, the Companies Act did not provide for avenues where the acts complained of are

67
Ibid, note 4.
68
Altaf Abdulrasul Dadani v Amini Akberazi Manji & 3 others [2004] eKLR
69
Charles Meto v Amos Kosgey & 3 others [2014] eKLR.
70
Supra, note 33.
71
Ibid note 5, Section 780,

14
prejudicial to the minority shareholder himself. The Act now provides for the minority
shareholder to bring suit seeking such orders that may include orders requiring the company to
do an act that the applicant complains the company has failed to do.72 Effectively, the minority
shareholder can claim that the Company has failed to enter his rights into the register of
members.

The Companies Act does not provide for the procedural law for derivative claims. However the
Court in Jane Wambui v Overseas Private Investment Corporation 73 held that a minor
shareholder should file the caim first then seek leave to continue with the derivative suit through
an application.

RIGHT TO CIRCULATION OF RESOULTION

This right is provided for under Section 266. (1) Of the Companies Act, 2015. The members of
a private company require the company to circulate a resolution that is written.74 The resolution
may be moved as a written resolution unless —

a) it would, if passed, be void (whether because of inconsistency with a written 'law or the
company's constitution or otherwise);

b) it defames a person; or

c) It is frivolous or vexatious.75

In instances where the members require a company to circulate a resolution with a statement of
not more than one thousand, words on the subject matter of the resolution.76 The request shall be
effective if it is in hard copy or in electronic form; it identifies the resolution and any
accompanying statement; and it is authenticated by the person or persons making it.77

72
Ibid, section 782(2) b) (ii).
73
Ibid, note 5.
74
Ibid, section 266 (1)
75
Ibid, section 266 (2)
76
Ibid, section 266 (3)
77
Ibid, section 266 (6)

15
A company is required to circulate the resolution and any accompanying statement as soon as
practicable after it has received requests to do so from members representing not less than the
requisite percentage of the total voting rights of all members entitled to vote on the resolution. 78

The requisite percentage is to be five per cent or if a lower percentage is specified in the articles
of the company, then that percentage that is specified. 79

RIGHT TO RECEIVE DIVIDEND

Dividend is a profit share attributed to a person in the light of his shareholder quality. Simply
put, based on number or weight of their shares (where there are classes of shares). 80 It is an
element of shareholder’s financial rights. 81 A right to receive dividends is the right to the
distribution of a part of the profits realized by the company. 82 As a rule in law of corporations, a
shareholder can only claim entitlement to a dividend already declared by the directors.83

Based on dividend rights, there is division as to shareholders. Preference shareholders and

ordinary shareholders are treated differently. 84 That is, if dividends are declared by the
corporation, preferred shareholders receive dividends first at a fixed rate before the ordinary
shareholders who are perceived to be the real owners of the company.85 A minority shareholder
therefore, who holds ordinary shares would be forced to wait till, first, dividends are declared,
two, preferred shareholders are paid, and three, if there is cumulative preference shareholders.86
They are paid what accumulated for them from dividends which were not paid in previous
years. 87 The said cumulative preference share holder come before even the non-cumulative
preference shareholders.88 The distinction between ordinary and preference shares relates to the
rights that attach to the shareholders of each class.

78
Ibid, section 266 (4)
79
The Companies Act, 2015, Article 266 (5)
80
Guglielmo Maisto, Taxation of Intercompany Dividends under Tax Treaties and EU Law (IBFD 2012).p.713.
81
Ibid.
82
Ibid.
See also section 487 0f the Companies Act, 2015.
83
Patrick R Delaney and O. Ray Whittington, Wiley CPA Exam Review 2009: Business Environment and
Concepts (John Wiley & Sons 2008).p.67.
84
Gary A Porter and Curtis L Norton, Financial Accounting.p.525.
85
Ibid.
86
Ibid.
87
Ibid.
88
Ibid.

16
Dividends which are to be paid in cash in respect of the shares can be paid by a cheque or a
warrant. This can be sent to the shareholder by way of registered address. The companies act
allows for distribution in kind and provides for the procedure for determination of amount.89 The
corporate directors have the discretion in deciding whether to distribute dividends to
shareholders or to reinvest profits back into the corporation.90

RIGHTS, TO ATTEND AND VOTE DURING MEETING AND THE RIGHT TO

APPOINT A PROXY TO VOTE

Corporate governance primarily takes a form of democracy and as such, majority decisions or
vote always prevail. However, the concept of majoritarian rule in corporate governance is open
to abuse.91 The minority shareholders are inherently in the vulnerable position as the majority
shareholders are bound to circumvent the rights afforded to minority shareholders through a
majority vote. 92 The minority shareholder’s disadvantage in the management of the company
affairs originates from their inability to influence actions submitted to shareholders as such
minority shareholders must take proactive measures to protect to shield themselves from
majoritarian oppression

Shareholder protection in Kenya today takes the form of shareholder empowerment well spelt
out in the Companies Act.93 The long title of the Act describes the Companies Act as

An Act of Parliament to consolidate and reform the law relating to the incorporation,
registration, operation, management and regulation of companies; to provide for the
appointment and functions of auditors; to make other provision relating to companies; and to
provide for related matters.”94

It can be deduced from the long title of the Act that the Act sought to modernise company law
and of importance to shield the shareholders from the excesses of directors. This the Act

89
Section 492 of the companies act
90
John Balouziyeh, A Legal Guide to United States Business Organizations (Springer 2013).p.51.
91
J. Kantai, Minority Shareholders in Kenya; Their Rights and Obligations (LLB Thesis 465/11)
92
Ibid
93
The Companies Act, 2015
94
Ibid.

17
achieves in various ways such as stretching the duties of directors and enforcement of such
duties and further outlining the provisions of derivative actions.95

THE RIGHTS OF MINORITY SHAREHOLDERS TO VOTE

Every shareholder in a company has the right to participate in fundamental matters that affects
the life and existence of a company. The courts have recognised the democratic principle in
company law that the majority rule. This then mean that the law permits members to treat their
right to vote as an incident of property which may be exercised to their advantage.96 In Eryeza
Bwambale & Co Ltd 97 the East African Court of Appeal held that the fact that minority
shareholders find themselves outvoted should not be taken as evidence of autocracy. However,
the law has developed considerably to shield minority shareholders from any oppression that
may be visited upon them by the majority shareholders. In North-West Transportation Co. Ltd
–v- Beatty98 the court held that it

“unless some provision to the contrary is to be found in the charter or other instrument by which
the company is incorporated, the resolution of a majority of the shareholders, only covered,
upon any question with which the company is legally competent to deal is binding upon the
minority, and consequently upon the company, and every shareholder has a perfect right to vote
upon any such question, although he may have a personal interest in the subject matter opposed
to, or different from, the general or particular interests of the company.”

It therefore flows from case law and statute law that all shareholders including minority
shareholders have the right to vote, such right includes but not limited to the right to receive
notices of general meetings and the right to appoint proxies to vote and participate in general
meeting. 99 By virtue of being minority, shareholders have the right to speak during general
meetings. This an important occasion for the minorities as it affords them the opportunity to air
their voices. This is a right conferred upon all shareholders by dint of section 298 of the
Companies Act, 2015.

95
Ibid
96
Eveready East Africa Limited v Energizer Middle East and Africa Limited & another [2017] Eklr.
97
Re Eryeza Bwambale & Co Ltd [1969] 1 EA.
98 North-West Transportation Co. Ltd –v- Beatty [1887] 12 AC 589 PC.
99
Ibid.

18
RIGHT TO APPOINT A PROXY TO VOTE

The Companies Act 2015 permits the use of proxies during company meetings. Section 298(1) of
the Act provides that a member of a company is entitled to appoint another person as the
member’s proxy to exercise all or any of the member’s rights to attend and to speak and vote at a
meeting of the company. However, section 298(2) presents reservations to the effect that
member who has a share capital may appoint more than one proxy for a meeting provided each
proxy is appointed to exercise the rights attached to a different share or different shares held by
the member. The effect of this then is that members fully have the right to appoint proxies to
exercise their rights, however, such appointments are limited by the class of shares held by the
shareholder intending to appoint the said proxy. The above position is affirmed by section 308(8)
of the Act which entitles holders of any class of shares to vote as a group on the variation of the
rights attached to that class of shares. This therefore means that the rights or preferences of any
class of shares cannot be altered without the authorization/consent of the affected shareholders
including the minority shareholders.

THE RIGHT OF MEMBERS TO RECEIVE NOTICE OF GENERAL MEETINGS

The Companies Act requires accompany to issue a notice of every general meeting to be held.
Failure to do so renders any resolution passed at such general meeting invalid.100 Principally,
general meetings are held in two scenarios. A general meeting may be called by the directors by
their own volition101 or by the directors when members direct them to convene the meeting102. In
the latter case where members direct the directors to call a meeting, the directors are required to
call the meeting after issuing a notice of the meeting provided that the time the meeting is held
does not exceed twenty eight days after the date of the notice convening the meeting.103

These provisions cement the right of members to receive notice before such meetings. The major
basis for the requirement to give them notice is that the notice acts as a tool of ensuring
accountability to members. The High Court in the case of Agricultural Development Corporation
of Kenya v Nathaniel K. Tum & another attached great to it as a way of granting members an
opportunity to interrogate the company’s profit and loss account and balance sheet as well as

100
Companies Act, sec 275
101
Ibid Companies Act Sec 276
102
Ibid Companies Act, sec 277(1)
103
Ibid Companies Act, Sec 278(1)b)

19
relevant information on assets and operations of the company at the annual general meeting. 104 A
special notice to be given where a meeting is expected to be held on a resolution to remove or
replace a director.105 Every general meeting is required to be preceded by a notice of the meeting.
The notice may include Details and a copy of a resolution intended to be moved at a general
meeting106

The right of members to receive a notice is also a simple requirement of the law which
companies must uphold. In the case of Agricultural Development Corporation of Kenya v
Nathaniel K. Tum & another, a notice issued convened the meeting right away thereby failing to
give the 21 mandatory days. The High Court stated that the notice fell short of compliance with
the law and that the non-compliance was a material one which could not be diminished as a mere
technicality.

The notice is a means of members to get information about the operations of the company.
Members cannot be expected to be aware of every action taken by a director because the
company and the members are distinct and separate. The legal requirements that members should
be given notice reinforced the principle of a company as a juristic person. Drawing from the
lessons of Salomon v Salomon it is imperative to note that the members and the company are
distinct and separate.

RIGHT TO INSPECT COMPANY’S BOOKS AND RECORDS

This right generates under the shareholders’ umbrella right to information. Though a common
law right, it is recognized by the company Act. This can be evidenced by for instance the need
specify a place for inspection of company records.107 It is recognized that for purposes and under
reasonable regulations as to place and time, a shareholder shall be allowed to inspect the books
of the corporation.108

104
Agricultural Development Corporation of Kenya v Nathaniel K. Tum & another [2014] eKLR.
105
Companies Act, sec 139(2).
106
Companies Act 278(2).
107
Section 1007.
108
Section 134.
See also GUTHRIEv. HARKNESS 199 U.S. 148 (1905)

20
The remedy for a shareholder who is denied a right to inspect company books and records after
complying reasonable regulations put in place by company directors may through judicial review
pray for mandamus to compel the directors to allow such inspection.109

RIGHT TO RECEIVE THE FINANCIAL RECORDS AND REPORTS

Companies are always required to always maintain proper records that deal with their
spending and other expenses. These records are required to help the different stakeholders to
gauge the rate at which the company is carrying out its activities110. Therefore, it is vital that
these parties are able to look at the updated financial records in order for them to deal with the
various issues such as fraud, overspending, and ultra vires acts. Section 34-38 of the Company’s
Act has duly provided for the need for companies to only execute documents with people who
are purely authorized to do the same. Consequently, it is important that this information can be
found within the company’s records.

In a bid to protect the rights of minorities, the company’s financial records and reports are
supposed to be available to all the members. This is regardless of the class of this particular
member. Section 114, expressly provides that all members have a right to receive the copies of
the company’s annual financial statements. Section 115 goes ahead and provides that these
members have the right to receive the copies in hard copy in instances that they have been
circulated in soft copy. Since it has been provided in the Companies Act 2015, then the various
players are bound to adhere to these applications by the minority shareholders.

Part XXV of the Companies Act 2015 provides the various accounting records and
financial statements. Section 620(2), provides the various financial records that a member is
supposed to receive in instances that it is an unquoted company. These are, the company’s
annual financial statement, the director’s report, and the auditor’s report on these financial
statements. Section 620(3), provides the reports in instances that the company is a quoted
company. These are the annual financial statement, the director’s remuneration report, the
director’s report, auditor’s report on the above-mentioned financial reports. Section 620(4)
further adds the financial reports; the notes to the statement, the balance sheet, and the profit and
loss account.

109 Cockburn v. Union Bank of Louisiana, 13 La. Ann. 289,

110
Gadaffi Yohana and Tatu Miriam, ‘Derivative action under the Companies Act 2015.

21
 Section 2.3.1 of the Corporate Governance Guidelines that were issued by the CMA
provide that it is important for all the shareholders to be part of the major decisions that the
company makes. The guidelines mandate that the information should be in the form of company
assets, restructuring reports, takeover, mergers, acquisition, and reorganization reports.

The financial records are supposed to be able updated every year. Therefore, all the
members are supposed to receive these financial records and reports on an annual basis. They
may be required to apply for these records when required.

Since the Act provides that these individuals are allowed to get these records, in case they
see that there are some areas that they see that there are some irregularities in the report then they
can take up some actions. These may include, putting the directors to strict proof or even
deciding to go to court to settle the matter. The court has powers to give order of mandamus that
force the directors to act within their powers. Therefore, the minority member will have a chance
to approach the court in his own accord and use the evidence based on the findings from their
perusal of the financial records. It can be seen from the Atlaf Abdulradul Dadani V Amini
Akberazi Manji & 3 Others111. The courts expounded on the issue of bringing the case by way of
a derivative suit. This is in cases that the minority shareholder perceives that the company is put
to loss and damage. Therefore, they are not allowed to bring the action for relief in its own name.

Lastly, the courts have the right to call for winding up in instances that a member applies
for the winding up. Section 219 of the Companies Act 2015, gives the courts the necessary
authority to wind up a company. Subsection (b), further holds that in cases that the court looks at
it is just and equitable that the company is wound up 112 . This can be seen in the Foss V
Harbottle113. In this case, a minority member saw that the directors were fraudulent in their
dealings. Therefore, the courts held that the applicant proved his case and the directors were
acting outside their powers. So, the winding up order were fit. However, when bring up this case,
the burden of proof will always lie on the minority shareholder.114 When they approach the court,
then they are supposed to ensure that they have the right prayers in place. In cases of fraud, the
courts have come up with the evidentiary threshold in fraud cases. It can be seen that the Tash

111 Altaf Abdulrasul Dadani v Amini Akberazi Manji & 3 others [2004] eKLR.
112
Elijah M Kiboi, ‘Protection of the Rights and Interests of Minority Shareholders’ (2016).
113
Ibid,note 39.
114
Cathy Mputhia, ‘Know your shareholder-rights before investing’ Business Daily (Nairobi 18 October 2010).

22
Goel Vedprakash V Moses Wambua Mutua and Rabbit Republic Limited115. The courts held that
was is required is the prima facie evidence of the company. This can be in the form of the
financial records

115
Tash Goel Vedprakash v Moses Wambua Mutua & another [2014] eKLR.

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