Most businesses do not start with a dispute. They start with an idea, a few conversations and a great deal of trust. Two friends decide to build a company together. A spouse invests in a partner’s business. A family member brings the capital while another brings the expertise. Everyone agrees that they will “figure things out as they go.”
Trust tends to wobble at predictable moments, especially when money comes into the business, an investor arrives with new ideas, or partners begin to disagree on how the business should be run. One partner may want to buy a new vehicle while another sees it as an unnecessary expense; a founder may take another job but still want to keep their shares and board seat, or a shareholder may leave or pass away. These situations can quickly change the relationship between shareholders, and by the time lawyers are called in, the relationship may already be strained, leaving fewer options and making what could have been a simple disagreement far more difficult and costly to resolve.
A shareholders’ agreement exists to have the awkward conversations early, while everyone is still on good terms. Think of it as a corporate pre-nup. It is a private, binding contract between shareholders, sometimes with the company as a party, that sets out how the business will be run and what happens when things go wrong. Under Kenyan law, the company is principally governed by the Companies Act, 2015 and its Articles of Association. A shareholders’ agreement operates alongside these documents as a contractual arrangement between the parties. It is not a substitute for the Articles, and the two should be carefully aligned. The real value of the agreement, however, is not in what happens when everything is going well. It is in what happens when things stop going well. A good agreement answers difficult questions before they become expensive disputes.
Perhaps the most important point is when to have the agreement. Waiting until the shareholders are already arguing is usually the worst time to start negotiating one. When the business is being formed, people are more willing to talk openly about money, control, responsibilities and exit. Once a dispute has begun, the same conversation can become a negotiation between people who are already trying to protect their own positions. A shareholders’ agreement is therefore not a sign that shareholders expect their relationship to fail, quite the opposite, It is a recognition that good relationships, like good businesses, need structure.
The friend who starts the company with you today may have different priorities five years from now. The investor who comes in may want a greater say in the business. The company may need more capital than anyone expected and one shareholder may want to leave while another wants to keep building. These are not necessarily signs that the business has failed, they are simply realities that a growing business may have to face. The real question is whether the shareholders have agreed on how to deal with those realities before they arrive. A shareholders’ agreement cannot prevent every disagreement. What it can do is prevent every disagreement from becoming a crisis.
The question of control becomes particularly important when shareholders have unequal interests or when two shareholders own the company equally. In a 50:50 company, neither shareholder can necessarily move an important decision forward without the other’s agreement. If they reach a serious disagreement, the company may be unable to make decisions, secure funding or pursue new opportunities.
A well-drafted shareholders’ agreement can provide a way through such a deadlock. The parties might first be required to negotiate in good faith, escalate the matter for further discussion or attempt mediation. If those steps fail, the agreement may provide for a buy-out or an orderly sale, depending on the circumstances. The aim is to avoid a situation where a disagreement between the owners brings the entire business to a standstill.
The agreement is equally important when the company needs to bring in new investors. Issuing additional shares may provide the capital needed for growth, but it can also reduce the percentage ownership of existing shareholders. Pre-emption rights can give existing shareholders the opportunity to take up new shares in proportion to their current holdings before they are offered to outsiders, subject to the applicable law and the company’s constitutional documents. This allows shareholders to plan for future investment while considering how ownership and control may change.
Minority shareholders also need protection. Owning a smaller percentage of a company should not necessarily mean having no say in decisions that could fundamentally affect one’s investment. An agreement can identify particular matters requiring the consent of specified shareholders or a higher voting threshold. The challenge is to strike a fair balance: protecting minority interests without allowing any one shareholder to block every decision the company needs to make.
A shareholders’ agreement can establish how shares may be transferred, how their value will be determined and whether the other shareholders have the first opportunity to purchase them. Rights of first refusal can help prevent shares from being transferred to an unwanted third party, while tag-along and drag-along provisions can address situations where a majority shareholder wishes to sell and the minority either wants to participate in the sale or may be required to sell on the agreed terms
Where shareholders also work in the business, the agreement can address what happens when one of them stops contributing. Good leaver and bad leaver provisions, where appropriate and carefully drafted, can establish different arrangements for shareholders leaving under different circumstances. This is particularly relevant where a founder’s contribution includes not only money but also time, expertise or other resources essential to the company’s success. Without clear exit arrangements, the remaining shareholders may find themselves in business with someone they never intended to work with, or unable to agree on a fair price for a departing shareholder’s stake. What began as a disagreement over someone’s decision to leave can then become a dispute over valuation, ownership and the future of the company.
Putting an agreement in place when a company is formed, or when a new investor joins, creates an opportunity to discuss expectations while the relationship is still constructive. It also allows the parties to consider how their arrangements should evolve as the company grows, rather than relying on rules that may no longer suit the business.
Of course, an agreement cannot predict every difficulty or prevent every disagreement. Its effectiveness depends on how carefully it is drafted, whether it reflects the company’s actual needs and whether it works alongside the Articles of Association and applicable law. A generic agreement copied from another jurisdiction may overlook important legal requirements or fail to address the commercial realities of the particular business.
Ultimately, a shareholders’ agreement is not about expecting business partners to fall out. It is about recognizing that a business can change even when the people behind it begin with the best intentions. The friend who starts the company with you may eventually want a different direction, an investor may seek greater influence, or the business may need decisions that were never anticipated at the beginning.
The goal is not to plan for failure, but to give the business a better chance of surviving change. Trust may bring people together, but clear agreements help protect the business they have built together. The best time to decide what happens when things go wrong is while everyone still has a reason to make things work.
