Minority shareholders lose power in new legal change

Major shareholders of several listed companies have in the recent past been embarrassed by minority owners who have resisted a push to buy them out.

In two such cases - Unga Limited and Express Kenya - the minority scuttled moves to have them sell their stakes and delist the companies as they demanded more money so they could part with their shares.

This was despite the major shareholders having accumulated more than two thirds of shares in the respective companies.

Going forward however, it will be easier to kick out minority shareholders following an amendment to the Companies Act (2015) contained in the Statute Law (Miscellaneous Amendments) Act No. 12 of 2019.

The Act required a shareholder to accumulate at least 90 per cent shareholding for a takeover to be successful. The amendment however lowers this to just 50 per cent.

This exposes minority shareholders to corporate bullies, which according to legal experts from law firm Bowmans Law is a departure from the global practice.

In other jurisdictions, holding the threshold at 90 per cent is a form of protection for minority shareholders and a major shareholder would have to toil a little more to convince the shareholders to sell.

It is however easy to kick out retail shareholders when the requirement is at 50 per cent, especially considering that a substantial number of listed firms are owned by a few big institutional shareholders, who can easily account for more than 50 per cent of the shareholding.

“The Amendment Act now lowers the 90 per cent threshold to just 50 per cent, thereby pulling Kenya away from global practice in relation to minority shareholder protections," said Bowmans Law in an analysis.

"The lower threshold allows any bidder to force out any non-assenting shareholders easily if 50 per cent of the shares to which the offer relates accept the offer.”

“There are few, if any, jurisdictions globally with such a low threshold for compulsory acquisition. We anticipate challenges to the legitimacy of this amendment and, potentially, in respect of any take-over effected in the future that takes advantage of the lower thresholds," said the law firm.

"It will also impact Kenya’s standing as a jurisdiction where minority shareholders are both valued and protected, especially in the context of the capital markets and publicly listed companies.”

The legal amendment will give directors of some listed firms a tool to deal with minority shareholders, who have always been a nuisance. While some shareholders sometimes pose difficult and even embarrassing questions to management and boards of companies, the corporate honchos always entertain them largely because of legal requirements.

The minority shareholders' stubbornness has moved from the annual general meeting to frustrating the takeover of a business by playing hardball and refusing to sell until they are offered what they think are fair terms to exit.

Such was the case for Seaboard’s planned takeover of Unga, where the retail shareholders declined to sell their shares. The American firm had offered Sh40 a share with the intention of acquiring 46.15 per cent stake to increase its shareholding from 2.92 per cent to 49 per cent.

Together with Victus, which owns 50.93 per cent of Unga Group, the two would have subsequently been the only shareholders and would go ahead to delist the company from the Nairobi Securities Exchange.

This however did not go according to plan and instead, Seaboard was only able to get 16.05 per cent of the shares from minority investors, who said the offer of Sh40 was too low against a market value of Sh67 per share.

At Sh40, the price was said to be a 31 per cent premium compared to Sh29 that the share was trading at when the company made the offer.

A similar scenario unfolded with Express Kenya shareholders who in 2018 declined to sell their stake to the chief executive, Hector Diniz. Less than 10 per cent of shareholders in the transport and logistics firm agreed to the buyout, which was far from the required 75 per cent threshold.

Despite holding significant shares in person and through his company Etcoville (61.64 per cent), Mr Diniz could not walk away with the company that holds prime property along Likoni Road.

He had sought to buy out 38.3 per cent ordinary shares that were not held by his affiliated companies but ended up only getting 9.78 per cent approved.

It will not be lost to many that while the amendment has huge repercussions on minority shareholders, it has been undertaken through a Miscellaneous Amendment Act, which is an omnibus of many amendments to numerous legislations, meaning that some of the amendments do not get the necessary scrutiny.

Other major laws that have been reviewed through the omnibus legislation include the Kenya Information and Communication Act (KICA), where the Miscellaneous Amendments Act 2018 expunged clauses requiring the authority to replace the board chairman and director general through a selection panel.

This gives the ICT cabinet secretary a free hand to appoint the two leaders of the telecommunications industry regulator. The result has been unending court cases and a board of directors whose arms are tied due to litigation, stalling some of CA’s projects that need board approval including the hiring of a new director general.

Another piece of legislation that came to be through the miscellaneous amendment is last year’s change to the Registration of Persons Act, which introduced a clause providing the legal basis for the establishment of the National Integrated Identification Management System (NIIMS), which enabled the Government to register people for the Huduma Namba.

Kenya Human Rights Commission Executive Director George Kegoro noted in a recent column in The Standard that considering the weight of the Huduma Nama, it deserved proper debate in Parliament, as opposed to the wholesale treatment it got when the Miscellaneous Amendment Bill was tabled last year.

“Traditionally, Kenya uses miscellaneous amendment statutes as a mechanism through which omnibus legislation touching on many unrelated subjects is enacted," he said.

"Given the important role that this law is meant to play, it deserved the kind of processing that would have allowed more debate than was possible when it came as part of omnibus legislation.

"Omnibus legislation represents an ‘all or nothing’ approach that is surely inappropriate for a law of this nature. In the event, while the government has achieved the law it desired it has done so in a manner that employed stealth and minimised participation."