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Democratic rights of a minority shareholder

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Minority shareholders hold the minority vote and control of the company. The chances of the company altogether disregarding the wishes of the minority shareholders are very high as most of the time there vote counts for little. In one of Kenya’s largest shareholder disputes, the two majority shareholders took their fight to court and also simultaneously sought remedies under the Companies Act. The minority shareholders were not in a position to move any court action and were only invited by majority shareholders to support their action. This is just one of the real life examples that illustrate the position of minority shareholders.

 

However the Companies Act provides minorities with a remedy under Section 211. The courts appreciate that given the fact that the minority shareholders have very little control of the company, the chances of the company affairs being run in a manner detrimental to their interest is very high. This is why Section 211 of the Companies Act provides this protective remedy to minorities. The provision states that any member of a company who feels that the affairs of the company are being run in a manner oppressive to a part of the members of the company may petition the court and if the court is satisfied that indeed the company affairs are being run in an unfair manner and that the circumstances justify the winding up of the company but that winding up the company is not the best remedy for the company; then the court shall make any order against the company with a bid to rectify the situation.

 

Therefore as a minority shareholder one needs to know two things. Firstly, that the burden of proving that the company is indeed being run in an unfair manner lies with him and secondly that the circumstances warranting Section 211 meet the threshold of winding up of the company, but that winding up would not be the best remedy. If any of these two requirements fail, then the court will not grant the orders sought for.

 

An action by the minority shareholders of Ngénda Location Ranching Company Limited failed for failure to satisfy the first requirement. The shareholders failed to prove to the court that the company was indeed being run unfairly. The minorities sought a winding up order against the company claiming that the company was being run contrary to the memorandum and articles of association. They also claimed that some assets of the company were being disposed off without their consent. The minorities also sought a permanent injunction against the directors stopping them from doing a number of things within the company. The main issue of contention was a parcel of land which the minorities claimed that the other shareholders were allowed to access while they as minorities were locked out. In response, the directors denied the allegations by the minorities and stated that the persons who were accessing the land were infact not shareholders of the company but employees who were licensed by the company to access the land for the benefit of all the shareholders. The minorities ‘action failed and the court found that upon going through the memorandum and articles of association of the company, that the company’s objects did not provide for the sub-division of land but was formed for conducting agri-business for the benefit of shareholders.

 

This case brings out a number of unrelated issues to the Section 211 filing and of them is that whenever the company seeks to do anything outside its memorandum of association then an amendment of the memorandum must be done. The minorities failed to prove their case and one undoing was the memorandum of association as their claim went outside the authorized objects of the company. Going back to Section 211, minorities must ensure that they have all the facts right before moving the court. The burden of proving the company is being run in an unfair manner lies with them.

 

In most cases, the minorities may not be able to collect evidence from the company due to the asymmetry of information that exists between them and the majority shareholders. Many times the minority shareholders are left in the dark as to exactly what is going on in the company while the majority shareholders know exactly what is going on and have a control over the board. For example many of the small investors who bought shares during recent IPOs seldom know what is going on with the company, yet the institutional investors with a large shareholding, control the board in many ways.

 

In such a case, the minorities may also apply to the court for an inspection of the company under Section 165. However for this right to exist the minorities must show the court that they in aggregate hold at least 10% of the company.

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EMPLOYEES AS YOUR BRAND: USING THE EMPLOYMENT CONTRACT TO CREATE A BRAND

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Branding has always been a powerful tool for businesses. Every business has a brand and that is because branding is the image and the outlook that your customers have about your products, services and their experience with your business. I have seen many ways that businesses create their brand. One could be by beginning with the end in mind and that is, come up with a vision of what you want to be and take positive steps in line with that. However a few months ago I learnt of a United Kingdom based organization that came up with their brand in an innovative way. What they did was get to their customers to leave comments on their website about what they thought of the company. From this customer feedback then they were able to create a brand and come up with a tagline.  A brand is created sub-consciously by things like the organizational culture…it is not only about a catchy tag-line for your business but a powerful brand is created when the organization takes active steps to be what it says it is. It is better for your business not to have a tag line at all than to have a tag line and then fail to meet the standards. A tag line creates an expectation in the mind of customers.

 

However one of the main stewards or trustees of an organization’s brand are the employees especially who have an inter-personal interaction with the customer. In the service industry, employees are the main people who interface with the clients on a daily basis. If the employee gives a bad service then the business owner begins to lose customers. In the service industry, business owners rarely get to deal with the clients on an inter-personal level. The owner may carry the vision of the organization and the risk is that if he does not pass on this vision to the employees then his brand is lost. Using a hypothetical example of a restaurant with a brand “to offer quality foods, “For the brand to be established then this vision has to be sold to the chef, the waiters and even the cleaners to ensure that the image is maintained. Before you can even sell your brand to the customers, you have to sell it to your staff. There are many ways of selling a vision to the staff including motivational tools.

 

But there are a number of legal tools that can be employed to ensure the vision is not lost. One major tool is the employment contract. An organization can incorporate its brand and vision in the employment contract so that it becomes a legally binding obligation for the staff members to uphold. Detailed job descriptions are also very important in brand creation and upholding. As the business owner you have a detailed idea of what each staff member is supposed to be doing in order to carry your vision. These duties should be included in the job descriptions and should be as specific as possible. During performance evaluations and reviews, then a staff member’s performance can be weighed against the job description.

 

Applying this principle of employing legal tools in selling your vision to staff members may sound very hard in theory. However it is not rocket science, it is as simple as putting it down on paper. Taking a hypothetical case of a cleaner’s job description then  you can state how many times a day he should clean, which areas to give emphasis, how he should be dressed, what materials he can use….and anything else that will help him carry your vision and your brand. You might find that the reason you have been losing customers is because the cleaner is perhaps not aware of the image that you want to create and performed poorly. It is therefore important to include all your staff members in the vision.

 

All staff members are involved in selling the brand to the customers. However, there are some members of staff especially the senior ones who have a higher responsibility when it comes to custodianship of the brand.  There are some staff members like directors who can bind the organization because they carry that implied authority. They therefore need to be sensitized on the brand of the organization and the vision it carries. They need to be told how far their authority extends to. For example when it comes to matters of public relations (which has a corresponding effect on the organization’s brand), are they allowed to issue press statements or talk to the media regarding the organization?

 

In general corporate law, where a person has implied authority then his actions can be assumed to be those of the entity. It is therefore important to train those with implied authority on branding.

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REAL ESTATE INVESTMENT TRUSTS BENEFICIAL FOR REAL ESTATE DEVELOPERS

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Real estate stakeholders in Kenya have a reason to smile after the 2011/2012 budget due to the introduction of real estate investment trusts. The CMA (REIT) Regulations of 2009 are drafted and will have a great impact on the real estate sector. In this column I have zeroed in on the financial impact of the REIT introduction on real estate developers.

 

Construction finance has been a long term challenge for many would be developers. Infact large construction projects are only undertaken by developers with financial muscle. An average construction project runs into the hundreds of millions a figure out of reach for many. The real estate development sector is limited to developers with ability. Yet many developers have developed innovative concepts for the real estate sector.

Options

The options for construction finance are limited. Traditionally the most common form of construction finance has been debt finance from financial institutions.  The developer may take out a loan and issue alternative security or in most cases, secure the land on which the development is undertaken. The income from the development is then used to service the loan. Repayment of the loan is pegged on the sales. The risk from debt financing is very high due to the fact the income may be uncertain. A developer may find himself in a dilemma if the units constructed do not sell or if the construction does not occur fast enough. This kind of scenario leaves the developer exposed to penalty interest and other undesirable costs.

 

Equity finance has also been used to finance construction projects though it is rarely used and is for the risk takers. Many landowners are very sceptical of equity finance due to the fact that there is an element of dilution of ownership. Most people want to hold on to ownership of their land and prefer debt finance to equity. There are several ways to finance a construction project using equity but the most common model is through the formation of joint ventures. The most simple is for the land owner to contribute his land into the venture while the developer or financier provides the capital required for construction. The sales are then split pro rata the contribution of each partner. Another common way of financing construction projects in Kenya has been through formation of a new entity with developers. Many foreign investors are keen on investing in developing countries and are therefore willing to pump in equity capital into a real estate venture. Once they recover their investment and get the required return then they exit the project.

 

Alternative

The two have worked for construction finance. However real estate developers have been presented with a new alternative to construction finance through the REITs. The developer approaches a registered Trustee under the REIT regulations and forms a REIT. The developer would be the sponsor of the REIT while the Trustee, a financial institution registered under the Regulations acts as the trustee to the scheme. Once the concept of the REIT is agreed upon then the same can be registered with the CMA. Section 5 of the Regulations set out the requirements of registration of a REIT. Amongst the other persons the sponsors must approach is a registered REIT manager who shall manage the scheme on behalf of all the unit holders, be they the sponsors or the new unit holders. To form a REIT the developer must have a trust deed drawn up and a management agreement between the trustees and the REIT manager.

 

Once all the regulatory approvals for the REIT are passed, then the REIT can access funds from the public. The schemes may be listed whereby the public is invited to invest in them. However it is not compulsory for them to be listed and if they are not then they have to be registered with the CMA and must provide for ease of transferability of shares.

 

A loose and simple form of REITs has always been in existence in Kenya. The infamous land buying companies of the 1990s were a loose form of REITs in that investment into real estate was done through a pooled fund. The promoters would form a land buying company and invite persons to subscribe in its shares with the promise that the company would acquire a large tract of land and thereafter subdivide portions for the benefit of the shareholders. More often than not the subscribers ended up losing their money to the promoters. However the REITs are heavily regulated by the CMA and it is difficult for an investor to lose his investment due to fraud or such other misrepresentations.

 

The introduction of REITs is therefore very welcome for the public as well as the developers and promoters.

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CHECK LIST FOR START-UPS

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As we head towards the New Year, a lot of new businesses are formed by entrepreneurs. However without proper business planning, the business is not likely to perform optimally. This is a check list that can be used by startups in planning their business for longevity and survival.

 

The first thing to do is to write down your business plan. The plan sets out the goals of the business and is the foundational document to refer to at all times of the business. The plan can be amended with time therefore a lot of detail should go into drafting the plan. An entrepreneur workbook advices that one should provide a summary description of the intended business. This is very important for marketing purposes. I was once a member of a networking club where each member was given two minutes to present their business to the rest of the club. It was interesting that not many people were able to do this in the given two minutes. This is because most did not have a clear description of their business and the products or services they provided. Not many had a clear definition of their target customers. However, writing down a brief description of your business will enable you present your business in an orderly manner.

 

It is important to find a good location for the business depending on the type of business. In some cases, such as in the case of consultancy or online shops, there is no need for any location as most of the business is done via e-commerce. However for some businesses, location determines how successful your business will be this is especially for businesses in the service sector. It is best to be nearer your target clients.

 

Your management structure should be set up beforehand. For those who run their own businesses, it would still be wise to incorporate a board of advisors whom the business is accountable to. A separation of ownership from management is the best practice for good governance. The board remains accountable to the owner. An independent board is prudent for a board offers a range of expert advice and it does not need to be expensive. Family and friends with different specialties can offer such services.

 

You will need to target your customers beforehand and properly define your product/service. A market analysis is also needed. This will be beneficial in the long term as you will not waste time and resources outside defined parameters.

 

Your business needs a vision and mission. Vision is simply what prompted you to start the business and mission is why your business exists that is, its purpose. Most business experts’ advice that your vision and mission should not be about revenue but should capture your core competencies, interests and passion. Most people are likely to fail if they get into business they have no capacity or passion for. But if you have capacity and passion you are likely to succeed. Write down your vision and mission for future reference. It is good to do your SWOT analysis so as to capitalize on your strengths, and deal with your weaknesses. Take advantage of new opportunities e.g. new laws, changing customer trends and mitigate risks.

 

Set up systems and operations in terms of ICT infrastructure, human resources, marketing and other pillars. Finally finances should be considered. Where are you getting capital from? Who are the suppliers? How much are you costing your services and what is your credit policy? With proper planning your business is likely to succeed.

 

Merry Christmas.

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EVOLUTION OF CONSUMER LAWS

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A lady known as Ms. Donahue and a friend travel to Paisley from Glasgow and on the way they stop at a restaurant and decide to have some cool drinks including a ginger beer. The owner pours half of the drink into Ms. Donahue’s cup and the other half in her friend’s cup. By that time Ms. Donahue had already had a few sips of the ginger beer. Now as the other half was being poured into her friend’s cup the unbelievable happened! The remains of a snail in half a decomposed state dropped out the bottle and into the other cup. Miss Donahue went into a state of shock and had to see her doctor. She obviously suffered damages and filed a suit against the manufacturers of the ginger beer. The case was filed way back in the 1920s under tort laws and as any young law student will tell you, this is one of the first cases that is taught within the first semester under tort laws.

 

Before the Promulgation of the new Constitution in 1920s and before Kenya had a clear consumer law, consumer protection was accorded under torts law, the Sale of Goods Act, contract laws and the Restrictive Trade Practises Act. There was no clear consumer law. If like Miss Donahue you suffered any injury as a direct or indirect result of someone else’s actions the easiest redress for you was to file a suit under torts law.

 

However this has now changed with the enactment of two new laws and hopefully the successful enactment of a third law. In a jurisdiction where consumers are fairly sophisticated….it is hoped that these new laws will increase the level of consumer sophistication.

 

One such law is the new Constitution. Article 46 of the Constitution sets out consumer rights as basic human rights. This is quite in contrast to the old Constitution which did not contain such a provision. The right states that consumers have a right to goods and services of reasonable quality, they have a right to receive information to enable them gain full benefits of the goods and services, they have a right to protection of their health and compensation where any damage has been suffered. Pursuant to this, Parliament is expected to come up with a new consumer law within 4 years of the promulgation date.

 

The second law that is already in operation and that guarantees consumer welfare is enhanced, is the Competition Act enacted last year. Part VI of this Act sets out various offences against consumer’s interests. Some offences set out include false representations that would entice a consumer to buy a good or service. The Competition Act creates a Competition Authority which is charged with consumer protection.

 

A more detailed proposed law on consumer protection is the Consumer Bill. The Bill is much more detailed in its provisions than both the Constitution and the Competition Act. The Consumer Bill if passed, shall overhaul consumer protection in Kenya.

 

The Bill provides for class action suits. This means that many persons aggrieved by the same person e.g. a manufacturer can file a class action suit against him instead of filing individual suits.

 

Agreements between suppliers and consumers shall be heavily regulated if the Bill is passed. For example where a supplier charges and estimate fee for goods/services then he cannot exceed ten per cent of that fee in the final figure. The Bill also states that where there is ambiguity in an agreement then the same shall be interpreted to favour the consumer.

 

The Bill proposes a lot of regulation for some certain types of agreements between a supplier and consumer. Some include internet gaming agreements which have been criminalized. Time share agreements in real estate and for assets like yatches…must also be in writing. Internet agreements, credit card agreements and lease agreements are also all provided for under the Bill.

The Bill has not yet been passed but it remains to be seen if it will be enacted as it is. Some may argue that it tilts too much in favour of the consumer. However, the consumer especially in Kenya, has suffered injustice possibly due to lack of a clear consumer law. Others may argue that the Bill is too detailed and some of its provisions too harsh and oppressive to the manufacturers. For example for motor vehicle agreements, when it comes to repair, your mechanic is supposed to give you a warranty for any repairs undertaken. The warranty is meant to last for 90 days or to cover a distance of 5,000 kilometres.

However whether the new consumer laws are deemed to be too oppressive or are deemed to be sufficient what is clear is that they will overhaul consumer protection

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Buying property off plan: Legal issues to consider

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Someone I know (let’s call him John) wanted to buy a property that they had seen advertised in the dailies. The graphic design of the yet to be built house was fabulous and the concept outstanding. The amenities promised included a swimming pool, club house and gym. He immediately expressed interest and was given the chance to view the showroom. To his surprise no other house had been built on the property….he was however promised by the witty salesman that the house would soon be ready and all he needed to do was to commit himself to buying one of the houses( due to the high demand of the houses, etc etc). The sale was simple make a 10% deposit and pay close to 3 instalments, before the house could be constructed. To John’s surprise the instalments comprised a staggering 80% of total purchase price.

 

Is John literally building castles in the air by paying for a house he has not even seen? There is nothing wrong with this arrangement and as risky as it may seem it is the norm in the real estate industry. It is perfectly legal and okay to enter into a contract with someone, premised on a future occurrence. The catch is all in the contract. One must ensure that the clauses on construction are captured well. What would you do if you were in John’s shoes?

 

One of the things you must do as a buyer is to ensure that you have examined and understood the architect’s plans. Once the deal is signed you cannot ask the architect to change the design of the house. The architects design is the only tangible thing you have concerning your future house and you must ensure you understand it. Second is to study the deed plan. The deed plan shows you exactly where your house shall be placed. Once the agreement is signed you cannot take up another house. Ensure that what is on paper conforms to what is on the ground.

 

Now you are ready to sign the contract. Ensure that the agreement includes a warranty that the construction will be completed within a given time frame. You would not want to wait infinitely for something you have already paid for. You must also ensure that the developer has adequate insurance to cover risks that may occur during construction for example fire and others.

There is a very catchy clause in most agreements, called the force majeure clause. With this clause the Vendor is able to escape liability from some risks like earthquakes and Acts of God. Therefore ensure that the force majeure clause is limited

John is unhappy. First of all construction took ages yet he had already paid for the house. Secondly when the house was finally finished it was of very disappointing quality. The materials used were cheap and nothing compared to the show house. The house was leaking, the finishings poor amongst other many complaints.

 

This is why you as a buyer must include a clause on implied quality of the completed house. The vendor must warrant in writing that the completed house will be as close as possible to the show house (already viewed) and that the materials used would be the same. There must also be a warranty by the Vendor that he will remain liable for all defects in the house for a period of about 6 months after the transaction is complete. Therefore before moving in, inspect the house thoroughly. Check the electrical and plumbing systems. If there is any defect, notify the Vendor immediately.

 

John tells me that the swimming pool that was to be one of the amenities is a small pool and a big insult to the property owners and is totally different from the graphics he was shown at the initial stage. He tells me that the whole concept of luxurious living is what attracted him to buy this property.

 

Well, unfortunately for him, pools, clubhouses and gyms comprise the common areas of the property. He has no absolute ownership in the common areas because these are owned by the management company which he is a shareholder of. However if the amenities offered on a property are part of the things that inform your decision to buy, then request the Vendor to include a detailed warranty on the amenities. This includes the time of completion and implied quality. Therefore when buying into a concept ensure that you properly understand the concept and details offered. Do not rush to buy a house based on advertisements and graphic designs because at the end of the day reality is what counts.

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Branding Regulations

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Branding is one of the main pillars of your business. It is your identity and it is also an asset for your business. Branding interfaces with many other aspects of your business and it affects all aspects of your business. There are many things to consider before one can settle on a particular brand. Some include the target market, the desired effect, the image that you would like to create and the costs involved. One important aspect of branding that is often overlooked, is the legal aspects of branding. A lot of laws must be taken into account when undertaking a branding exercise with the main law being intellectual property law. Trademark laws cannot be overlooked when doing a branding exercise. A trademark is a sign, name and logos used to identify and distinguish brands. In countries where trademark laws are so developed, unique smells and even distinct sounds are protected so as to identify the particular smell or sound with your business.

 

Therefore when undertaking a branding exercise, it is important to ensure that your brand design, brand name and brand logo are as unique as possible. Only distinct brands qualify for protection. Brands like Kodak and Xerox were formed from words without any grammatical meaning but now they are synonymous with photography and photocopying. This is where creativity comes in. A distinctive name and logo will qualify for protection. It is therefore important to play with shapes, numbers and names when coming up with your brand. A brand like 98.4 Capital FM is made up of numbers, names and a logo, that make this brand unique and qualify for protection. A protected brand is an intangible asset of the business which can be traded as one would normally trade with tangible assets.

 

It is important to ensure that your brand is not identical or similar to any other brand in the market. The reason for this is to avoid trademark litigation which is an expensive affair and can kill your business. The holder of a registered trademark can institute proceedings against your business for infringement of their brand. A lot of business form their strategies by emulating market leaders. However when it comes to brands it is very risky to emulate and ride on the goodwill created by brands which are registered. A common trend for start up businesses is to name or package their brands in a manner that is almost similar to a market leader’s brand, with the hope of gaining market share. It may seem logical but it is very illegal and exposes your business to brand litigation. The manufacturers of a petroleum jelly known as “nivelin”faced action here in Kenya by the brand owners of “nivea.” Similarly the brand owners of a margarine known as “goldband” faced action by the brand owners of “blueband.” There is a lot of case law in Kenya on brand litigation. It is prudent to avoid it.

 

When coming up with a brand name, avoid as much as possible offensive words, names and logos. These could include treasonable logos and other logos that are against public order. This may seem pretty obvious, but the marketing trend that many businesses are now adopting is controversy because controversy apparently sells with the generation Y. However if you sought protection for an offensive brand, the registration would be declined. Kenya is at the brink of an election and many political parties are coming up with political brands and slogans to distinguish them from others. Political parties should ensure that they avoid offensive slogans, slogans that are against public order and border on hate speech. Such slogans and brands will not be protected by law. Other than that, there is risk of breaching many laws including hate speech laws, public security laws and human rights laws. Therefore for political parties be careful as you select your slogans, logos and brands.

 

Another thing to know is that you cannot seek protection for public emblems like the national flag, the court of arms and other national icons. This is because they are deemed to be in the public realm and not individually owned. Therefore ensure that your brand does not include public emblems as protection will be declined. Avoid references to geographical locations when creating your brands. Chances are that protection will be declined or you will be put at task to explain if the product originates from the geographical area mentioned. Therefore when creating your brand ensure you stay away from the public domain as this has an impact on how original your brand is.

 

For those who intend to sell their brand in more than one jurisdiction, then it is important to undertake a proper market research in every country you want to gain entry into to avoid creating offensive brands and breaching trademark laws.

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