Navigating Shareholder Disputes: Lessons from Warari v Suntap Kenya Limited

In last year’s judgment (Warari v Suntap Kenya Limited & Another, [2024] KEHC 6284 (KLR)), the High Court of Kenya tackled a complex shareholder dispute that revolved around deadlock, transparency, and the justifiability of liquidation. The ruling underscores the nuanced interplay between shareholder relationships, corporate governance, and the legal thresholds for liquidation. It highlights that while interpersonal conflicts can strain a company’s operations, they do not automatically warrant its dissolution.

The Case at a Glance: The Collapse of a Partnership

The petitioner, Peter Kamau Warari, and the respondent, Irene Warukira Kiragu, were co-directors and shareholders of Suntap Kenya Limited. The company, a family venture, owned and managed a profitable property in Kajiado County. The petitioner, holding 35,001 shares, sought the company’s liquidation, citing an irretrievable breakdown in the relationship with Kiragu, who owned 35,000 shares.

The petitioner argued that operational stalemates arising from their strained relationship, compounded by an inability to transact company business effectively, rendered the company unviable. The respondent, however, contended that the business remained a going concern and alleged bad faith in the petitioner’s pursuit of liquidation.

Key Issues in the Dispute

1. Management Deadlock:
   The petitioner alleged that irreconcilable differences had resulted in a governance deadlock, paralysing decision-making on important issues affecting the company including its re-capitalisation, adoption of company financial statements, the appointment of a valuer and auditor, or the possibility of a voluntary liquidation. However, evidence presented showed that board meetings and other actions such as paying wages, engaging an auditor, appointing a property valuer, changing the company secretary and operating bank accounts continued to occur despite disagreements.
2. Transparency and Accountability:
   The respondent accused the petitioner of unilaterally making financial and operational decisions without her knowledge or approval, undermining trust.
3. Liquidation as a Last Resort:
   The petitioner sought liquidation on “just and equitable” grounds under the Insolvency Act, but the court stressed that such measures must only follow exhaustive exploration of alternative remedies.

Court’s Findings: When Liquidation Fails the Test

1. A Going Concern:
   Despite interpersonal differences, the company remained financially stable, with its property generating substantial rental income.
2. Availability of Alternative Remedies:
   The respondent proposed a buyout of the petitioner’s shares as an alternative to liquidation. The court noted that Article 31 of the company’s Articles of Association provided mechanisms for share transfers, which had not been fully explored.
3. Inadequate Grounds for Liquidation:
   While the relationship between shareholders was fractured, the court found no evidence of operational paralysis warranting the company’s dissolution.

The petition was dismissed, and the court ordered an independent valuation of the petitioner’s shares to facilitate a buyout.

Takeaways for Shareholders

1. Lack of transparency – a potential deal breaker
   A recurring theme in the dispute was the lack of mutual transparency in managing the company’s finances and operations. Transparency is not just a matter of good practice; it is a pillar of corporate governance and a fundamental duty among shareholders and directors. This case illustrates how a lack of mutual transparency in managing finances and operations can erode trust, create suspicion, and escalate disputes to potentially irreparable levels. For shareholders, proactive transparency is essential to safeguarding the company and maintaining productive shareholder relationships. For directors, a lack of transparency or a failure to disclose material information could constitute a breach of the fiduciary duty to act in the best interests of the company.
2. Governance Mechanisms Prevent Chaos
   The absence of a robust shareholder agreement left the parties with limited options for resolving disputes, ultimately pushing the conflict to court.
3. Liquidation Is a Last Resort:
   Courts are reluctant to approve liquidation if a company remains a going concern and alternative remedies exist. Shareholders should exhaust all dispute resolution mechanisms before seeking such irreversible measures.

How a Shareholders’ Agreement Could Have Avoided This Conflict

A well-drafted shareholders’ agreement is a cornerstone of effective corporate governance. It acts as a strategic safeguard, preemptively addressing potential disputes and how to resolve them without undermining the company’s operations or value. In this case, a comprehensive shareholders’ agreement could have provided the following solutions:

1. Defined Exit Strategies
   • A clear mechanism for share buyouts or transfers in the event of a deadlock or a material dispute would have allowed for an amicable resolution.
   • Provisions for independent valuation methods would have minimised conflicts over fair value.
2. Decision-Making Protocols
   • Procedures for resolving a stalemate, such as the use of a tie-breaking vote by an independent director, would have prevented operational paralysis.
3. Transparency Clauses
   • Mandatory reporting and approval requirements for significant decisions would have ensured both parties were informed and involved.
4. Conflict Resolution Mechanisms
   • The agreement could have stipulated mediation or arbitration as the first recourse for resolving disputes, avoiding costly and public litigation.

Conclusion

The Warari v Suntap Kenya Limited case serves as a stark reminder that interpersonal conflicts between shareholders can jeopardise an otherwise thriving business. Proactive governance tools, such as shareholder agreements, are essential to safeguard the company’s interests and provide clear paths for mitigating and resolving disputes.