KABARAK UNIVERSITY

SCHOOL OF LAW

KLAW 324: Law of Business Associations II

Facilitated by: Kemunto Matoke, LL.M (ND), LLB (Kabarak) PGDL (KSL)

GROUP 6

1. Joan chelangat Rotich LAW/M/1274/09/21

2. Esther Nelima LAW/M/1429/09/21

3. Isaac Gheno LAW/M/0518/05/20

4. Wendy Musonye LAW/M/0945/09/21

TABLE OF CONTENTS
1. Shareholders
2. Role of Shareholders
3. Rights of shareholders
4. Shareholder remedies
5. Directors and Company secretary
a) Definition of Director
b) Legal position of directors
c) Duties and liabilities
d) Removal procedure
e) Remuneration
Cite footnotes fully especially your links-refer to Kabarak reference guidelines
1. SHAREHOLDERS
A shareholder, also known as a stockholder, is a person who holds at least one share in a company.
Shareholders aren’t always involved in the day-to-day running of the business-that duty is left to
the directors and company management. However, company directors can also be shareholders.
They’re not the same as a stakeholder though – this is someone who has an interest but doesn’t
necessarily hold shares. 1
ROLES AND DUTIES OF SHAREHOLDERS
The Companies Act of 2015 in Kenya outlines the rights and responsibilities of shareholders,
including:2
Shareholder rights
Shareholders have the right to receive dividends, bonus shares, and share certificates. They can
also remove directors, alter the share capital, and change the company’s name.
Shareholder responsibilities
Shareholders must approve substantial property transactions, such as when a director or a person
connected to a director acquires a non-cash asset from the company. They must also pass an
ordinary resolution to authorize any changes to the share capital.
ROLE OF SHAREHOLDERS
Shareholders have several important roles and responsibilities within a company which include:3

1https://squareup.com/gb/en/glossary/shareholder#:~:text=The%20dictionary%20definition%20of%20a,doesn't%

20necessarily%20hold%20shares.
2 Companies Act 2015
3 https://skilling.com/row/en/blog/stocks-trading/shareholder/

1
Voting rights: Major corporate decisions, including choosing the board of directors, authorizing
mergers and acquisitions, and amending the corporate charter, are subject to shareholder voting.
Dividend entitlement: A percentage of the business's income are given to shareholders as
dividends, which they may receive. The board of directors of the corporation decides how much
and how often dividends are paid out.
Ownership and control: Shareholders who possess shares are entitled to a share of the company's
profits and assets. By using their right to vote, they can affect corporate policies and choices.
Profit sharing: As a result of the company's performance, shareholders receive dividend payments
and higher stock prices. Significant profits can also be obtained from capital gains from the selling
of shares.
Management oversight: Through voting and other governance procedures, shareholders can hold
the company's management responsible for their actions and keep an eye on their performance.
RIGHTS OF SHAREHOLDERS
Shareholders, as owners of a corporation, possess several fundamental rights that are crucial for
protecting their interests and ensuring their voices are heard within the governance of the company.
These rights can vary by jurisdiction, but generally include the following:
1. Right to Vote
Shareholders have the right to vote on key corporate matters, including the election of the board
of directors, mergers and acquisitions, and other significant corporate policies. This right is
typically exercised during annual general meetings (AGMs) or special meetings.4
2. Right to Information
Shareholders are entitled to receive essential information regarding the company’s performance
and operations. This includes access to financial statements, annual reports, and disclosures about
significant corporate actions. Transparency is vital for informed decision-making.5
3. Right to Dividends
Shareholders have the right to receive dividends when declared by the board of directors. The
amount and frequency of dividends depend on the company's profitability and dividend policy. 6
4. Right to Attend Meetings
Shareholders have the right to attend AGMs and other shareholder meetings where they can
express their opinions, ask questions, and engage with management about the company’s
direction.7

4 "The Rights of Shareholders" - Corporate Governance Institute cite fully

5 "Shareholder Rights: A Global Perspective" - Harvard Law School Forum on Corporate Governance
6 "Understanding Shareholder Rights" – Investopedia?
7 "Corporate Governance: Shareholder Rights" – OECD?

2
5. Right to Sue for Wrongdoing
Shareholders can take legal action against the company or its directors if they believe there has
been a breach of fiduciary duty or other misconduct that harms their interests. This includes
derivative actions where shareholders sue on behalf of the corporation. 8
6. Right to Transfer Shares
Shareholders generally have the right to sell or transfer their shares unless there are specific
restrictions outlined in the company's bylaws or shareholder agreements.9
7. Right to Participate in Liquidation Proceeds
In the event of liquidation, shareholders have a right to receive their proportionate share of any
remaining assets after all debts and obligations have been settled.
8. Preemptive Rights
Some jurisdictions grant existing shareholders preemptive rights, allowing them to purchase
additional shares before the company offers them to new investors. This helps shareholders
maintain their proportional ownership in the company.
REMEDIES OF SHAREHOLDERS
Shareholders in a company have remedies available to the when their rights have been infringed
or when they face issues such as mismanagement, oppression or unfair prejudice. These remedies
are essential for protecting their interest and ensuring fair governance within companies.
a) unfair prejudice
Minority shareholders can seek remedies if their rights have been oppressed under section 994 of
the companies act 2006 where a petition is allowed in court where the company’s affairs are being
conducted in a manner that is oppressive to one or more shareholders. If a shareholder has suffered
direct harm due to the actions of the company or its management they may file a personal claim.
In the case of Re Company (1986) the court ruled in favor of minority shareholders who faced
unfair treatment emphasizing the need for fair dealings.
b) Derivative action
A shareholder can initiate derivative action on behalf of the company against directors for the
misconduct done in the company. Section 260 of the companies act allows shareholders to bring
claim to court if it is in the best interest of the company.
c) Injunction and specific performance
These remedies can be sought for breach of contractual obligation such as agreements relating to
transfer of shares. Shareholders may seek an injunction to prevent the company from taking certain

8 "Legal Rights of Shareholders" - American Bar Association cite fully

9 "Transferability of Shares" - Securities and Exchange Commission

3
actions that may harm their rights or interests. An example is an injunction to prevent the company
from holding a vote that does not conform to proper corporate governance procedures. The case
of Mason v Harris (2008) the court granted an injunction to prevent the company from acting in a
manner detrimental to the shareholder’s interest.
d) Petition for winding up
Shareholders can petition the court for winding up of a company if it is just and equitable. An
example is where there is breakdown in communication and trust between shareholders or where
the company cannot continue its business effectively. Section 386 and 387 of the companies act
2006 grant shareholders the right to inspect accounting records.
e) Remedy to voting
Shareholders have the right to vote on corporate matters including mergers, acquisitions and
changes to corporate governance policies. If their voting rights are denied shareholders can seek
remedies to enforce their right to vote.

2. DIRECTORS IN BUSINESS ASSOCIATIONS

Definition
Directors are individuals elected by shareholders to oversee the management of a company. The
directors have responsibilities that encompass a wide range of tasks aimed at ensuring the smooth
operation and success of the company. Some of their roles is making strategic decisions that impact
the future of the business. For example, when it comes to decision making, they must carefully
analyze the potential risks and rewards to make an informed decision.
Furthermore, they are tasked with ensuring legal compliance within the company. This involves
being up to date with relevant laws and regulations that govern the industry in which the company
operates.
Additionally, directors are responsible for acting in the best interest of the company. This means
considering the long-term sustainability and growth of the business, as well as the welfare of those
who have invested in it.
Legal Positions
Fiduciary Duty: Directors owe a fiduciary duty to the company requiring them to act in good faith,
with loyalty, and in the best interest of the company.
Duty of Care: Directors must exercise reasonable care, skill, and diligence in their roles, making
informed decisions and staying informed about the company's affairs 10.

10 Companies Act 2015, Section 145

4
Duty of Loyalty: Directors must avoid conflicts of interest and prioritize the company's interests
over their own11.
Directors are be held liable for violating these duties and may face legal consequences if found to
have acted negligently, fraudulently or in violation of the duties stated above.
Director Duties
Directors in Kenya operate under a framework of duties derived from both the Companies Act and
established common law principles. These duties are owed primarily to the company as a separate
legal entity, not to individual shareholders, as affirmed in Section 140(1) of the Companies Act. 12
Statutory Duties
The Companies Act codifies several key director duties, providing clarity and a basis for
enforcement.
1. Duty to Act Within Powers (Section 142):
Directors must exercise their powers in alignment with the company's constitution and only for the
purposes those powers were granted. Acting beyond these limitations can expose directors to
personal liability. In Re Denham & Co. Ltd (1883), a director was held personally liable for
exceeding his authority by making decisions unilaterally without consulting other directors, thus
violating the company's constitution. 13
2. Duty to Promote the Success of the Company (Section 143):
This duty mandates directors to act in good faith to promote the company's success for the benefit
of its members as a whole. When making decisions, directors must consider a range of factors:
a) The likely long-term consequences of their actions
b) The interests of the company's employees
c) The need to foster the company's business relationships with suppliers, customers, and
others
d) The impact of the company's operations on the community and the environment
e) The desirability of maintaining a high reputation for the company
f) The need to act fairly between members of the company
This list is not exhaustive, but it emphasizes a holistic approach to decision-making, considering
a broader stakeholder perspective. 14

11 Companies Act 2015, Section 145

12 Companies Act 2015, Section 140
13 Companies Act 2015, Section 142; Re Denham & Co. Ltd (1883).
14 Companies Act 2015, Section 143.

5
 3. Duty to Exercise Independent Judgment (Section 144):
Directors must make decisions independently, free from undue influence from external parties or
personal interests. This duty ensures that the board acts in the company's best interests, not as
puppets for other stakeholders. However an exception exists, the duty to exercise independent
judgment is not infringed if a director acts:
a) In accordance with a valid agreement entered into by the company that restricts the future
exercise of discretion by its directors; or
b) In a way authorized by the company's constitution. 15
4. Duty to Exercise Reasonable Care, Skill, and Diligence (Section 145):
Directors are expected to perform their duties with the same care, skill, and diligence as a
reasonably diligent person possessing:
a) The general knowledge, skill, and experience reasonably expected of a person carrying
out the director's functions in relation to the company.
b) The actual knowledge, skill, and experience possessed by the individual director.
This sets a variable standard of care, recognizing different levels of expertise and experience
among directors. Simple errors of judgment are not grounds for liability, but recklessness or gross
negligence will be. In Re City Equitable Fire Insurance Co. Ltd, the court clarified that directors
have a duty to scrutinize information provided to them and are expected to participate actively in
the company's management. Blind reliance on others, particularly if it leads to losses, can
constitute negligence. However, Dovey vs. Cory showed that directors are entitled to a degree of
trust in their colleagues and may not be liable for negligence if they rely on information provided
by seemingly trustworthy officers.16
5. Duty to Avoid Conflicts of Interest (Section 146):
Directors must avoid situations where their personal interest’s conflict with their duties to the
company. This includes exploiting opportunities that rightfully belong to the company. Disclosure
is key: If a conflict arises, the director must disclose the nature and extent of their interest to the
board. The company can authorize such transactions, but this usually requires shareholder
approval. Consequences of breach: Failure to disclose can lead to fines and may allow the company
to set aside the transaction. Directors may also be required to account for profits made from
undisclosed conflicts of interest. In Cook vs. Deeks, the court held that directors who diverted a
business opportunity to a company they controlled, without proper disclosure and consent from
the original company, breached their fiduciary duty and were required to disgorge their profits. 17

15 Companies Act 2015, Section 144.

16 Companies Act 2015, Section 145; Re City Equitable Fire Insurance Co. Ltd; Dovey vs. Cory
17 Companies Act 2015, Section 146; Cook vs. Deeks.

6
 6. Duty to Declare Interest in Proposed or Existing Transactions or Arrangements
(Section 151):
This duty reinforces the conflict-of-interest principle by requiring directors to make written
declarations of any interest they have in transactions involving the company. Section 152 mandates
that this declaration be given to other directors, either in hard copy or agreed-upon electronic form.
Section 153 permits the use of a general notice to cover recurring transactions of a similar nature. 18
7. Duty to Not Accept Benefits from Third Parties (Section 147):
Directors cannot accept benefits (including bribes or secret commissions) from third parties if
those benefits are granted due to the director's position in the company or actions taken as a
director. This reinforces the principle of loyalty, preventing directors from profiting personally at
the company's expense. Penalties: Contravention of this duty can lead to fines and the forfeiture
of any benefit received.19
Common Law Duties
While the Companies Act codifies several key duties, common law principles continue to shape
director conduct, enriching the understanding of their obligations.
1. Duty to Act Bona Fide in the Company's Best Interest:
This foundational duty requires directors to act honestly and in good faith, always prioritizing the
company's welfare. In Percival v. Wright, the court established that directors owe their duties to
the company and not to individual shareholders. 20 However, if directors are specifically appointed
to act as agents for particular shareholders in a transaction, they then owe those shareholders the
duties of an agent.
2. Duty to Exercise Powers for Proper Purposes:
Directors must utilize their powers for the reasons they were granted, not for ulterior motives or
personal gain. This principle ensures that directors act in line with the company's objectives.
3. Duty to Not Misuse Company Information or Property:
Directors have a fiduciary responsibility to safeguard confidential information belonging to the
company and to use company assets solely for the company's benefit. In numerous cases, the court
has upheld this duty, emphasizing the importance of confidentiality and appropriate use of
company property by directors.
Liabilities: Consequences of Breaching Director Duties
Breaches of director duties can result in various liabilities, aimed at deterring misconduct and
providing remedies for the company.

18 Companies Act 2015, Sections 151, 152, 153.

19 Companies Act 2015, Section 147.
20 Percival v. Wright, Companies Act 2015.

7
a) Civil Liabilities: Primarily Financial in Nature
i. Damages: Directors may be held personally liable to compensate the company for
financial losses caused by their breach of duty.
ii. Account of Profits: Directors who profit personally from breaching their duties, such as
through conflicts of interest, can be required to disgorge those profits to the company.
iii. Injunctions: The court can issue injunctions to prevent directors from engaging in actions
that would breach their duties.
iv. Rescission of Contracts: Contracts entered into by directors in breach of their duties, such
as those involving undisclosed conflicts of interest, can be rescinded by the company.
b) Criminal Liabilities: Punitive Measures for Serious Breaches
i. Fines: The Companies Act prescribes fines for specific breaches of duty, such as failing to
disclose interests in transactions.
ii. Imprisonment: In some cases, particularly those involving fraud or dishonesty, directors
may face imprisonment.21
Removal of Directors: Procedures and Safeguards
The Companies Act provides a mechanism for removing directors before their term expires,
ensuring accountability to the shareholders.
Statutory Process: Ordinary Resolution and Right to Representation
Section 139: This section empowers the company to remove a director by an ordinary resolution
passed at a general meeting.
Notice and Right to Make Representations (Section 141):
The company must give the director notice of the intended resolution. The director has the right to
make written representations in their Défense, which must be considered by the shareholders at
the general meeting. This ensures fairness and natural justice in the removal process.
Despite being removed, a director may still be entitled to compensation or damages payable in
respect of the termination of their appointment as director this is established under Section 141(6).
This is particularly relevant for managing directors, whose removal might constitute wrongful
dismissal under their service contract. 22

Remuneration of Directors: Requiring Authorization and Transparency

Director remuneration is subject to statutory controls to ensure fairness and transparency.

21 Companies Act 2015.

22 Companies Act 2015, Sections 139, 141.

8
Authorization: From Articles or General Meeting Resolutions
Directors are not automatically entitled to payment for their services. Their remuneration must be
authorized either:
i. By the company's Articles of Association, or
ii. By a resolution passed at a general meeting.
Disclosure and approval for certain payments made as compensation for loss of office, or
consideration for or in connection with a director's retirement, require disclosure to the members
and approval by the company in a general meeting. Transparency is crucial as this ensures that
shareholders are informed about significant payments to directors, particularly those that may not
be directly related to their ongoing service to the company. 23
Expenses and Profit Independence
Directors are typically entitled to reimbursement for reasonable expenses incurred while
performing their duties, usually detailed in the company's articles of association. Also, directors’
remuneration can be paid even if the company does not make a profit, provided it is authorized as
described above.
Reporting Requirements: Transparency in Financial Statements
Section 650: Requires directors to include details of benefits they have received, other than
remuneration, in the notes to the company's individual financial statement. This includes gains on
share options, long-term incentive schemes, payments for loss of office, and consideration paid to
third parties for making available director services.
Section 651: Mandates the disclosure of details relating to advances, credits, and guarantees
provided by the company to its directors. 24
General Requirements for the Content of a Director's Report (Section 654)
i. Identification: Include the names of all individuals who served as company directors during
the financial year.
ii. Principal Activities: Describe the company's principal activities throughout the year.
iii. Dividend Recommendation (Non-Small Companies): Specify the recommended dividend
amount, if any.
iv. Audit Information Confirmation: Include a statement confirming that each director is
unaware of any relevant audit information not known to the company's auditor and has taken
all necessary steps to be aware of and ensure the company's auditor is aware of any relevant
audit information.

23 Companies Act 2015, Sections 650, 651.

24 Companies Act 2015, Section 651.

9
 v. Small Companies Regime Statement: If applicable, state that the report was prepared in
accordance with the small companies’ regime. 25
Additional Reporting Requirements
i. Business Review (Section 655): Directors of companies not subject to the small company’s
regime must generally include a business review in their reports. This review provides a
comprehensive analysis of the company's business development, performance, risks, and
uncertainties.26
ii. Directors' Remuneration Report (Section 659): Quoted companies must prepare a separate
report detailing directors' remuneration. Regulations may specify the content, presentation,
and auditable portion of this report. 27
iii. Division Reports (Section 949): Directors involved in company divisions must prepare
reports that outline responsibilities, legal and economic grounds for the division, and any
special valuation difficulties. 28

25 Companies Act 2015, Section 654.

26 Companies Act 2015, Section 655.
27 Companies Act 2015, Section 659.
28 Companies Act 2015, Section 949.

10