Corporate Governance 2024 Comparisons

Kenyan law provides diverse legal structures to accommodate various specific needs.

Companies

The most common form of corporate organisation is a company. The Companies Act, Chapter 486 of the Laws of Kenya ("Companies Act") provides for the following types of companies:

• Companies limited by shares: A company is limited by shares if the liability of its members is limited by the company’s articles to any amount unpaid on the shares held by the members. A company limited by shares can take one of two (2) forms:
1. Private limited companies: Companies whose articles restrict a member’s right to transfer shares, limit membership to 50, prohibit public invitations to subscribe for shares or debentures of the company and require all members to consent to add a new member.
2. Public limited companies: Companies whose articles allow their members the right to transfer their shares in the company and do not prohibit initiations to the public to subscribe for shares or debentures of the company.
• Companies limited by guarantee: A company is limited by a guarantee if its articles limit its members' liability to the amount they undertake to contribute to the company's assets in the event of its liquidation, and its certificate of incorporation states that it is limited by guarantee.
• Unlimited companies: A company is unlimited if there is no limit on the liability of its members, and its certificate of incorporation states that the liability of its members is unlimited.

Partnerships

Kenya also recognises various partnership structures. These are set out below.

General Partnerships: A partnership is a relationship between persons carrying on a business in common and seeking profit. This traditional model entails unlimited liability for all partners, who share full responsibility for the partnership's operations. They can:

• sue and be sued in their own name;
• enter contracts and own property for business purposes; and
• ensure continuity despite partner changes, subject to the partnership agreement.

Limited Partnerships are a form of partnership that involves:

• at least one general partner with unlimited liability and responsibility for the management of the limited partnership's business; and
• one or more limited partners whose liability is restricted to their initial contribution to the partnership.

Limited Liability Partnerships (LLPs) combine features of general partnerships with limited liability benefits typically associated with companies. Upon registration, LLPs become a separate legal entity with perpetual succession. As such, an LLP:

• is a legal entity separate from its members;
• has unlimited capacity and can do anything that a legal person can do; and
• its members have limited liability, hence they do not need to meet the LLP's liabilities.

Here are several key sources that establish corporate governance requirements for companies in Kenya:

• The Companies Act sets out the primary legal framework governing the formation, operation, and dissolution of companies, including aspects of corporate governance.
• The Insolvency Act, Chapter 53 of the Laws of Kenya ("Insolvency Act"), provides regulations for dealing with financially distressed companies and influences how companies manage their finances.
• The Partnership Act, Chapter 29 of the Laws of Kenya ("Partnership Act") sets out the framework for the formation, management and operation of general partnerships and limited partnerships.
• The Limited Liability Partnerships Act, Chapter 30 of the Laws of Kenya ("LLP Act") specifically addresses the registration and management of LLPs.
• Common law: Principles established through past court decisions (precedent) in England regarding companies can still be relevant even if not directly codified in Kenyan law.
• Internal governance documents: A company's articles of association or a partnership's partnership deed and, in the case of companies listed on the Nairobi Securities Exchange ("NSE"), its board charter, establish internal rules regarding its operations, including director powers and shareholder meetings.
• The Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 (the “CMA Governance Code”) is a set of guidelines issued by the Capital Markets Authority ("CMA") that apply to publicly traded companies in Kenya and sets out various requirements aimed at ensuring fair treatment of shareholders, transparency, and responsible management.
• The Code of Governance for State Corporations (Mwongozo) is a set of guidelines that lays a foundation for the management, governance and oversight of state corporations in Kenya.

Publicly traded companies in Kenya must comply with the CMA Governance Code. Some key requirements should include the following:

• Fair treatment of shareholders: The CMA Corporate Governance mandates companies to treat all shareholders fairly, including minority and foreign shareholders. This includes ensuring equal voting rights and access to information.
• Disclosure: The CMA Governance Code follows an “Apply or Explain” principle in which listed companies are required to fully disclose any instances where they are not complying with the CMA Governance Code. While the CMA may consider satisfactory explanations for non-compliance, adherence to the mandatory disclosure provisions outlined in the Capital Markets (Public Offers, Listing and Disclosures) Regulations, 2023 ("Disclosure Regulations") is essential.

The Kenyan corporate governance landscape is witnessing an increased focus on environmental and social responsibility. This emphasis is particularly evident in the realm of "green" and sustainability reporting.

In this regard, the Central Bank of Kenya ("CBK") published the Guidance on Climate-Related Risk Management ("CBK Guidance"), which lays out a framework for banks and mortgage refinance companies, requiring them to integrate climate-related risks into their core functioning and ensuring that business decisions and activities account for potential climate impacts. Key aspects of CBK Guidance include:

• Time-bound Plans: banks and mortgage refinance companies are mandated to develop a concrete plan with specific timelines. This plan, detailing the implementation of the CBK guidance, needs approval from the board and signatures from both the CEO and Chairman.
• Quarterly reporting: To ensure accountability, banks and mortgage refinance companies must submit quarterly progress reports to the CBK within ten (10) days after the end of each calendar quarter, starting from 30 September 2022.

The emphasis on climate-related risk management by the CBK strongly suggests that "green" and sustainability reporting will be a major talking point in Kenyan corporate governance for 2023 and the foreseeable future. It is likely to extend to other players in the financial sector and influence corporate governance practices across a broader spectrum of Kenyan businesses.

There are no requirements for private or public companies to report on ESG issues. However, companies listed on the NSE have the following reporting requirements:

• Companies Act: The directors' report for listed companies must incorporate a business review section. This section delves into the company's environmental practices, employee treatment, and social and community involvement.
• NSE ESG Disclosures Guidance Manual ("ESG Manual"): Issued in late 2021, this manual provides listed companies with a framework for collecting, analysing, and publicly disclosing ESG information. The objective is to achieve alignment with internationally recognised reporting standards.

In addition, certain industries, such as the banking sector, have established their own ESG-related guidelines. For instance, the Kenya Bankers Association's Sustainable Finance Initiative ("SFI") encourages its member banks to:

• implement robust environmental and social risk management systems; and
• publish comprehensive sustainability reports biennially (every two years).

The principal bodies and functions involved in the governance and management of a company in Kenya are the board of directors, the company secretary, the shareholders and the contact person.

Board of Directors

The board of directors is ultimately responsible for overseeing the company's affairs. As stipulated by the Companies Act, the directors are entrusted with the power to direct and regulate the company's business, set strategic direction, and ensure compliance.

While the board of directors retains ultimate authority, it can delegate specific functions to individual directors, committees, management teams, and employees.

Company Secretary

The Companies Act mandates that public and private companies with a share capital of KES5,000,000 (approximately USD38,760) or more appoint a company secretary.

The company secretary has various responsibilities, including documenting board and shareholder meetings and maintaining registers of directors, shareholders, and debenture holders. They also liaise with the Registrar of Companies and file required documents like annual returns and financial statements.

Shareholders

Shareholders are the company's owners. Their ownership translates into specific rights and influence over the company's direction. Shareholders exercise their power through voting rights, allowing them to elect board members and approve significant changes, including amendments to the company's articles of association.

Contact Person

Private companies or companies limited by guarantee that do not meet the threshold for a company secretary and do not have a resident director in Kenya must appoint a contact person.

The contact person's primary function is to maintain critical company records, including those related to directorships, shareholding, beneficial ownership, and any other information required by law. Notably, the contact must be a natural person with a permanent Kenyan residence.

Directors

The Board of Directors is the primary decision-making body for the company. It is entrusted with the responsibility of overseeing the day-to-day operations and setting the company's strategic direction. The articles of association will typically provide that the company's business is to be managed by the directors, who are empowered to exercise all the company's powers.

Shareholders

Certain fundamental decisions are explicitly reserved for the shareholders and require a formal resolution passed at a duly constituted meeting. These decisions typically involve significant changes to the company's core structure or capital, such as amendments to the articles of association and alterations to the share capital. The company's articles of association may, however, allow for the delegation of certain reserved decisions to the board of directors.

The board of directors and the shareholders make the decisions through the following processes:

Directors

The board makes decisions through formal resolutions, typically reached during board meetings. The company's articles of association outline the specific procedures, quorum requirements (the number of members needed to be present), meeting notice periods, and voting requirements for passing resolutions. Generally, a simple majority vote suffices. Written resolutions can also be used to make decisions without a physical meeting.

Shareholders

Shareholders make decisions through shareholder resolutions. These resolutions can be passed either by a vote at a formal shareholders' meeting or as a written resolution without a meeting. Some exceptions exist, such as the early removal of a director or auditor, which requires a meeting and cannot be done through a written resolution. The type of resolution needed, ordinary (simple majority) or special (75% majority), depends on the specific decision and is dictated by both the Companies Act and the company's articles of association.

Number of Directors

Private companies must have at least one natural director, although their governing documents may establish a higher minimum or maximum number.

Public companies, on the other hand, require at least two directors, one of whom must be a natural person. Similar to private companies, public companies retain the flexibility to define a higher minimum or maximum number of directors within their governing documents.

Leadership

In most cases, the board elects a chairperson from its members to lead and manage board meetings unless the company's articles of association or a shareholders agreement specify otherwise.

The Companies Act provides for a single-tiered board of directors with no distinctions unless a company elects to differentiate certain managerial roles for certain board members. In some cases, the chairperson may be given a casting vote in the event of a deadlock in a decision of the directors. The board of directors as a whole is in charge of managing the company's business.

The Companies Act does not prescribe the composition of the board of directors for private or unlisted public companies. These entities are free to appoint directors as deemed necessary to fulfil their specific requirements.

However, companies listed on the NSE must ensure their board composition complies with the recommendations set forth in the CMA Governance Code. These recommendations include:

• Balance of Directors: The board should be comprised of a balanced mix of executive directors responsible for the company's day-to-day operations and non-executive directors who provide independent oversight and guidance. A majority of the directors should be non-executive directors and one-third of the board should be composed of independent non-executive directors.
• Board Size: The optimal size of the board should be determined based on the company's specific needs and operations. It should be large enough to accommodate a diversity of expertise and perspectives yet remain conducive to productive discussions during board meetings.
• Director Limits: An individual director of a listed company (excluding corporate directors) cannot hold such a position in more than three publicly listed companies concurrently.

In addition, certain industries, such as banking and insurance, may have additional board composition requirements based on "fit-and-proper" assessments conducted by the relevant regulatory bodies on the directors.

Appointment of Directors

The Companies Act allows for appointing directors upon a company's incorporation. This process is set out in the articles of association for future appointments. As such, directors are typically appointed by a resolution of the shareholders, with a simple majority vote sufficing. However, the articles of association may prescribe specific instances where the directors may appoint a director (eg, filing a casual vacancy.)

Restrictions on appointment of directors

The Companies Act imposes certain restrictions on who can be appointed as a director. Firstly, any individual under the age of eighteen is automatically ineligible. Furthermore, the company's articles of association will ordinarily preclude specific groups of people from acting as directors. Such groups may include undischarged bankrupts and individuals deemed to be of unsound mind. This aligns with the Insolvency Act, which further prohibits undischarged bankrupts from participating in the management or control of any business without the express consent of a bankruptcy trustee or the court.

Removal of directors

Ordinary resolutions can remove a director. However, specific procedures must be followed. A special notice detailing the proposed removal must be served on the director in question. The director is then given the opportunity to submit written representations within twenty-one days of receiving the notice.

Following the receipt of any representations, the board must convene a meeting to consider the matter. The director facing removal is entitled to be heard during this meeting when the motion for removal is being considered. If the motion for removal is passed, the director retains the right to challenge the removal in court.

It is important to note that even after being removed from office, a director remains subject to certain continuing duties. These duties include:

• The obligation to avoid conflicts of interest regarding exploiting any property, information, or opportunity that the individual became aware of while acting as a director.
• The prohibition on accepting benefits from third parties concerning actions taken or omitted during their tenure as a director.

Independence of Directors

There are no rules and requirements on the independence of directors in private companies or unlisted public companies. Listed companies, on the other hand, must ensure that at least one-third of the board of directors are independent non-executive directors. Under the CMA Governance Code and the Disclosure Regulations, a director is considered to be independent if he or she:

• is not an executive director;
• does not have a material or pecuniary relationship with the company or related persons;
• is compensated through sitting fees or allowances;
• does not own shares in the listed company;
• serves in such role for a maximum period of six (6) years.

Conflict of Interest

The Companies Act provides that a director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts with or may conflict with the company's interests. The duty to avoid conflict of interest is not breached where the matter in question has been approved by the other directors.

The duty to avoid conflict of interest and not to accept benefits from third parties to survive the cessation from office as a director dictates that if a director has personal interests in proposed or existing transactions with the company, they are required to give notice of such interest to the other directors and, in the case of a public company, to the members of the company within 72 hours. Failure to disclose a personal interest in accordance with the Companies Act is an offence, and on conviction, the director concerned is liable to pay a fine not exceeding KES1,000,000.

The principal legal duties of directors in Kenya arise from common law and have been codified under the Companies Act and include the duties listed below.

Act Within Their Powers

Directors have specific authorities outlined in the company's constitution. These powers must be used solely to benefit the company, not for personal gain or the interests of others and for the specific purpose for which they are conferred.

Promote the Company's Success

Directors are obligated to make decisions they believe, in good faith, will best promote the company's success for its shareholders. This includes considering long-term consequences, employee interests, community impact, and fostering good relationships. When a company becomes insolvent, the director's primary duty shifts to protecting creditors' interests.

Exercise Independent Judgment

While seeking professional advice is encouraged, directors must ultimately make independent decisions. They cannot blindly follow the will of others or rely solely on external advice. However, some situations may require following pre-existing agreements or the company's constitution.

Exercise Reasonable Care and Diligence

Directors are expected to exhibit the same level of care, skill, and diligence as a reasonably competent person in their position. This includes applying their own knowledge and experience alongside any relevant expertise. Failure to do so could lead to negligence claims against them.

Avoid Conflicts of Interest

Directors must avoid situations where their personal interests directly or indirectly conflict or may conflict with the company's interests. This includes exploiting company property, information, or opportunities. This is a strict duty, regardless of whether the company could benefit from it. Breaches can result in serious consequences, including criminal action. However, situations unlikely to create a conflict are acceptable.

Not Accept Benefits from Third Parties

Directors are prohibited from accepting benefits (gifts, bribes, etc) from third parties arising from their position. This includes offers of hospitality intended to influence their decisions. Such actions violate the Companies Act and potentially other anti-bribery laws. However, minor benefits unlikely to create a conflict are permissible. Additionally, benefits from the company itself are not restricted by this duty.

Disclose Any Interest in Transactions

Directors must declare any direct or indirect interest they have in company transactions or arrangements. This applies to both private and public companies, with varying disclosure timelines and procedures. Failure to disclose or provide inaccurate information can lead to penalties. However, directors are not responsible for situations where they are unaware of a conflict or their interest is insignificant.

Under Kenyan law, directors primarily owe their duty to the company and not to individual shareholders or other stakeholders. This principle is codified in the Companies Act.

While the company's success remains the directors' primary objective, their duties can, in certain circumstances, encompass other stakeholders' well-being. This may include employees, customers, and suppliers. For instance, the duty to promote the company's success can involve considering the impact on employees, the community, and the environment and fostering strong relationships with suppliers and customers.

In addition, if the company enters insolvency proceedings, the directors' duties shift. The Insolvency Act takes precedence, requiring them to prioritise the interests of creditors and other stakeholders involved in the insolvency process.

Directors owe their primary duty to the company, not to the shareholders. Therefore, acting through its proper organs (usually the board or shareholders in a general meeting), the company is the primary party that can enforce a breach of directors' duties.

However, shareholders have derivative claim rights under Kenyan law. This means that if the company fails to take action for a breach of directors' duties that harms the company, a shareholder can bring a lawsuit against the directors on behalf of the company. The directors' actions ultimately impact the value of the company's shares, which affects shareholders.

Breach of directors' duties in Kenya can lead to several consequences for directors:

• Personal liability: Directors can be ordered to pay damages to the company for any losses caused by their breach.
• Accountability for profits: If directors breach their duty by profiting from a conflict of interest, they may be required to return those profits to the company.
• Removal from office: Shareholders can remove directors who have breached their duties by voting at a general meeting.
• Disqualification: In serious cases, a court can disqualify a director from holding office in any company for a set period. This can significantly damage a director's career prospects.
• Criminal prosecution: Certain breaches of directors' duties may be criminal offences punishable by fines or imprisonment.

Beyond breaches of corporate governance requirements, directors and officers in Kenya can face claims and enforcement actions for various reasons under Kenyan law, including:

• Negligence: Directors and officers must act with reasonable care and skill in managing the company. If their actions or lack thereof cause harm to the company, shareholders, or creditors due to negligence, they can be held personally liable.
• Breach of fiduciary duty: Directors and officers owe a fiduciary duty to the company. This includes duties of loyalty and good faith. They can be liable for the resulting losses if they act in their interests or those of a third party at the company's expense.
• Misfeasance and/or breach of trust: Similar to a breach of fiduciary duty, this applies when directors or officers misuse company property or assets for personal gain or purposes outside the company's interests.
• Statutory violations: Specific laws such as the Companies Act, the Capital Markets Act or the Competition Act may impose liability on directors and officers for breaches of their provisions.

The Companies Act in Kenya restricts attempts to shield directors and officers from liability and voids any clause in the company's articles, contracts, or other documents that attempt to exempt directors from liability arising from negligence, default, breach of duty, or breach of trust.

Companies can, however, obtain insurance for directors and officers to cover liabilities incurred while acting in the company's best interests. This insurance wouldn't protect directors from intentional wrongdoing or gross negligence.

Directors' service contracts that extend beyond two years require the approval of company members. This requirement does not apply to companies not registered under the Companies Act or wholly owned subsidiaries of other corporate entities. Where a director's service contract is entered into in contravention of the provisions of the Companies Act, the contract is void to the extent of the contravention, and the company is entitled to terminate the contract with reasonable notice.

Directors of a company (excluding companies subject to the small companies regime) are required to include details of the benefits they have received in that financial year in the notes to the company's individual financial statement.

The directors of a listed company shall prepare a directors’ remuneration report for each financial year of the company. A quoted company is one whose equity share capital has been included in the official list on a stock exchange or other regulated market in Kenya.

Individuals become members of a company by subscribing to shares on:

• incorporation; or
• the creation of new shares; or
• through a transfer of shares from an existing shareholder.

Shareholders provide equity/financial backing to a company and are generally liable only for the amount of their unpaid shares.

The Companies Act provides that a company's constitution binds the company and its members to the same extent as if the company and its members had covenanted with each other to observe the constitution, making the relationship contractual in nature.

The company's constitution (articles of association) governs the relationship between the company and its members, including the rights attached to the respective members' shares. In some cases, members may opt to enter into a private shareholders agreement to govern the relationship amongst themselves.

Generally, a company is a separate legal entity from its shareholders. This separate personality is not without limits, and courts may allow piercing the corporate veil in cases of fraud and serious misconduct. The concept of piercing the corporate veil is recognised under Kenyan law, and courts will do so if satisfied that there has been serious misconduct or fraud. In doing so, the individuals behind the company who have committed a wrong using the company will be held personally liable.

Shareholders are not involved in the company's day-to-day running, as this is a function of the board of directors. Shareholders, however, have the power to appoint and remove directors from office. In addition, certain decisions, such as loans by a company to its directors, may only be made with the approval of shareholders.

Every company must hold an annual general meeting within a year. Failure to do so can result in a fine of up to KES100,000 (approximately USD775).

All private or public companies must provide members with at least 21 days' notice for annual general meetings. For other types of meetings, a 14-day notice period is required. However, a company's articles of association may specify longer notice periods.

Members may request that directors convene a general meeting. In such an instance, the directors must respond by scheduling the meeting within 21 days.

The Companies Act permits hybrid or virtual meetings. Notices for such meetings must clearly outline how to join and participate. Additionally, companies must adhere to the provisions of their articles of association regarding the conduct of general meetings.

The Companies Act recognises the institution of derivative claims by shareholders on behalf of a company. For purposes of derivative claims, a "member" includes a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of the law. This means that an applicant must not necessarily appear in the company's register of members or hold a share certificate, but it is sufficient if it is shown that they are beneficially entitled to any shares.

The grounds that the court will consider to permit a derivative claim include negligence, default, breach of duty, and breach of trust by a company director. Courts in Kenya have held that permission to commence a derivative claim will be denied where the suit is not in the interest of or of benefit to the company and where the company has authorised the proposed act.

Yes, shareholders in publicly traded companies in Kenya are subject to various disclosure obligations. These include:

• Notification of holdings above certain thresholds: any person obtaining a "notifiable interest" (ie, 3% or more) in shares of a listed company or who ceases to be interested in such shares to notify the listed company of the acquisition or cessation of interest in the shares. The Licensing Regulations also require that listed companies report to the NSE on a monthly basis:
1. all persons who have acquired or cease to have a notifiable interest in its shares;
2. all directors holding 1% or more in the relevant share capital; and
3. cumulative holding of the relevant share capital by directors.
• Disclosure obligations for ultimate beneficial owners: subject to certain exceptions, companies incorporated in Kenya to file a register of beneficial owners. A beneficial owner is a natural person who holds at least 10% of the shares or voting rights or has the power to change directorship or have a significant influence over the company.
• Shareholding disclosures: Listed companies must publish detailed information about their shareholding, including:
1. a quarterly disclosure to the NSE of every person who holds or acquires 3% or more of the listed company’s ordinary shares;
2. publication by a listed company in its annual report of (i) distribution of shareholders; and (ii) names of the ten largest shareholders and the number of shares in which they have an interest as shown in the issuer's register of members;
3. immediate disclosure by an issuer of any information likely to have a material effect on market activity; and
4. disclosure in the annual report of any substantial sale of assets involving 25% or more of the total assets.
• Notification to the Kenya Revenue Authority: Every business entity is required to report to the Commissioner-General of the Kenya Revenue Authority within thirty days of any change in the ownership structure resulting in a change of ten per cent (10%) or more of the issued share capital.

Directors of a company are required to prepare annual financial statements that give a true and fair view of the company's financial position for the relevant year. A copy of the annual financial statement must be sent to every member of the company, every holder of the company's debentures and every person entitled to receive notice of general meetings.

In addition, directors are required to prepare a director's report for each financial year. For companies that do not qualify for exemption under the small companies' regime, the report should also contain a business review containing information about the company's business.

Listed companies are required to publish their annual financial statements, as well as the director's report, on their website.

The directors are required to lodge certain documents, such as balance sheets, annual financial statements, director's report, and auditor's report, with the Registrar of Companies, but in practice, this is not done as the Companies Registry only provides for filing a company's annual returns.

The CMA Governance Code requires institutions to explain in their annual reports how they have applied the recommendations contained in the code.

Companies are required to lodge annual returns with the Registrar on the anniversary of their incorporation or, if their last return was made on a different date, on the anniversary of that date. Failure to lodge annual returns may result in the company and each officer in default being separately liable to a fine not exceeding KES200,000. The annual returns are open for inspection to the public.

Following a recent amendment of the Companies Act by the Anti-Money Laundering and Combating of Terrorism Financing Laws (Amendment) Act, 2023, a company may be deemed not to be carrying on business if it has failed to file annual returns or financial statements for a period of 5 years or more or where a company has failed to lodge a copy of the register of beneficial owners after being directed to do so by the Registrar.

Companies are generally required to appoint an independent auditor to review their annual financial statements. There are exemptions for small and dormant companies.

• Small company: A company qualifies as "small" if its turnover for the relevant year does not exceed KES50,000,000 (approximately USD387,570) and the value of its net assets at the end of the financial year does not exceed KES20,000,000 (approximately USD155,026).
• Dormant company: A dormant company is one that has not traded or has minimal activity during the year. However, this exemption does not apply to companies in specific industries, even if they are dormant. These industries include insurance companies, banking companies, and e-money issuers.

Even if a company falls under the small or dormant company exemptions, its members (owners or shareholders) can still require an audit by providing formal notice to the company.

The company's directors or members vote to appoint and remove an auditor. A simple majority vote is required for appointment, but a special resolution from the members is required for removal.

The Companies Act and the CMA Governance Code establish specific requirements for directors in relation to risk management and internal controls:

• Directors' report: Directors must prepare a report for each financial year. This report should include a business review detailing the company's principal risks and uncertainties.
• Internal control systems: The boards of listed companies must:
1. establish and regularly review the adequacy and integrity of the company's internal control systems;
2. ensure compliance with applicable laws and regulations; and
3. establish an effective risk management framework.