By a petition dated 10 th June 2024, the petitioner prayed for the following orders;
A declaration that the resolutions passed by the Board of Directors of the 1 st respondent on 4 th June 2024 are illegal, null and void.
An order restraining the respondents, their agents, servants, or any other person acting under their instructions from implementing or giving effect to the resolutions passed by the Board of Directors of the 1 st respondent on 4 th June 2024.
An order directing the respondent to issue the transfer shares in the Allocation Notice dated 15 th April 2024 in favour of the petitioner and update the register of members accordingly.
An order for costs of this petition.
Any other relieve that this Honourable Court may deem just and fit to grant in the circumstances.
Simultaneously with the petition the petitioner brought a notice of motion dated the same date which had the following prayers;
This application be certified urgent and heard ex-parte on a priority basis.
Pending the hearing and determination of this application inter partes , an interim order be issued suspending the resolutions passed by the 1 st respondent’s board of directors on 4 th June 2024 and restraining the respondents, their agents, servants, or any other person acting under their instructions from implementing or giving effect to the afore-mentioned resolutions.
Pending the hearing and determination of this application inter parte s, an interim order be issued retraining the respondents from convening any further meeting to discuss and/or determine the deferred consideration under the Share Purchase Agreement dated 29 th July 2022 between the petitioner and the 2 nd respondent, the exercise of preemptive rights of the petitioner under the Allocation Notice dated 15 th April 2024, the transfer of Monarch Insurance Company Limited shares from the 1 st respondent and withdrawal of the deposits of J.B Kangwana Advocates in the 1 st respondent.
Pending the hearing and determination of the petition, an interim order be issued suspending the resolutions passed by the 1 st respondent’s board of directors on 4 th June 2024 and restraining the respondents, their agents, servants, or any other person acting under their instructions from implementing or giving effect to the afore-mentioned resolutions.
Pending the haring and determination of petition, an interim order be issued restraining the respondents from convening any further meeting to discuss and/or determine the deferred consideration under the Share Purchase Agreement dated 29 th July 2022 between the petitioner and the 2 nd respondent, the exercise of preemptive rights of the petitioner under the Allocation Notice dated 15 th April 2024, the transfer of Monarch Insurance Company Limited shares from the 1 st respondent and the withdrawal of the deposits of J.B Kangwana Advocates in the 1 st respondent.
The cost of this application be provided for.
The parties opted to file submissions for both the notice of motion and the petition and when the matter came for highlighting of submissions on 25-11-2024, the advocates concentrated their highlights on the petition. That being the case and considering that the court had granted interim orders, I do believe that the judgement herein should concern the petition only. The fate of the notice of motion shall be determined by the final orders in respect of the petition.
The petition is brought under Sections 780 and 782 of the Companies Act Chapter 486 of the Laws of Kenya. Section 780 provides that;
A member of a company may apply to the Court by application for an order under section 782 on the ground-
that the company's affairs are being or have been conducted in a manner that is oppressive or is unfairly prejudicial to the interests of members generally or of some part of its members (including the applicant); or
that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be oppressive or so prejudicial.
In this section, "member", in relation to a company, includes a person who is not a member of the company but is a person to whom shares of the company-
have been transferred; or
have been transmitted by operation of law.
In view of the above provisions, in order to succeed in this matter, the petitioner must satisfy the court that the acts it is complaining of are oppressive or prejudicial to it or some other members. The position in law is that a court should not interfere in internal affairs or operations of a company unless it is shown that the acts complained of are ultra vires its memorandum and article of association, fraudulent or not rectifiable by an ordinary resolution. In Mokoosio & another v Vadera & 3 others (2021) KEHC 56 (KLR), the court held that;
“ Whereas I agree that disputes regarding internal affairs of a Company ought to be resolved in accordance with the constitution of the Company, where it is alleged that the Company is not acting in accordance with its own constitution, the court has the power to intervene.”
The acts in contention here are resolutions of the 1 st respondent’s Board of Directors dated 4 th June 2024 which the petitioner claims to have been illegal, null and void. These resolutions were;
To cancel allocation notice dated 15-04-2024 which was in respect to the petitioner exercising its pre-emptive rights to purchase the 2 nd respondent’s shares.
To forfeit 50 per cent of the petitioner’s shares and return them to the 2 nd respondent; and
To move the shares held by the 1 st respondent in Monarch Insurance Company Limited.
The respondents have raised two preliminary issues which I propose to deal with first. First is that the petitioner does not have locus standi to bring this petition because Sections 780 and 782 of the Act were meant to protect minority shareholders whereas the petitioner is a majority shareholder.
Reading of the said Sections does not reveal or suggest any differentiation between minority and majority shareholders. The Sections talk of a member or class of members and in my view, they may be invoked by any class of members as long as there is justification and demonstration of grounds for such an application. I believe the majority in circumstances of this case denotes the minority in voting and not shareholding. Honourable Justice D.K. Kemei in Samson Mukeku Mutuku v David Kioko Musau (2020) KEHC 6256 (KLR) in explaining the circumstances in which a member is allowed to sue under Sections 780 and 782 stated as follows;
‘The other kind of action is covered under Section 780 to 782 of the Companies Act where the member’s rights have been prejudiced by the wrongdoers. In Rai and Others v Rai and Others [2002] 2 EA page 537 Shah J.A. held that shareholders have a limited right to bring an action for wrongs done to the company and at page 551 set out the rule in Foss vs. Harbottle which rule is expounded in Edwards v Halliwell [1950] 2 ALL ER 1064 – 1067 that firstly the proper plaintiff in an action in respect of a wrong alleged to be done to the company is the company itself. Secondly where the alleged wrong is a transaction which might be made binding on the corporation and on its’ members by a simple majority of the members, no individual member of the corporation is allowed to bring an action in respect of that matter, because, if the majority challenge the transaction, there is no reason why the company should not sue:
“(3) There is no room for the operation of the rule if the alleged wrong complained of is ultra vires the corporation, because the majority members cannot confirm the transaction (4) There is also no room for the operation of the rule if the transaction complained of could be validly sanctioned only by a special resolution or the like because a simple majority cannot confront a transaction which requires the concurrence of a greater majority (5) There is an exception to the rule where what has been done amounts to fraud and the wrong doers are themselves in control of the company. In this case the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrong doers themselves, being in control, would not allow the company to sue.”
The second preliminary issue is found in the respondents’ submissions that the share purchase agreement had an arbitration clause and the suit was therefore premature as the petitioner should have referred the dispute to arbitration. For this reason, the 2 nd respondent urges that the petition should either be dismissed or stayed pending arbitration. It is evident that the parties had agreed that disputes resulting from the agreement would go for arbitration and the petitioner or any of the parties should have declared a dispute then go for arbitration and perhaps come to court for an injunction pending arbitration as provided for in Section 7 of the Arbitration Act.
The 2 nd respondent had filed an application dated 20 th June 2024 seeking for stay of these proceedings and referral to arbitration which application it withdrew by a notice to that effect dated 2 nd July 2024. Interestingly, the 2 nd defendant has in its submissions proposed that the court should postpone these proceedings and refer the matter to arbitration. Such an application should not be made in submissions as the 2 nd respondent has done but through a substantive application to enable the petitioner and other parties make appropriate responses to the application. In that case, the parties having submitted themselves to this court’s jurisdiction and proceeded to argue the main petition and the 2 nd respondent having withdrawn its application dated 20 th June 2024, that point is moot.
The petitioner has claimed that the resolutions were oppressive and prejudicial to it as much as they are illegal as it appears in the first prayer of the petition. In order to establish whether the resolutions are oppressive and prejudicial as claimed by the petitioner, this court must analyse and interrogate the events leading to the resolutions and their effects and ascertain whether the same were in accordance with the law and the 1 st respondent’s memorandum and articles of association.
The petition is supported by a supporting affidavit dated 10-06-2024 and a further affidavit dated 11-08-2024 both sworn by one Grant Brooke who states that he is a director of the petitioner. He depones that on 3-06-2024 a notice was issued that a special meeting of directors of the 1 st respondent would be held on 4 th June 2024 which meeting he confirms to have attended as a representative of the petitioner a majority shareholder in the 1 st respondent. The petitioner claims that during the meeting of 4-06-2024, the Board of Directors could not agree on the agenda culminating to voting with the results of the resolutions the petitioner is challenging.
The background of the first resolution as given by the parties is that the petitioner, the 1 st respondent and the 2 nd respondent entered into a share purchase agreement dated 29 th July 2022 for the petitioner to purchase 5,743,684 of the 2 nd respondent’s 9,482,128 ordinary shares in the 1 st respondent for a consideration of Kshs 200,000,000/= payable on completion date and Kshs 200,000,000/= payable within 12 months after completion among other terms. It was a term of the agreement that the second payment (hereinafter referred to as ‘the deferred consideration’) depended on the outcome of an audit to be carried out to ascertained the worth of the 1 st respondent.
The said post completion audit was done by KPMG which was said to have been appointed by a company known as Shara Inc which was the petitioner’s parent company. The audit showed that the net value of the 1 st respondent had fallen by more than 10 per cent (Kshs 238,000,000.00) and therefore the deferred consideration was not, according to the petitioner, payable. The petitioner avers further that the 1 st respondent’s auditors reported financial improprieties and violation of the Prudential Guidelines by the 2 nd respondent and its affiliates. It is alleged that the company’s annual audit done by Price Waterhouse Coopers confirmed the numbers done by KPMG. The petitioner complained that despite this shortfall, the 2 nd respondent demanded payment of the deferred consideration. The 2 nd respondent maintains that it was entitled to demand the deferred consideration since there was no consensus on the KPMG audit.
There is dispute between the parties on how the appointment of KPMG as the auditor for purposes of establishing whether the deferred consideration should be paid was done. The respondents have stated that KPMG was appointed unilaterally by Shara Inc which was not a party to the agreement and that the 2 nd respondent was not involved in the appointment. The petitioner however maintains that the 3 rd respondent who is the chairman of the 2 nd respondent instructed the petitioner to choose KPMG to complete the final accounts. The respondents have alleged that the terms of reference given by Shara Inc and the petitioner to KPMG were at variance with the terms of the agreement. The respondents have deponed further that the report by KPMG is not binding on the parties and that the draft final accounts were not shared with the 2 nd respondent before being submitted to the Board as agreed.
Submissions and averments by the parties reveal that the subject of litigation is non fulfillment of terms of contract between the petitioner, the 1 st respondent and the 2 nd respondent, the main cause being failure by the petitioner to pay the deferred consideration. The reason given by the petitioner for that failure is that the report by KPMG returned a verdict that negated payment of the differed consideration in that the net worth of the 1 st respondent had gone down. The respondents counter that by saying that the firm which did the audit on the net worth of 1 st respondent was appointed by the petitioner and Shara Inc without consulting the other parties. This deadlock between the two was obviously affecting the first respondent’s operations including risk of penalties and drastic actions by the Central Bank of Kenya.
The agreement between the parties was that an audit firm would be appointed by the parties without specifying who was responsible for initiating the appointment. This having been a mutual contract, it followed that none of them could act unilaterally without involving the others. In this matter, the auditor was appointed by Shara Inc which was indisputably not a party to the agreement. The petitioner has not presented to this court any evidence to show that it consulted the respondents in appointing the auditor. The unilateral appointment of KPMG was in breach of the spirit of the agreement and that means that the report from the firm unless consented to by the 2 nd respondent was not binding on the parties. It follows therefore that the results could not be used as a determinant of whether or not the petitioner was bound to pay the deferred consideration.
An affidavit sworn by Hellen Wangechi Thuiya dated 15 th July 2024 has made attempts to show that the appointment of the auditor was consultative. I find the said affidavit contradictory and unbelievable for two reasons. First, the minutes exhibited by the respondents (which she has omitted in her affidavit) do not support her position that the appointment of KPMG was approved by the 1 st respondent’s board of directors. Secondly, the correspondences which she alleges to have circulated the proposals and recommendation of the audit firms are addressed to Shara Inc and not the 2 nd respondent. This gives credence to the averments of Ken Okwero that she was working for the interests of Shara Inc and not the 1 st or 2 nd respondent. Hellen avers further that the 2 nd respondent was involved in financial improprieties and violation of Prudential Guidelines which averments are not supported by any evidence.
What would have been the effect of lack of an audit of the 1 st defendant? In my view, it would have meant that there was no gauge of determining how much would the petitioner pay for the deferred consideration. If there was a dispute as to this, the parties should have resorted to settling that dispute and the method of doing so should have been subjected to dispute resolution mechanism provided in the agreement.
Instead of pursuing settlement of the issue of the audit on the 1 st respondent, the petitioner attended the board meeting, participated in voting on the agenda and then rushed to this court. I note that the meeting of 4-06-2024 was a culmination of discussions and correspondence between the parties and the petitioner was aware of what was in store for discussion on that day. It cannot claim to have been ambushed or claim that the meeting was constituted illegally after it participated and voted.
One Ken Okwero who has described himself as the Chief Executive Officer of the 1 st respondent having been so appointed on 1-09-2023 has sworn a supplementary affidavit dated 2 nd September 2024. He has deponed that prior to his appointment by the 1 st respondent, he was an employee of Shara Inc and that he participated in the transaction in dispute in this matter on behalf of the said Shara Inc. He has added that Hellen Wangechi Thuiya who appointed KPMG to carry out the audit was working for interests of the said Shara Inc and not the 1 st respondent. He stated further that the Chief Executive Officer of the 2 nd respondent was not engaged in search and selection of KPMG as the audit firm.
Ken Okwero adds, which I agree with, that Hellen Wangechi Thuiya breached her duty to the 1 st respondent when she seemed to be working for Shara Inc. In a meeting held on 10-7-2023, the Board of the 1 st respondent was to receive an update on the status of the post transaction audit where KPMG, PKF and Deloitte were presented and the Board directed that the management should carry out an accurate analysis of the three firms and come up with a recommendation upon which the Board would approve. According to this deponent, KPMG was appointed by Hellen Wangechi Thuiya before the circulation of the analysis and recommendation.
Based on the above, it is clear to me that KPMG was engaged by Shara Inc and from the correspondence exhibited by the parties, the said company did not involve or consult the parties to the share purchase agreement in the process of the appointment.
The emails exchanged as late as mid May 2024 show that the petitioner did not have ready capital to pay the deferred consideration. The petitioner appears to me not to have been ready for payment of the deferred consideration from the onset of the transaction and that is why it engaged in unilateral appointment of auditors and bringing in Shara Inc which was not a party to the agreement in order to drag the transactions or avoid the payment altogether. This must be the reason it was offering a lien in May 2024 as consideration for the purchasing of the remainder of the 2 nd respondent’s shares.
The petitioner argues that the dispute on the auditor was a matter between shareholders and the 1 st respondent’s Board had no role to play in it. It is indisputable that the payment of the shares was an integral and important part of decision making in the Board including injection of more capital. The 1 st respondent was also a party to the agreement and had in my view a stake in finalization of share transfers and that argument by the petitioner has no basis. The 1 st respondent was at the center of the transaction and that is why the transactions were subject of its board meetings.
I do not see any acts which are oppressive or prejudicial to the petitioner in the manner the resolution to forfeit 50 per cent of the petitioner’s shares was made. The petitioner got the shares it paid for. The forfeited shares were not paid for and any damages which may arise from the resolution to forfeit cannot be termed as oppressive conduct as it is a subject of normal suit for breach of contract. As far as I can get from the facts of the matter, the resolution to forfeit the contentious shares was made for the best interest of the company. Whether or not the decision was strategically right is not for this court to decide.
The second issue involves the petitioner’s attempts to exercise his pre-emptive rights to purchase the 2 nd respondent’s 3,738,444 shares. The 2 nd respondent declared its intention to sell the said shares to a 3 rd party on 1-01-2024 following which the petitioner indicated its intention to exercise its pre-emptive rights over the sale. The Board of the 1 st respondent approved a shares allocation notice on 15 th April 2024 giving a twenty eight days timelines for conclusion of the transfer. The twenty days period lapsed before the petitioner and 2 nd respondent could conclude agreement for the sale.
The 2 nd respondent submits that it was not to blame for the delay in transfer of shares to the petitioner and lays the blame on the petitioner who failed to pay the consideration or reply to their letters in time. It is argued that the petitioner did not have intention of buying the shares but was out to frustrate the sale of the same to a third party known as Kingkem Enterprises Limited.
Peter Njonjo, the 4 th respondent and who was a director of the petitioner has deponed that at the time the petitioner sought to exercise its pre-emption rights, it did not have funds to purchase the same. The 2 nd respondent submits that the intention of the petitioner was to frustrate and drag the CBK’s approval as it sourced money to pay for acquisition of the shares and comply with the regulator’s requirements.
The 2 nd respondent submits that the Board was within its power to forfeit shares as per Article 41 of its Articles of Association. Having gone through the affidavits and annexures, I am convinced that the petitioner was the one who delayed exercise of its pre-emption rights and it is my position that the petitioner’s conduct was not clean and it is as guilty if not more, as the 2 nd respondents as far as the performance and observance of the share purchase agreement is concerned.
The third complaint is about the removal of Monarch Insurance Company Limited from the 1 st respondent’s balance sheet and transferring those shares to the 2 nd respondent. The petitioner complains that the proposal to remove the insurance company from the balance sheet was voted for by the 3 rd , 4 th and 5 th respondents despite the apparent conflict of interest since the insurance company was an affiliate of the 2 nd and 3 rd respondents.
I note that the resolution of 4-06-2024 on this issue was that the 1 st respondent’s shares in the Monarch Insurance Company Limited be transferred to the 2 nd respondent. The petitioner has not shown how this resolution was oppressive to it as a member of the 1 st respondent. The petitioner has shares in the 2 nd respondent and if there were any conflict of interest on the said transfer, which has not been demonstrated, the same would still favour the petitioner.
The other point of conflict was withdrawal of deposit by J B Kangwana Advocates, an affiliate of the 3 rd respondent. The petitioner argued that 1 st respondent is required to meet share capital requirements and the proper way to have allowed for withdrawal of deposits by JB Kangwana Advocates was to recapitalize the 1 st respondent through a share issuance and injection of capital which was being blocked by the 2 nd respondent and its affiliates. Again, the petitioner did not demonstrate what interest it had in the deposits of the said firm which in my view the firm was entitled to withdraw.
The petitioner has submitted that the best way to have raised the capital was to issue shares and that the matter should have been left between it and the 2 nd defendant rather than the resolutions in dispute. The court cannot be expected to micro manage affairs of a company but can only interfere where there is proof of illegality or oppression of some members which I do not see in this matter.
There is no contention that the meeting of 4-06-2024 which came up with the resolution was properly constituted. The petitioner was actually represented in the said Board meeting. There is no claim that the petitioner’s rights to participate or contribute to the meeting were muzzled. The resolutions were passed through a regularly convened and legal meeting.
In my view, the safety granted to members or group of members of the company under Section 780 and 782 of the Act are different in terms of parameters to normal suits where parties claim breach of their legal rights. The Sections are clear and specific that they seek to protect members from oppressive or prejudicial actions by the company. These special Sections in my view are meant to look into the way the company is being ran and to establish whether there is any illegality or abuse of the rights of the members. A court presiding over litigation based on these Sections should be careful and confine itself to grounds and boundaries provided therein. It must differentiate the operations of the company from normal breaches of contract between the individual directors or shareholders.
What we have in this matter is a claim that the voting was skewed and the 3 rd , 4 th and 5 th respondents voted the way they did in order to deliberately hurt the petitioner. There is no evidence that the members who voted in one way or the other were forced to do so or the vote was not taken properly. What I have seen in the minutes of the day is unwelcome remarks by the representative of the petitioner calling the 3 rd respondent an extortionist and refusing to withdraw the remarks despite calls to do so by the other members. Based on these remarks, one would be justified to assume that the relationship between the said representative and the 3 rd respondent was not cordial but that does not make the voting exercise malicious or illegal.
If this court were to engage in interrogating the reasons behind the vote of each member, it would in my view be interfering with independence and free will of the members of the Board which is not a function of the court. A company belongs to the members and it is run by the directors for the benefit of the members and the court should not be seen to suggest how members of its Board or shareholders should exercise their rights to make decisions on a particular issue or which strategic decisions they should take. In Njama Wambugu v Winfrida Wanjiku Ngumi; Space Style Limited (Nominal Respondent) (2020) KEHC 9664 (KLR), Honourable Justice W.A. Okwany held that;
‘Courts have taken the position that they will not interfere with the internal affairs or management of companies. This was the position taken in the celebrated case of Foss v Harbottle (1843) 2 Hare 261 wherein it was stated that courts will interfere only where the act complained of is ultra vires, or is fraudulent or not rectifiable by an ordinary resolution.’
I also note that the resolutions of the Board were implemented on 11-06-2024 and the CBK informed of the same whereas the interim orders in this matter were issued on 14 th June 2024 and in the circumstances, I agree with the respondents that prayer two of the petition has been overtaken by events and cannot be granted. On the prayer for compelling the 1 st respondent to issue the transfer shares in the allocation notice dated 15-04-2024 in favour of the petitioner, I find that it will be improper to do so. The shares were not paid for and have already been forfeited. The timelines for allocation had lapsed before the resolutions were made.
In my own judgment from the facts and evidence produced before me, the resolutions were meant to salvage the status and standing of the company in order to meet the regulatory requirements. The petitioner should go back to the drawing board and consider a cause of action against the 2 nd respondent as in my view, the circumstances of this cause does not afford it remedies under Sections 780 and 782 of the Companies Act. Allowing the petition would be taking the 1 st respondent back to the precarious position it sought to get out of considering the demands and requirements prescribed by the Central Bank of Kenya.
Ken Okwero avers that the 1 st respondent had a core capital shortfall of 66 million and risked withdrawal of banking licenses and therefore there was dire need to raise it. In these circumstances, I hold the view that it was in the best interest of the 1 st respondent to comply with regulatory requirements. The interest of a company must take precedence over those of individual directors or shareholders as long as the aggrieved member has not demonstrated oppressive and prejudicial conduct by the company.
The upshot of the above discussion is that, I find no merit in this petition and the same is hereby dismissed with costs.
Dated, signed and delivered at Nairobi this 31 st day of July 2025.
B.M. MUSYOKI
JUDGE OF THE HIGH COURT.
Judgment delivered in presence of;
Mr. Odhiambo and Mr. Kiragu for the petitioner;
Mr. Ndungu for the 2 nd respondent; and
Mr. Ngeno holding brief for Dr Nyaundi of the 1 st , 3 rd , 4 th , 5 th and 6 th respondents.
A declaration that the resolutions passed by the Board of Directors of the 1 st respondent on 4 th June 2024 are illegal, null and void.
An order restraining the respondents, their agents, servants, or any other person acting under their instructions from implementing or giving effect to the resolutions passed by the Board of Directors of the 1 st respondent on 4 th June 2024.
An order directing the respondent to issue the transfer shares in the Allocation Notice dated 15 th April 2024 in favour of the petitioner and update the register of members accordingly.
An order for costs of this petition.
Any other relieve that this Honourable Court may deem just and fit to grant in the circumstances.
Simultaneously with the petition the petitioner brought a notice of motion dated the same date which had the following prayers;
This application be certified urgent and heard ex-parte on a priority basis.
Pending the hearing and determination of this application inter partes , an interim order be issued suspending the resolutions passed by the 1 st respondent’s board of directors on 4 th June 2024 and restraining the respondents, their agents, servants, or any other person acting under their instructions from implementing or giving effect to the afore-mentioned resolutions.
Pending the hearing and determination of this application inter parte s, an interim order be issued retraining the respondents from convening any further meeting to discuss and/or determine the deferred consideration under the Share Purchase Agreement dated 29 th July 2022 between the petitioner and the 2 nd respondent, the exercise of preemptive rights of the petitioner under the Allocation Notice dated 15 th April 2024, the transfer of Monarch Insurance Company Limited shares from the 1 st respondent and withdrawal of the deposits of J.B Kangwana Advocates in the 1 st respondent.
Pending the hearing and determination of the petition, an interim order be issued suspending the resolutions passed by the 1 st respondent’s board of directors on 4 th June 2024 and restraining the respondents, their agents, servants, or any other person acting under their instructions from implementing or giving effect to the afore-mentioned resolutions.
Pending the haring and determination of petition, an interim order be issued restraining the respondents from convening any further meeting to discuss and/or determine the deferred consideration under the Share Purchase Agreement dated 29 th July 2022 between the petitioner and the 2 nd respondent, the exercise of preemptive rights of the petitioner under the Allocation Notice dated 15 th April 2024, the transfer of Monarch Insurance Company Limited shares from the 1 st respondent and the withdrawal of the deposits of J.B Kangwana Advocates in the 1 st respondent.
The cost of this application be provided for.
The parties opted to file submissions for both the notice of motion and the petition and when the matter came for highlighting of submissions on 25-11-2024, the advocates concentrated their highlights on the petition. That being the case and considering that the court had granted interim orders, I do believe that the judgement herein should concern the petition only. The fate of the notice of motion shall be determined by the final orders in respect of the petition.
The petition is brought under Sections 780 and 782 of the Companies Act Chapter 486 of the Laws of Kenya. Section 780 provides that;
A member of a company may apply to the Court by application for an order under section 782 on the ground-
that the company's affairs are being or have been conducted in a manner that is oppressive or is unfairly prejudicial to the interests of members generally or of some part of its members (including the applicant); or
that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be oppressive or so prejudicial.
In this section, "member", in relation to a company, includes a person who is not a member of the company but is a person to whom shares of the company-
have been transferred; or
have been transmitted by operation of law.
In view of the above provisions, in order to succeed in this matter, the petitioner must satisfy the court that the acts it is complaining of are oppressive or prejudicial to it or some other members. The position in law is that a court should not interfere in internal affairs or operations of a company unless it is shown that the acts complained of are ultra vires its memorandum and article of association, fraudulent or not rectifiable by an ordinary resolution. In Mokoosio & another v Vadera & 3 others (2021) KEHC 56 (KLR), the court held that;
“ Whereas I agree that disputes regarding internal affairs of a Company ought to be resolved in accordance with the constitution of the Company, where it is alleged that the Company is not acting in accordance with its own constitution, the court has the power to intervene.”
The acts in contention here are resolutions of the 1 st respondent’s Board of Directors dated 4 th June 2024 which the petitioner claims to have been illegal, null and void. These resolutions were;
To cancel allocation notice dated 15-04-2024 which was in respect to the petitioner exercising its pre-emptive rights to purchase the 2 nd respondent’s shares.
To forfeit 50 per cent of the petitioner’s shares and return them to the 2 nd respondent; and
To move the shares held by the 1 st respondent in Monarch Insurance Company Limited.
The respondents have raised two preliminary issues which I propose to deal with first. First is that the petitioner does not have locus standi to bring this petition because Sections 780 and 782 of the Act were meant to protect minority shareholders whereas the petitioner is a majority shareholder.
Reading of the said Sections does not reveal or suggest any differentiation between minority and majority shareholders. The Sections talk of a member or class of members and in my view, they may be invoked by any class of members as long as there is justification and demonstration of grounds for such an application. I believe the majority in circumstances of this case denotes the minority in voting and not shareholding. Honourable Justice D.K. Kemei in Samson Mukeku Mutuku v David Kioko Musau (2020) KEHC 6256 (KLR) in explaining the circumstances in which a member is allowed to sue under Sections 780 and 782 stated as follows;
‘The other kind of action is covered under Section 780 to 782 of the Companies Act where the member’s rights have been prejudiced by the wrongdoers. In Rai and Others v Rai and Others [2002] 2 EA page 537 Shah J.A. held that shareholders have a limited right to bring an action for wrongs done to the company and at page 551 set out the rule in Foss vs. Harbottle which rule is expounded in Edwards v Halliwell [1950] 2 ALL ER 1064 – 1067 that firstly the proper plaintiff in an action in respect of a wrong alleged to be done to the company is the company itself. Secondly where the alleged wrong is a transaction which might be made binding on the corporation and on its’ members by a simple majority of the members, no individual member of the corporation is allowed to bring an action in respect of that matter, because, if the majority challenge the transaction, there is no reason why the company should not sue:
“(3) There is no room for the operation of the rule if the alleged wrong complained of is ultra vires the corporation, because the majority members cannot confirm the transaction (4) There is also no room for the operation of the rule if the transaction complained of could be validly sanctioned only by a special resolution or the like because a simple majority cannot confront a transaction which requires the concurrence of a greater majority (5) There is an exception to the rule where what has been done amounts to fraud and the wrong doers are themselves in control of the company. In this case the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrong doers themselves, being in control, would not allow the company to sue.”
The second preliminary issue is found in the respondents’ submissions that the share purchase agreement had an arbitration clause and the suit was therefore premature as the petitioner should have referred the dispute to arbitration. For this reason, the 2 nd respondent urges that the petition should either be dismissed or stayed pending arbitration. It is evident that the parties had agreed that disputes resulting from the agreement would go for arbitration and the petitioner or any of the parties should have declared a dispute then go for arbitration and perhaps come to court for an injunction pending arbitration as provided for in Section 7 of the Arbitration Act.
The 2 nd respondent had filed an application dated 20 th June 2024 seeking for stay of these proceedings and referral to arbitration which application it withdrew by a notice to that effect dated 2 nd July 2024. Interestingly, the 2 nd defendant has in its submissions proposed that the court should postpone these proceedings and refer the matter to arbitration. Such an application should not be made in submissions as the 2 nd respondent has done but through a substantive application to enable the petitioner and other parties make appropriate responses to the application. In that case, the parties having submitted themselves to this court’s jurisdiction and proceeded to argue the main petition and the 2 nd respondent having withdrawn its application dated 20 th June 2024, that point is moot.
The petitioner has claimed that the resolutions were oppressive and prejudicial to it as much as they are illegal as it appears in the first prayer of the petition. In order to establish whether the resolutions are oppressive and prejudicial as claimed by the petitioner, this court must analyse and interrogate the events leading to the resolutions and their effects and ascertain whether the same were in accordance with the law and the 1 st respondent’s memorandum and articles of association.
The petition is supported by a supporting affidavit dated 10-06-2024 and a further affidavit dated 11-08-2024 both sworn by one Grant Brooke who states that he is a director of the petitioner. He depones that on 3-06-2024 a notice was issued that a special meeting of directors of the 1 st respondent would be held on 4 th June 2024 which meeting he confirms to have attended as a representative of the petitioner a majority shareholder in the 1 st respondent. The petitioner claims that during the meeting of 4-06-2024, the Board of Directors could not agree on the agenda culminating to voting with the results of the resolutions the petitioner is challenging.
The background of the first resolution as given by the parties is that the petitioner, the 1 st respondent and the 2 nd respondent entered into a share purchase agreement dated 29 th July 2022 for the petitioner to purchase 5,743,684 of the 2 nd respondent’s 9,482,128 ordinary shares in the 1 st respondent for a consideration of Kshs 200,000,000/= payable on completion date and Kshs 200,000,000/= payable within 12 months after completion among other terms. It was a term of the agreement that the second payment (hereinafter referred to as ‘the deferred consideration’) depended on the outcome of an audit to be carried out to ascertained the worth of the 1 st respondent.
The said post completion audit was done by KPMG which was said to have been appointed by a company known as Shara Inc which was the petitioner’s parent company. The audit showed that the net value of the 1 st respondent had fallen by more than 10 per cent (Kshs 238,000,000.00) and therefore the deferred consideration was not, according to the petitioner, payable. The petitioner avers further that the 1 st respondent’s auditors reported financial improprieties and violation of the Prudential Guidelines by the 2 nd respondent and its affiliates. It is alleged that the company’s annual audit done by Price Waterhouse Coopers confirmed the numbers done by KPMG. The petitioner complained that despite this shortfall, the 2 nd respondent demanded payment of the deferred consideration. The 2 nd respondent maintains that it was entitled to demand the deferred consideration since there was no consensus on the KPMG audit.
There is dispute between the parties on how the appointment of KPMG as the auditor for purposes of establishing whether the deferred consideration should be paid was done. The respondents have stated that KPMG was appointed unilaterally by Shara Inc which was not a party to the agreement and that the 2 nd respondent was not involved in the appointment. The petitioner however maintains that the 3 rd respondent who is the chairman of the 2 nd respondent instructed the petitioner to choose KPMG to complete the final accounts. The respondents have alleged that the terms of reference given by Shara Inc and the petitioner to KPMG were at variance with the terms of the agreement. The respondents have deponed further that the report by KPMG is not binding on the parties and that the draft final accounts were not shared with the 2 nd respondent before being submitted to the Board as agreed.
Submissions and averments by the parties reveal that the subject of litigation is non fulfillment of terms of contract between the petitioner, the 1 st respondent and the 2 nd respondent, the main cause being failure by the petitioner to pay the deferred consideration. The reason given by the petitioner for that failure is that the report by KPMG returned a verdict that negated payment of the differed consideration in that the net worth of the 1 st respondent had gone down. The respondents counter that by saying that the firm which did the audit on the net worth of 1 st respondent was appointed by the petitioner and Shara Inc without consulting the other parties. This deadlock between the two was obviously affecting the first respondent’s operations including risk of penalties and drastic actions by the Central Bank of Kenya.
The agreement between the parties was that an audit firm would be appointed by the parties without specifying who was responsible for initiating the appointment. This having been a mutual contract, it followed that none of them could act unilaterally without involving the others. In this matter, the auditor was appointed by Shara Inc which was indisputably not a party to the agreement. The petitioner has not presented to this court any evidence to show that it consulted the respondents in appointing the auditor. The unilateral appointment of KPMG was in breach of the spirit of the agreement and that means that the report from the firm unless consented to by the 2 nd respondent was not binding on the parties. It follows therefore that the results could not be used as a determinant of whether or not the petitioner was bound to pay the deferred consideration.
An affidavit sworn by Hellen Wangechi Thuiya dated 15 th July 2024 has made attempts to show that the appointment of the auditor was consultative. I find the said affidavit contradictory and unbelievable for two reasons. First, the minutes exhibited by the respondents (which she has omitted in her affidavit) do not support her position that the appointment of KPMG was approved by the 1 st respondent’s board of directors. Secondly, the correspondences which she alleges to have circulated the proposals and recommendation of the audit firms are addressed to Shara Inc and not the 2 nd respondent. This gives credence to the averments of Ken Okwero that she was working for the interests of Shara Inc and not the 1 st or 2 nd respondent. Hellen avers further that the 2 nd respondent was involved in financial improprieties and violation of Prudential Guidelines which averments are not supported by any evidence.
What would have been the effect of lack of an audit of the 1 st defendant? In my view, it would have meant that there was no gauge of determining how much would the petitioner pay for the deferred consideration. If there was a dispute as to this, the parties should have resorted to settling that dispute and the method of doing so should have been subjected to dispute resolution mechanism provided in the agreement.
Instead of pursuing settlement of the issue of the audit on the 1 st respondent, the petitioner attended the board meeting, participated in voting on the agenda and then rushed to this court. I note that the meeting of 4-06-2024 was a culmination of discussions and correspondence between the parties and the petitioner was aware of what was in store for discussion on that day. It cannot claim to have been ambushed or claim that the meeting was constituted illegally after it participated and voted.
One Ken Okwero who has described himself as the Chief Executive Officer of the 1 st respondent having been so appointed on 1-09-2023 has sworn a supplementary affidavit dated 2 nd September 2024. He has deponed that prior to his appointment by the 1 st respondent, he was an employee of Shara Inc and that he participated in the transaction in dispute in this matter on behalf of the said Shara Inc. He has added that Hellen Wangechi Thuiya who appointed KPMG to carry out the audit was working for interests of the said Shara Inc and not the 1 st respondent. He stated further that the Chief Executive Officer of the 2 nd respondent was not engaged in search and selection of KPMG as the audit firm.
Ken Okwero adds, which I agree with, that Hellen Wangechi Thuiya breached her duty to the 1 st respondent when she seemed to be working for Shara Inc. In a meeting held on 10-7-2023, the Board of the 1 st respondent was to receive an update on the status of the post transaction audit where KPMG, PKF and Deloitte were presented and the Board directed that the management should carry out an accurate analysis of the three firms and come up with a recommendation upon which the Board would approve. According to this deponent, KPMG was appointed by Hellen Wangechi Thuiya before the circulation of the analysis and recommendation.
Based on the above, it is clear to me that KPMG was engaged by Shara Inc and from the correspondence exhibited by the parties, the said company did not involve or consult the parties to the share purchase agreement in the process of the appointment.
The emails exchanged as late as mid May 2024 show that the petitioner did not have ready capital to pay the deferred consideration. The petitioner appears to me not to have been ready for payment of the deferred consideration from the onset of the transaction and that is why it engaged in unilateral appointment of auditors and bringing in Shara Inc which was not a party to the agreement in order to drag the transactions or avoid the payment altogether. This must be the reason it was offering a lien in May 2024 as consideration for the purchasing of the remainder of the 2 nd respondent’s shares.
The petitioner argues that the dispute on the auditor was a matter between shareholders and the 1 st respondent’s Board had no role to play in it. It is indisputable that the payment of the shares was an integral and important part of decision making in the Board including injection of more capital. The 1 st respondent was also a party to the agreement and had in my view a stake in finalization of share transfers and that argument by the petitioner has no basis. The 1 st respondent was at the center of the transaction and that is why the transactions were subject of its board meetings.
I do not see any acts which are oppressive or prejudicial to the petitioner in the manner the resolution to forfeit 50 per cent of the petitioner’s shares was made. The petitioner got the shares it paid for. The forfeited shares were not paid for and any damages which may arise from the resolution to forfeit cannot be termed as oppressive conduct as it is a subject of normal suit for breach of contract. As far as I can get from the facts of the matter, the resolution to forfeit the contentious shares was made for the best interest of the company. Whether or not the decision was strategically right is not for this court to decide.
The second issue involves the petitioner’s attempts to exercise his pre-emptive rights to purchase the 2 nd respondent’s 3,738,444 shares. The 2 nd respondent declared its intention to sell the said shares to a 3 rd party on 1-01-2024 following which the petitioner indicated its intention to exercise its pre-emptive rights over the sale. The Board of the 1 st respondent approved a shares allocation notice on 15 th April 2024 giving a twenty eight days timelines for conclusion of the transfer. The twenty days period lapsed before the petitioner and 2 nd respondent could conclude agreement for the sale.
The 2 nd respondent submits that it was not to blame for the delay in transfer of shares to the petitioner and lays the blame on the petitioner who failed to pay the consideration or reply to their letters in time. It is argued that the petitioner did not have intention of buying the shares but was out to frustrate the sale of the same to a third party known as Kingkem Enterprises Limited.
Peter Njonjo, the 4 th respondent and who was a director of the petitioner has deponed that at the time the petitioner sought to exercise its pre-emption rights, it did not have funds to purchase the same. The 2 nd respondent submits that the intention of the petitioner was to frustrate and drag the CBK’s approval as it sourced money to pay for acquisition of the shares and comply with the regulator’s requirements.
The 2 nd respondent submits that the Board was within its power to forfeit shares as per Article 41 of its Articles of Association. Having gone through the affidavits and annexures, I am convinced that the petitioner was the one who delayed exercise of its pre-emption rights and it is my position that the petitioner’s conduct was not clean and it is as guilty if not more, as the 2 nd respondents as far as the performance and observance of the share purchase agreement is concerned.
The third complaint is about the removal of Monarch Insurance Company Limited from the 1 st respondent’s balance sheet and transferring those shares to the 2 nd respondent. The petitioner complains that the proposal to remove the insurance company from the balance sheet was voted for by the 3 rd , 4 th and 5 th respondents despite the apparent conflict of interest since the insurance company was an affiliate of the 2 nd and 3 rd respondents.
I note that the resolution of 4-06-2024 on this issue was that the 1 st respondent’s shares in the Monarch Insurance Company Limited be transferred to the 2 nd respondent. The petitioner has not shown how this resolution was oppressive to it as a member of the 1 st respondent. The petitioner has shares in the 2 nd respondent and if there were any conflict of interest on the said transfer, which has not been demonstrated, the same would still favour the petitioner.
The other point of conflict was withdrawal of deposit by J B Kangwana Advocates, an affiliate of the 3 rd respondent. The petitioner argued that 1 st respondent is required to meet share capital requirements and the proper way to have allowed for withdrawal of deposits by JB Kangwana Advocates was to recapitalize the 1 st respondent through a share issuance and injection of capital which was being blocked by the 2 nd respondent and its affiliates. Again, the petitioner did not demonstrate what interest it had in the deposits of the said firm which in my view the firm was entitled to withdraw.
The petitioner has submitted that the best way to have raised the capital was to issue shares and that the matter should have been left between it and the 2 nd defendant rather than the resolutions in dispute. The court cannot be expected to micro manage affairs of a company but can only interfere where there is proof of illegality or oppression of some members which I do not see in this matter.
There is no contention that the meeting of 4-06-2024 which came up with the resolution was properly constituted. The petitioner was actually represented in the said Board meeting. There is no claim that the petitioner’s rights to participate or contribute to the meeting were muzzled. The resolutions were passed through a regularly convened and legal meeting.
In my view, the safety granted to members or group of members of the company under Section 780 and 782 of the Act are different in terms of parameters to normal suits where parties claim breach of their legal rights. The Sections are clear and specific that they seek to protect members from oppressive or prejudicial actions by the company. These special Sections in my view are meant to look into the way the company is being ran and to establish whether there is any illegality or abuse of the rights of the members. A court presiding over litigation based on these Sections should be careful and confine itself to grounds and boundaries provided therein. It must differentiate the operations of the company from normal breaches of contract between the individual directors or shareholders.
What we have in this matter is a claim that the voting was skewed and the 3 rd , 4 th and 5 th respondents voted the way they did in order to deliberately hurt the petitioner. There is no evidence that the members who voted in one way or the other were forced to do so or the vote was not taken properly. What I have seen in the minutes of the day is unwelcome remarks by the representative of the petitioner calling the 3 rd respondent an extortionist and refusing to withdraw the remarks despite calls to do so by the other members. Based on these remarks, one would be justified to assume that the relationship between the said representative and the 3 rd respondent was not cordial but that does not make the voting exercise malicious or illegal.
If this court were to engage in interrogating the reasons behind the vote of each member, it would in my view be interfering with independence and free will of the members of the Board which is not a function of the court. A company belongs to the members and it is run by the directors for the benefit of the members and the court should not be seen to suggest how members of its Board or shareholders should exercise their rights to make decisions on a particular issue or which strategic decisions they should take. In Njama Wambugu v Winfrida Wanjiku Ngumi; Space Style Limited (Nominal Respondent) (2020) KEHC 9664 (KLR), Honourable Justice W.A. Okwany held that;
‘Courts have taken the position that they will not interfere with the internal affairs or management of companies. This was the position taken in the celebrated case of Foss v Harbottle (1843) 2 Hare 261 wherein it was stated that courts will interfere only where the act complained of is ultra vires, or is fraudulent or not rectifiable by an ordinary resolution.’
I also note that the resolutions of the Board were implemented on 11-06-2024 and the CBK informed of the same whereas the interim orders in this matter were issued on 14 th June 2024 and in the circumstances, I agree with the respondents that prayer two of the petition has been overtaken by events and cannot be granted. On the prayer for compelling the 1 st respondent to issue the transfer shares in the allocation notice dated 15-04-2024 in favour of the petitioner, I find that it will be improper to do so. The shares were not paid for and have already been forfeited. The timelines for allocation had lapsed before the resolutions were made.
In my own judgment from the facts and evidence produced before me, the resolutions were meant to salvage the status and standing of the company in order to meet the regulatory requirements. The petitioner should go back to the drawing board and consider a cause of action against the 2 nd respondent as in my view, the circumstances of this cause does not afford it remedies under Sections 780 and 782 of the Companies Act. Allowing the petition would be taking the 1 st respondent back to the precarious position it sought to get out of considering the demands and requirements prescribed by the Central Bank of Kenya.
Ken Okwero avers that the 1 st respondent had a core capital shortfall of 66 million and risked withdrawal of banking licenses and therefore there was dire need to raise it. In these circumstances, I hold the view that it was in the best interest of the 1 st respondent to comply with regulatory requirements. The interest of a company must take precedence over those of individual directors or shareholders as long as the aggrieved member has not demonstrated oppressive and prejudicial conduct by the company.
The upshot of the above discussion is that, I find no merit in this petition and the same is hereby dismissed with costs.
Dated, signed and delivered at Nairobi this 31 st day of July 2025.
B.M. MUSYOKI
JUDGE OF THE HIGH COURT.
Judgment delivered in presence of;
Mr. Odhiambo and Mr. Kiragu for the petitioner;
Mr. Ndungu for the 2 nd respondent; and
Mr. Ngeno holding brief for Dr Nyaundi of the 1 st , 3 rd , 4 th , 5 th and 6 th respondents.