New law boosts shareholders’ rights to put boards in check

Corporate governance in Kenya has changed ever since the enactment of the new 2015 law. Previously, corporate governance was managed under common law whereby provisions were not legislated except for a few minor provisions.

Corporate governance refers to the manner in which organisations are managed. The aim of good governance is to ensure that they are run in an accountable, fair, transparent and responsible manner.

Under the old system, in the event a shareholder felt the company was not being run well, he had a few ways to enforce his rights. One was through voting. For example, shareholders could vote out an underperforming board. This has always been subject to politics and often institutional investors, such as pension funds, have more say than individual shareholders.

Shareholders could seek other avenues of redress such as filing an application for inspection at the High Court. The court or company registrar would then order that a company be investigated.

Minority shareholders could also choose to file a minority action where a court would intervene in the running of the company for the sake of protecting minorities.

The shareholder could also apply to have the company wound up. There has always been an asymmetry of information between shareholders and the board of directors.

Not withstanding the fact that shareholders are owners of a company, the board of directors is charged with day to day management. Often shareholders do not have full access to information on the running of the company, except when the same persons make up the board.

This asymmetry of information has led to abuse of office by directors who make decisions which favour them and do not take into account shareholders’ rights.

Some shareholder rights include the right to vote and participate in decision-making in the company, benefit from assets of the company, transfer shares, receive dividends, right to information and to file suits against directors.

Stronger shareholder rights

The new law provides for stronger shareholder rights and legislates directors’ duties. Directors owe shareholders a fiduciary duty and a duty of trust. These duties have for the first time been legislated.

What this means is that shareholders can now bring action against directors under both common law and statutes.

The legal environment for businesses, especially companies, has changed since the enactment of the new Constitution in 2010. For example, for the first time in the Bill of Rights there is a right to information. It states that every person has a right to receive information that is necessary to protect their fundamental right.

Shares are property and shareholders have a right to the property.

For example, a shareholder can file a constitutional petition if the board of directors does not provide him with financial information.

Before 2010, this was not possible as there was nothing like the right to information. The shareholders’ position is now strengthened by the new laws.

However, shareholder education should be carried out to make them aware of their rights and responsibilities as well as the power of the board.

Unfortunately, many shareholders continue to suffer in silence as boards make decisions which are unfavourable to them.

Mputhia is the founder of C Mputhia Aocates. cmputhia@cmputhiaocates.co.ke

SOURCE: BUSINESS DAILY