Introduction – Shareholder Oppression and Mismanagement
Complaints by shareholders that the affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to the interests of shareholders generally or some part of them are not unusual. Whereas such complaints are often raised by minority shareholders of the company, majority shareholders who are not in control of the company or are unable to control the board may also raise such complaints.
To emphasise, conduct affecting all or some part of the shareholders of a company equally may be deemed oppressive or unfairly prejudicial. There is therefore no legal requirement to prove disparate treatment. Disparate treatment by itself would however strengthen a claim of oppression or unfair prejudice.
Courts have characterised oppressive conduct as that which is burdensome, harsh and wrongful, or which lacks probity and fair dealing (Velani & 6 others v Naran & 2 others 2021] KEHC 75 (KLR).
Dispute Resolution
Section 780 of the Companies Act, 2015 allows shareholders to apply to Court for protection if they are aggrieved by either actual or potential conduct (or omission) that would be oppressive or occasion unfair prejudice to their interests. Upon such an application being made, the Court is empowered by section 782 of the Companies Act, 2015 to make several orders including:
a. regulating the conduct of the affairs of the company in the future.
b. authorising civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court directs.
c. provide for the purchase of the shares of any shareholders of the company by other shareholders or by the company itself.
A key issue that oppressed shareholders must consider prior to instituting court proceedings is whether the existence of an arbitration clause would bar them from approaching the Court for relief. This raises the question of arbitrability of such disputes.
Arbitrability
Arbitrability refers to whether a dispute is capable of being determined through arbitration or whether it can only be determined by a Court of law. For a matter to be capable of determination by arbitration, the parties must have agreed to have it determined by arbitration. If, however, the law renders a particular kind of dispute non-arbitrable, then the parties’ consent to arbitrate is irrelevant. The concept of non-arbitrability allows the Courts to refuse to enforce an otherwise valid arbitration agreement on, among others, public policy grounds (Larsen Oil and Gas Pte Ltd vs Petroprod Ltd [2011] SGCA 21).
The provisions of the Companies Act, 2015 do not suggest that a shareholder’s claim for relief from oppression and or unfairly prejudicial conduct is inherently incapable of being arbitrated.
Kenyan Courts appear to have taken the judicial stance that shareholder disputes are arbitrable. We are aware of certain cases filed under section 780 of the Companies Act, 2015 including the case of Lettau vs Paradiso Toys Limited & another (Commercial Petition E002 of 2023) [2024] KEHC 3793 (KLR) where the Court referred the matter to arbitration because the company’s Articles of Association contained an arbitration clause.
The position taken by Kenyan Courts is probably informed by section 10 of the Arbitration Act, 1995 which provides that no Court shall intervene in matters governed by the Act, except as provided in the Act. This is often referred to as the non-intervention clause.
It is, however, important to note that certain reliefs such as authority to institute civil proceedings in the name and on behalf of the company can only be granted with the permission of the Court. This means that arbitration may not be the correct forum to obtain such a remedy.
Arbitration or Court, what is the best forum for you?
Arbitration is certainly an avenue to consider in oppression and unfair prejudice claims, where a contractual remedy is sought and will be enforced against other shareholders or the company. Where statutory remedies against third parties are necessary, parties may be left with no option but to air their claims in public before a Court.
Shareholders who wish to seek relief against conduct that is oppressive or unfairly prejudicial to their interests in the running of a company should seek legal advice on what the appropriate forum is for the resolution of their grievances and what are the best remedies to pursue. Otherwise, they run the risk of having their claims dismissed based on jurisdictional challenges.