Two founders holding equal shares, a family with everyone on the register, or an investor with a preference class: the shareholding written at incorporation determines what happens in every disagreement that follows. The structure and the directors’ duties are two sides of the same governance question, because the people who control the company are accountable to it for how they exercise that control.
Quick answer: decide the share classes and the rights attached to them before the shares are issued, record the arrangement in the constitution and any shareholders’ agreement, and make sure the register of members reflects it. Directors must then act within their powers, promote the success of the company, exercise care and independent judgment, and manage conflicts openly. A structure that relies on goodwill alone is harder to enforce when relations change.
Why the structure decided at incorporation matters
The Companies Act 2015 allows a company to create different classes of shares with different rights to votes, dividends and capital on a winding up. Those rights are recorded in the constitution and reflected in the register of members. The register and any share certificates should match the intended arrangement from the first day, because correcting a wrong allocation later is a registry and contractual process rather than a handshake.
A common mistake is to treat shareholding as a formality that follows friendship or family relationships. The shareholding decides who can pass an ordinary resolution, who can block a special one, and who is entitled to a return if the company is sold or wound up. It is worth getting the arithmetic and the rights right at the start.
Share classes and what they can carry
Ordinary shares usually carry votes in proportion to the holding and a residual right to dividends and capital. Preference shares can rank ahead on dividends or on a return of capital, and may carry limited or conditional voting rights. The constitution can create weighted voting on defined matters, reserved matters that require a higher majority, or classes with different rights on a sale.
The design should match the commercial deal. An investor putting in capital may want a preference on return, information rights and approval over specified decisions. A founder may want protection against dilution or a defined role. Those terms belong in the constitution and, where the parties need more detail, in a shareholders’ agreement.
Equal holdings, deadlock and minority protection
An equal split between two shareholders can produce deadlock where the constitution provides no casting vote, tie-break or escalation mechanism. That is not a reason to avoid equal holdings, but it is a reason to plan for disagreement. A reserved-matter list, a defined deadlock procedure and a clear exit route reduce the chance that a commercial disagreement becomes a paralysed company.
Minority holders should consider protections such as weighted voting on defined matters, the right to appoint a director, information rights or reserved-matter consent. These are stronger when they are written into the constitutional documents than when they rest on an informal understanding. The rights must also be workable in practice, so test how they would operate in a disagreement rather than only in a happy year.
What a shareholders’ agreement can cover
A shareholders’ agreement can address matters the constitution leaves open, including how the company is managed, reserved decisions, information rights, transfer restrictions, pre-emption on a sale, exit routes and dispute resolution. It can also set expectations about board composition, dividends and the process for resolving deadlock.
Consistency matters. If the agreement and the constitution say different things, the company and its advisers must work out which governs a particular question, and the answer may depend on the Act and on whether the constitution has been amended. Align the two documents and keep a record of the version that was adopted.
Director duties under the Companies Act 2015
Directors owe their duties to the company, not to individual shareholders. The Act sets out general duties, and the constitution and case law add context. The duties commonly described are:
- to act within the powers conferred by the constitution and the Act;
- to promote the success of the company for the benefit of the members as a whole;
- to exercise independent judgment;
- to exercise reasonable care, skill and diligence;
- to avoid conflicts of interest;
- to declare an interest in a proposed transaction;
- not to accept benefits from third parties that arise from the directorship.
A breach may expose a director to a claim by the company, to an order to account for gains, or in serious cases to disqualification. Insurance and indemnities can address some exposure, but they do not replace lawful process or a properly constituted board decision.
Conflicts of interest and declarations
Conflicts are easier to manage before they harden. A director with an interest in a transaction should declare it early, and the declaration should be recorded in the minutes along with how the board handled participation, voting and quorum. The constitution and the Act determine whether a conflicted director may vote or be counted.
Related-party transactions deserve the same discipline. Where the company contracts with a director, a shareholder or an entity connected to them, the terms should be documented and approved through the proper process. A transaction that is defensible on the merits but poorly documented is harder to defend later.
When things go wrong, and a governance checklist
Take advice where the board is deadlocked, a director’s conduct is in question, a share transfer is disputed, or a financing depends on the validity of earlier share issues. Our governance advisory practice advises boards and shareholders, and our banking and securities practice covers the financing side of new share issues. Related guides cover transferring shares in a private company in Kenya and beneficial ownership filing in Kenya. For a confidential first assessment, contact the firm.
- Define what each shareholder will contribute and what each share class carries.
- Align the constitution, the shareholders’ agreement and the register of members.
- Decide reserved matters and how deadlock will be resolved before a dispute arises.
- Record share issues and transfers in the register and complete any stamping required.
- Explain the directors’ duties to every new director at appointment.
- Record conflicts and related-party transactions in the minutes.
- Review the structure before any financing, exit or new investor joins.
Primary sources
- Companies Act 2015, Kenya Law.
- Business Registration Service: Companies Registry, for company records and filing guidance.
- Business Registration Service, for registry services generally.
This article is general information, not legal advice.