The Companies Act 2015 (the “Act”) was published on 18th September 2015 and will eventually replace the previous Companies Act which had been in place for over 50 years[1].  The Act is one amongst other statutes including the Insolvency Act 2015[2] recently enacted for the purpose of modernizing the laws regulating Kenya’s business environment. The Act aims to:

• provide mechanisms to enhance transparency and the scrutiny of management in companies (in particular public companies);
• promote investment and entrepreneurship;
• penalize and hold to account individuals and companies in violation of the law; and
• protect investors’, creditors, and public interests.

In this, the first in a series of four articles, we highlight the most significant changes brought about under the new regime. In the subsequent articles, we shall look at the impact of the Act on:

• the duties of directors;
• the enhanced rights of shareholders;
• the new formation requirements and capital restructuring mechanisms for companies.

Directors: On the hot seat?
The Act now requires that at least one director in a company will be a natural person (individual).  This is to ensure that despite the use of corporate directorships, in the event a company is to be sanctioned, somebody can be held accountable.
 
Directors found to be in breach of their duties shall be liable to pay fines or face disqualification from holding office (in the most extreme cases with a maximum period of up to fifteen (15) years on conviction). The alternative is for a director to volunteer for disqualification to be followed with a court monitored probationary period.
 
The Act broadens the scope of the duties of directors, imposing obligations to not only act in accordance to the constitution of the company, and exercise the powers granted therein for the purposes for which they are conferred but directors shall also be required to exercise independent judgement, not accept benefits from third parties, avoid conflicts of interest and exercise reasonable care, skill and diligence in performing their functions as directors.
 
The Act sets out onerous fines and penalties for breach of directors’ duties, ranging from million shilling fines, to disqualification from future directorships and imprisonment. 
 
Shareholders: The Winners?
The Act makes the formation of a company easier. It shall be possible to constitute a single shareholder company which shall provide sole entrepreneurs the benefit of the protection accorded by a limited company.
 
The Act also facilitates faster decision making within companies. Written resolutions of members, without the need for any shareholder meetings are now permitted for private limited companies and electronic communication is recognised in the conduct of business. For example, a public company shall now be able to issue notices and other documents to shareholders through its website. This shall lower company costs and grant shareholders easier access to information, as well as promote participation.
 
To further encourage shareholder participation, the Act provides greater clarity on both the grounds and procedure on which to institute a suit against a director (including a past director) or company officer on behalf of the company with regard to their level of duty of care in discharging their role.  
 
The Company: Dynamic Evolution?
Several changes are effected under the Act that impact on the structure of a company. As mentioned above the Act introduces one-shareholder companies. In addition, private limited companies shall not be required to have a company secretary unless their paid up capital exceeds KShs. 5 Million (approximately USD 50,000[3]).
 
The Act turns the existing mode of drafting a company’s memorandum of association on its head; a company is no longer required to detail its objects, which resulted in difficult to read and unnecessarily long constitutional documents that often inadvertently left out objects critical to a company’s operations.  Going forward, a company’s memorandum shall only state the restrictions imposed on it. Other changes introduced are the use of electronic communication as stated above such as for issuing notices, prospectus and the passing of resolutions, which shall facilitate transmission of information and reduce operating costs (particularly for public companies). 
 

A significant new aspect of the Act is that it now sets out in much greater detail, the permitted instances in which a limited company may buy back its own shares. Considerable effort is taken to expound on this with the Act by defining what constitutes financial assistance, the modes of acquisition, the exceptions to the rules and the penalties for contravention.
 
Foreign companies registering a branch in Kenya will now be required to demonstrate that at least thirty percent (30%) of their shareholding is held by Kenyan citizens of birth. The Act provides no exemptions to this provision and raises the question on how this will be implemented. It is also not clear from the Act whether this requirement will affect already foreign companies which have already registered a local branch. Furthermore, new market entrants will now face the added challenge of finding a local investor to match this minimum requirement without jeopardising their investment programme.
 
The Questions
The questions a director, a shareholder, a company and its officers should be asking are “Am I ready? Is the Company ready to implement necessary changes? What are the benefits and new opportunities? What are the risks?” Indeed the Act brings with it great change but the real risk to such stakeholders is stagnating under the practices of the previous law. In the second article, we shall look at the impact of the Act on directors’ duties, the need of awareness to the higher standards required of directors and the real risk they now face with regard to personal liability.

[1] The Act provides that various sections of the old Act will be repealed in turns, with corresponding sections of the new Act brought into effect contemporaneously.  We will update you as and when specific sections come into effect, and whether they affect existing or only newly incorporated companies.
[2] The Companies Act no longer includes provisions relating to the insolvency of companies; these are now contained in a stand-alone act, the Insolvency Act, 2015 which consolidates the law relating to the insolvency of natural persons and incorporated and unincorporated bodies.
[3] All USD figures quoted are based on current exchange rates.

Disclaimer: This article has been prepared for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing on this article is intended to guaranty, warranty, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.