Commentaries From Our Desk

24 Feb, 2025

Are Shareholder Agreements Still Protecting Minority Interests?

Silas Akiro

5 min Read

Shareholder agreements are traditionally viewed as vital instruments in safeguarding the rights and interests of minority shareholders within a company. These agreements typically contain provisions on decision-making, exit rights, dispute resolution, and protections against oppressive conduct by majority shareholders. However, recent trends and court decisions in Kenya suggest that the practical efficacy of these agreements in protecting minority interests is increasingly being tested. In many closely-held companies, majority shareholders often wield disproportionate control, using their voting power to alter board composition, restructure the business, or divert resources in ways that prejudice minority stakeholders. While shareholder agreements may provide for preemptive rights or veto powers, enforcement can be complex and costly. In Ghelani Metals Ltd & 3 Others v Elesh Ghelani Natwarlal & Another [2017], the Court of Appeal emphasized that courts must uphold contractual obligations under shareholder agreements unless there are clear reasons to intervene. Still, this offers little comfort to minority shareholders when majority decisions are framed as being in the company’s best interest.

Minority oppression often manifests in subtle but harmful ways—denial of dividends, exclusion from management, or dilution of shares through capital raising strategies that disproportionately affect smaller stakeholders. Though shareholder agreements may contain protective clauses, they are often overridden by provisions in the Articles of Association or by the will of the majority during general meetings. This is especially so in Kenya’s corporate culture, where enforcement mechanisms are weak and many shareholders lack the resources or knowledge to litigate breaches of agreement. The Companies Act, 2015 introduced some statutory remedies, including derivative actions and protections against unfair prejudice under Section 780. These have provided minority shareholders with additional recourse, especially where shareholder agreements are silent or ambiguous. The High Court in Mohamed Fazal v Lush Cosmetics Kenya Ltd & 2 Others [2022] highlighted the court’s readiness to intervene where corporate decisions are used to oppress or unfairly prejudice minority shareholders. Yet, the remedy is reactive and depends on litigation, which may not always be accessible or timely.

In the current business environment, shareholder agreements remain an important tool for minority protection, but they are not foolproof. Their effectiveness largely depends on the clarity of the terms, the balance of power within the company, and the willingness of the courts to enforce equitable outcomes. For minority shareholders, it is increasingly necessary to not only negotiate strong agreements at the outset but also to remain vigilant and prepared to assert their rights through legal and regulatory channels where necessary.