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Mandate of the Special Representative of the Secretary-

General (SRSG) on the Issue of Human Rights

and Transnational Corporations and other Business

Enterprises

CORPORATE LAW PROJECT JURISDICTION: Kenya

FIRM: ORARO & COMPANY

ADVOCATES (O & CO.) (Submission

coordinated by Edward Nathan

Sonnenbergs)

DATE: October 2010

This survey is an independent submission to the SRSGs Corporate Law Project.

It is the sole work of Oraro & Company Advocates in coordination with Edward

Nathan Sonnenbergs and the SRSG takes no position on any views expressed

or implied in this report.

More information about the Corporate Law Project is available at:

http://www.business-

humanrights.org/SpecialRepPortal/Home/CorporateLawTools. A NOTE FROM THE UN SPECIAL REPRESENTATIVE ON BUSINESS AND HUMAN RIGHTS

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If you have any questions about this report, please contact

A NOTE FROM THE UN SPECIAL REPRESENTATIVE ON BUSINESS AND HUMAN RIGHTS

September 2010

This survey is an independent submission to a project on corporate law and human rights under my

mandate as Special Representative of the UN Secretary-General on Business and Human Rights: the

Corporate Law Project. I am delighted that nineteen leading corporate law firms from around the

world have agreed to make submissions to this project, and thank them for their engagement. The

willingness of so many firms to provide their services pro bono in order to expand the common

knowledge base indicates that corporate law firms worldwide appreciate that human rights are

relevant to their clients needs.

It is important at the outset to understand how this project fits into my wider work. I was appointed

in 2005 by then UN Secretary-General Kofi Annan with a broad mandate to identify and clarify

standards of corporate responsibility and accountability regarding human rights, including the role of

states. In June 2008, after extensive global consultation with business, governments and civil society,

I proposed a policy framework for managing business and human rights challenges to the United

Nations Human Rights Council (Council). The Framework of Protect, Respect and Remedy rests on

three differentiated yet complementary pillars: the state duty to protect against human rights

abuses by third parties, including business, through appropriate policies, regulation, and

adjudication; the corporate responsibility to respect human rights, which in essence means to act

with due diligence to avoid infringing on the rights of others; and greater access for victims to

effective remedy, judicial and non-judicial. You can read more about the Framework in my 2008,

2009 and 2010 reports to the Council, available at my website: http://www.business-

humanrights.org/SpecialRepPortal/Home.

The Council unanimously welcomed what is now commonly referred to as the U.N. Framework and

extended my mandate by another three years, tasking me with operationalizing the Framework

that is, to provide practical recommendations and concrete guidance to states, businesses and

others on the Frameworks implementation. There has already been considerable uptake of the U.N.

Framework by all relevant stakeholders. It has also enjoyed unanimous backing in the Council; strong

endorsements by international business associations and individual companies; and positive

statements from civil society.

A key aspect of the first pillar, the state duty to protect, is that states should foster corporate

cultures respectful of rights both at home and abroad, through all appropriate avenues. In particular,

I have been exploring the opportunities and challenges that corporate and securities law can provide

in this regard. Corporate law directly shapes what companies do and how they do it. Yet its

implications for human rights remain poorly understood. The two have often been viewed as distinct

legal and policy spheres, populated by different communities of practice.

The Corporate Law Project will allow me to explore this area further by gaining knowledge from over

40 jurisdictions as to how national laws and policies dealing with incorporation and listing; directors

duties; reporting; stakeholder engagement; and corporate governance more generally currently

require, facilitate or discourage companies from respecting human rights. I am interested not only in

what laws currently exist, but also how corporate regulators and courts apply the law to require or

facilitate consideration by companies of their human rights impacts and preventative or remedial

action where appropriate.

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The project thus formally comprises part of my work on the state duty to protect. It will assist me to

understand whether and how national corporate law principles and practices currently encourage

companies to foster corporate cultures respectful of human rights. I will in turn consider what, if

any, policy recommendations to make to states in this area, following consultation with all relevant

stakeholders. However it is just one element of my work on the state duty to protect, which also

looks at other areas of the law and national policies which might help states to encourage

companies to respect human rights.

The project will also support my work on the corporate responsibility to respect and access to

effective remedy. In relation to the responsibility to respect, I have explained that in addition to

compliance with national laws, the baseline responsibility of companies is to respect human rights.

To discharge the responsibility, I have recommended that companies conduct ongoing human rights

due diligence whereby they become aware of, prevent, and mitigate adverse human rights impacts.

The responsibility exists even where national laws are absent or not enforced because respecting

rights is the very foundation of a companys social license to operate. It is recognized as such by

virtually every voluntary business initiative, including the UN Global Compact, and soft law

instruments such as the International Labour Organization Tripartite Declaration and the OECD

Guidelines on Multinational Enterprises. Nevertheless, an understanding of national laws, including

corporate law, remains vital to ensure companies understand and comply with their national legal

obligations. Moreover, as my 2010 report to the Council highlights, companies may face non-

compliance with corporate and securities laws where they fail to adequately assess and aggregate

stakeholder-related risks, including human rights risks, and may thus be less likely to effectively

disclose and mitigate them, as may be required.

The Corporate Law Projects website is http://www.business-

humanrights.org/SpecialRepPortal/Home/CorporateLawTools. There you will find the original press

release for this project; the research template the firms have agreed to follow; summary reports

from two consultations held to date on the project; an over-arching trends paper bringing together

the main themes from the firms surveys; and all completed firm surveys.

My thanks again to all stakeholders who have contributed to this project.

John G. Ruggie

Special Representative of the UN Secretary-General on Business and Human Rights

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BACKGROUND1

A. INCORPORATION OF A PRIVATE KENYAN COMPANY

Under Kenyan law, a private company is a company which restricts the right to transfer shares, limits the

number of shareholders to fifty (excluding employees) and prohibits offers to the public of its shares and

debentures. Private companies enjoy a number or privileges including an exemption from the requirement to

file the annual accounts at the Kenyan Companies Registry. Please note that it is not necessary for a private

company to be owned by Kenyans, or for any of its directors to be Kenyans. Private companies constitute of:

1. Under the Companies Act of Kenya (Chapter 486) (the Companies Act) each director must be above

the age of 21 years and below the age 70 years. The minimum number of directors is 2.

2. The board of directors must hold at least one board meeting per year in order to approve the

companys accounts. The quorum at a board meeting shall be stipulated under the companys

Articles of Association, which provides for at least 2 directors. If the directors are located in different

countries then circular resolutions can be distributed to each of the directors for signature, moreover

if permitted under the companys Articles of Association, a board meeting can be held by conference

telephone call.

3. The subscribers to the Company, must be at least two and either subscriber may be an individual or

an incorporated company. The members (or shareholders) of the Company must, in each year, hold

one general meeting as its Annual General Meeting in addition to any other meetings in that year.

Not more than fifteen months should elapse between the date of one Annual General Meeting of the

Company and that of the next. Annual and other General Meetings shall be held at such times and

places as the Board shall appoint.

The following details would be required to incorporate a private company.

(a) 2 or 3 potential company names These are subject to availability of the names i.e. no other Company

uses the name;

(b) the proposed objects of the company which will be put in the Memorandum and Articles of Association.

It should be noted that this may be as wide as possible and can cover any aspect of business;

(c) the full names and addresses of the proposed shareholders and the number of shares to be held by each

shareholder;

(d) the full names, addresses, nationality and occupations (including details of other directorships in Kenyan

companies) of the proposed new directors;

(e) the name and address of the new company secretary;

(f) share capital of the company It should be noted that the share capital amount is not restricted and it can

be any amount that may be proposed by JHPA and

(g) the address of the new registered office.

Time scale for registration

The Companies Registry usually issues a Certificate of Incorporation signifying registration within 5 weeks of

filing.

1 See page 9 for the beginning of answers based on the project template.

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In practice, compliance with these requirements takes place before the actual establishment of the business

since the Certificate of Incorporation issued by the Registrar will be required by other licensing authorities.

B. DIRECTORS LIABILITY

1. Fiduciary Duties

(a) Being in a position of trust, directors owe fiduciary duties to the company. A director must

be loyal and faithful to the company and any decision he makes must be in good faith and in

the best interests of the company as a whole and not geared towards deriving a personal

reward or for the exclusive or primary benefit of any particular shareholder.

(b) The duties of a director are owed to the company as a whole and not merely to a single

member or a group of members.

2. Duty to ensure that the company acts within its constitution

(a) A company is governed by its memorandum and articles of association. The objects for which

it is established are set out in its memorandum of association. The directors are under a duty

to ensure that the company acts within these objects. If the company acts outside its

objects, the action is ultra vires (beyond its powers) and void. Directors may become

personally liable to third parties who enter into a void contract with the company and may

be liable to the company for breach of the duty owed to it.

(b) The directors must also ensure that powers delegated to them under the articles of

association are not exceeded. Consequently, each director should acquaint himself fully with

the memorandum and articles of association to ensure compliance with their requirements.

(c) If a director acts outside the scope of his authority, he may be personally liable to the

company, as well as to third parties, for the breach of his duties as a director. Please note

that there is very little authority from the Kenyan courts on this matter as it is unusual for

directors to be prosecuted on personal liability.

(d) Since the directors fiduciary duties are owed to the company, the companys shareholders

may, in certain circumstances, ratify the directors actions. The following actions cannot be

ratified by the shareholders:

(i) breaches of duty involving acts which the company cannot lawfully do;

(ii) breaches of duty involving actions which are fraudulent or dishonest.

3. Duty to avoid a conflict of interest with the company

(a) Each director is required to disclose his interest in any contract or other arrangement to

which the company is or may become a party, to the extent required by the companys

articles of association. In addition, a director must disclose any position that he occupies

which might conflict with the duties he owes to the company. Depending upon the

provisions of the articles, a director may be prohibited from voting on matters in which he

has an interest.

(b) A director will be required to account to the company for any undisclosed personal profit

which has come to the director because of his position as director. In the absence of prior

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disclosure to the board, such profit may be retained legitimately by a director only if the

company in general meeting authorises its retention.

4. A director must not misapply the companys property

A director will render himself liable to the company if he misapplies company assets where he ought

to have known that his action amounted to a misapplication.

5. A director must keep all company information confidential

Being in a position of trust, directors are under a duty not to pass to any other person any information

obtained by virtue of their office as director. This requirement extends beyond the period of office as

a director.

6. Duty of skill and care

A director owes a duty of skill and care to the company. The directors are not required to exercise a

greater degree of skill than may be expected from a person of similar knowledge and experience. If a

director has professed an expertise, more will be expected of him in relation to the companys

business.

7. Liability for actions of co-directors

A director is not liable for the actions of other directors merely because he is a co-director. He will be

liable if he participates in the wrong e.g. by signing a cheque for an unauthorised payment without

question.

8. Statutory duties and liabilities

A director has a considerable number of statutory tasks to perform under various statutes. Many

statutes impose obligations and duties, and hence potential civil or criminal liability, on directors.

Such legislation now extends to almost all areas of a companys activities ranging from taxation

compliance to environmental protection and health and safety matters. Some of the more significant

provisions are set out below.

9. The Companies Act

(a) The Companies Act imposes a wide range of duties on directors and other officers. Although

these duties are many, the penalties have not been revised for many years and are seldom (if

ever) enforced. The relevant section of the Act provides:

(i) Where, by any section of [the Act], it is provided that a company and every officer of

the company who is in default shall be liable to a default fine, the company and

every officer shall, for every day during which the default, refusal or contravention

continues, be liable to a fine not exceeding such amount as is specified in such

section, or if the amount of the fine is not so specified, to a fine not exceeding one

hundred shillings.

(ii) For the purpose of any section of this Act which provides that an officer of a

company who is in default shall be liable to a fine or penalty, officer who is in

default means any officer of the company:

(b) Provided that -

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(i) in any proceedings against an officer of a company who is alleged to be in default, it

shall be a good defence to prove that he had reasonable grounds to believe, and did

believe, that a competent and reliable person was responsible for complying with

the particular requirement and was in a position to discharge that responsibility;

and

(ii) an officer who is in default shall not be sentenced to imprisonment for such default

unless, in the opinion of the court, the offence was committed wilfully.

(c) More serious liabilities can arise in the following circumstances.

(i) Where shares or other securities are issued to the public. Directors can incur both

civil and criminal liability in relation to mis-statements in prospectuses. Criminal

offences are punishable both by fines and potential imprisonment.

(ii) Where a company provides financial assistance in the purchase of its own shares.

This is forbidden under the Act except in limited circumstances. The exceptions

include (i) lending by companies whose business is lending money if the lending is in

the ordinary course of business and (ii) employee share schemes.

(iii) Numerous offences relating to the conduct of insolvency proceedings and improper

or fraudulent conduct in the period leading to an insolvent winding up of a

company. In particular, directors must take care to ensure that the company does

not trade in insolvency thereby defrauding creditors. Directors can incur both civil

and criminal liability in these circumstances. Prosecutions for trading in insolvency

are rare.

(iv) It is particularly important that directors ensure that proper books of account are

kept. The Companies Act imposes criminal liability for failure to keep proper books

in the 2-year period prior to a winding-up which is punishable by imprisonment.

10. Income tax

The Income Tax Act provides particularly stringent obligations on officers (including directors). These

include the following provisions:

(a) Where an offence under the Act has been committed by a corporate body of persons, every

person who at the time of the commission of the offence was a director, general manager,

secretary, or other similar officer, of the body corporate, or was acting or purporting to act in

that capacity, shall also be guilty of the offence unless he proves that the offence was

committed without his consent or knowledge and that he exercised all the diligence to

prevent the commission of the offence that he ought to have exercised having regard to the

nature of his functions in that capacity and in all the circumstances.

(b) Where an obligation is imposed by or under the Act on a corporate body, the general

manager or other principal officer of that body shall be responsible for performing that

obligation.

11. Other potential liabilities

A director may also be personally liable in many other circumstances including:

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(a) to a third party for damages for breach of an implied warranty of authority if the director

concludes a contract in excess of his authority;

(b) in contract, if a director fails to disclose to a third party that he is acting on behalf of the

company and not personally;

(c) if a director commits fraud in the course of his duties, he is liable to the injured party.

12. Right to indemnity

(a) The articles of association of the company will usually include an indemnity for directors in

limited circumstances. This will provide that a director has a right to be indemnified by the

company for any losses he may suffer in defending himself in criminal or civil proceedings if it

relates to anything he did on behalf of the company including costs incurred in making an

application under section 402 of the Companies Act, under which the court is empowered to

grant relief in certain cases where it considers it fair to excuse an officer of the company for

his negligence, default, breach of duty or trust. This Article is especially beneficial in

instances where the court does not award the director the costs of the suit.

(b) However, under the Companies Act the company cannot (i) indemnify a director against

actions which are occasioned by his own wilful default or negligence or (ii) attempt to

exempt a director of liability specifically imposed on him by statute.

13. Penal Code

(a) Under the Penal Code:

(i) Where an offence is committed by any company or other body corporate, or by any

society, association or body of persons, every person charged with, or concerned or

acting in, the control or management of the affairs or activities of such company,

body corporate, society, association or body of persons shall be guilty of that

offence and liable to be punished accordingly, unless it is proved by such person

that, through no act or omission on his part, he was not aware that the offence was

being or was intended or about to be committed, or that he took all reasonable

steps to prevent its commission.

(ii) Persons who solicit or are guilty of conspiracy or become accessories to criminal

offences also commit offences punishable by varying terms of imprisonment.

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SETTING THE LEGAL LANDSCAPE

1. Briefly explain the broader landscape regarding business and human rights.

There is some government regulation of business, for instance, through labour laws (protecting the

right to proper working conditions, maternity leave, equal pay for equal work, etc,) and laws

concerning environmental preservation and conservation.

For instance, the Employment Act (Act No. 11 of 2007) prescribes duties for the employer that

constitute the minimum conditions of employment. The employer is obligated to give an employee an

annual leave and at least a day of rest every week, as well as provide water in the work place. The Act

also recognizes the right of employees to form and participate in trade unions.

Moreover, the Act prohibits any employer from discriminating against any employee or prospective

employee on grounds of race, colour, sex, language, religion, political or other opinion, nationality,

ethnic or social origin, disability, pregnancy, mental status or HIV status.

Additionally there exist a myriad of consumer protection laws that have a bearing to human rights

observance by corporations. These include the Food, Drugs and Chemical Substances Act, Trade

Descriptions Act, Weights and Measures Act, among others. These laws are designed to ensure inter

alia that corporations do not benefit from abuse of human rights.

However, even where the law specifically provides for protection of human rights by corporations,

the practice may be different because in our experience, the enforcement of these laws can be

lacking.

Finally, the observance of human rights by corporations in Kenya has been given a boost in this

decade by the embracement of a culture of Corporate Social Responsibility (CSR). Through CSR

corporations implement long-term management models that meet actual problems in society by

advancing feasible solutions. It should however, be noted that this concept is vague in its definition in

Kenya and does not constitute explicit benchmarks by which corporations can be held accountable,

for human rights violations.

While human rights may be found in various legislative instruments, the primary source of human

rights is Chapter IV of the New Constitution of Kenya, loosely referred to as the Bill of Rights of Kenya.

This part of the Constitution provides for human rights with respect to:

Section 26 Right to life

Section 27 Equality and freedom from discrimination

Section 28 Human dignity

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Section 29 Freedom and security of the person

Section 30 Slavery, servitude and forced labour

Section 31 Privacy

Section 32 Freedom of conscience, religion, belief and opinion

Section 33 Freedom of expression

Section 34 Freedom of media

Section 35 Access of information

Section 36 Freedom of Association

Section 37 Assembly, demonstration, picketing and petition

Section 38 Political rights

Section 39 Freedom of movement and residence

Section 40 Protection of right to property

Section 41 Labour relations

Section 42 Environment

Section 43 Economic and social rights

Section 44 Language and Culture

Section 45 Family

Section 46 Consumer rights

Section 47 Fair administrative action

Section 48 Access to justice

Section 49 Rights of arrested person

Section 50 Fair hearing

Section 51 Rights of persons detained, held in custody or imprisoned

As noted above, the protection of fundamental rights and freedoms of the individual is embodied in

Chapter IV of the New Constitution of Kenya. Please note that this year (2010) Kenya welcomed a

new Constitution which has major enhancements when compared to the previous Constitution. The

New Kenyan Constitution has adopted what is regarded as the positive approach, in the protection of

the individuals rights and freedoms. By stating broadly what rights and freedoms accrue, to any

Kenyan, and by providing provisions for instances in which case these may be derogated from, the

Kenyan Constitution assures and provides for their protection. It should be noted further that, the

Constitution is Supreme and takes precedence over all other forms of law, written and unwritten. If

any other law is inconsistent with the Constitution, the Constitution prevails and the other law to the

extent of the inconsistency is void. Article 2 (4) of the Constitution.

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The courts have upheld these fundamental rights and freedoms, in many cases involving business, in

Kenya under the old Constitution, examples of which are provided below. It is expected that the new

extensive provisions under fundamental rights and freedoms will be tested more, in the Kenya Courts.

In Haridas Chhanganlal v. Kericho Urban District Council [1965] E.A. 370, which dealt with the

protection from deprivation of property the question for judicial consideration was whether the

provisions of the by-laws, the effect of which was to curtail the plaintiffs scope for the use of their

property were in conflict with the constitution. An enactment, it was held, could not take away

private rights of property without compensation, unless the intention is expressed, in clear and

unambiguous terms.

In Madhwa v. City Council of Nairobi [1968] EA 406 the court held that a distinction drawn between

Africans and non-Africans in the allocation of market stalls to favour Africans amounted to

discrimination and was a violation of the Constitution.

In Shah Vershi Devshi & Co. Litd. v. Transport Licensing Board (1971) EA 289, the appellant had been

refused the renewal of some of his transport licenses by the respondents. The appellant successfully

applied for an order of certiorari quashing the decision of the respondents. The evidence clearly

revealed that they had discriminated against the applicant, on the grounds of race and the court

found this unconstitutional.

The areas where business and human rights law closely intersect include physical planning,

environmental management and labour laws. Amongst these, environmental and resource

management issues have attracted slightly more jurisprudence, primarily because of the 1999

environmental law statute (The National Environmental and Management and Co-ordination Act).

This Act will be largely mentioned in this report to provide examples which highlight various matters

with regard to human rights and business in Kenya.

Bearing in mind the links between a safe and healthy environment and human rights, the statute

contains obligations which in our view promote the respect of human rights by corporations. Inter

alia, the Act prohibits activities carried out by any corporation that may be injurious to the

environment. Further the Act lifts the corporate veil and imposes culpability directly on the

management of a company for offences against the environment that have been committed by such

company.

This Act is perhaps the piece of legislation in Kenya that demonstrates a direct link between business

and human rights and in particular, the question of the right to a healthy environment. A business

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enterprise may under this legislation be required to prepare an Environmental Impact Assessment

Report (EIA) where its proposed activities are likely to substantially affect the environment.

As regards physical planning, under section 19 of the Physical Planning Act (Chapter 286 of the Laws

of Kenya) in exercise of the right to a clean and healthy environment, members of the public may

raise objections against plans to carry out construction (for example, where a change of user from

residential to commercial is proposed and it is feared that this will create noise pollution) in a certain

area.

Although certain human rights are not constitutionally protected, there may be laws encouraging and

facilitating their realisation by members of the public. Examples include the right to health and the

right to education. In the case of health there exists laws that ensure the health of Kenyans is

prioritised by Hotels and restaurants and the quality of consumer goods is observed by

manufacturers.

For instance, under the Standards Act (Chapter 496 of the Laws of Kenya), the Kenyan consumer is

protected from substandard goods which may also have an adverse impact on health. And the Public

Health Act, and the Hotels and Restaurants Act (Chapter 496 of the Laws of Kenya) provide that

licences for the running of such businesses are only granted where such an establishment produces a

certificate from a medical officer, ascertaining that the necessary sanitary conditions have been met

by the establishment.

REGULATORY FRAMEWORK

2. To what tradition does the jurisdiction belong, i.e. civil/common law, mixed?

During the era of colonialism, Kenya was a British colony. The colonial legacy was characterised by the

importation of alien English law and thus Kenya became a common law jurisdiction. The English

common law and the doctrines of equity remain a source of law of Kenya, but, so far as the

circumstances of Kenya and its inhabitants permit and subject to such qualifications, as those

circumstances may render necessary.

The Judicature Act (Chapter 8 of the Laws of Kenya) makes no reference to the Kenya common law as

a source of law, but such a body of law exists, based on the reported decisions of the courts. The body

of the Kenya common law is also swollen by a substantial number of Kenya cases interpreting Kenyan

statutes. Over the years, however, the Kenyan courts have increasingly come to determine cases by

departing from established English rules and fashioning new rules, particularly appropriate to Kenya.

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Under Section 3 of the Judicature Act, the Kenya courts are free to make their own common law rules,

rules which will operate under the doctrine of precedent.

3. Are corporate/securities law regulated federally, provincially or both?

Kenya is a unitary state. All legislative provisions emerge from parliament. This remains the position

with entrenchment of the new constitution.

4. Who are the government corporate/securities regulators and what are their respective powers?

(a) The Nairobi Stock Exchange

The Nairobi Stock Exchange (NSE) was started in the 1920s by the British as an informal market for

Europeans only. In 1954, the market was formalized through incorporation into a company. During

this year, it was established as a voluntary association of stockbrokers registered under the Societies

Act. In 1963, Africans were allowed to join and trade in the market.

The NSE is the fourth largest securities exchange in Africa in terms of the volume of capitalization. The

NSE operates as the sole exchange forum in Kenya.

In 1991 the NSE was registered as a limited liability company without share capital, under the

Companies Act. About fifty (50) companies are listed on the NSE.

In 2000, Kenya, Uganda and Tanzania signed the Joint Stock Exchange Taskforce report on cross

border listing. Subsequently, the East African Breweries Limited and Kenya Airways proceeded to

cross list at the Kampala and Dares Salaam Stock Exchanges. In 2001, NSE was categorized into three

market segments namely, the Main Investment Market Segment (MIMS), Alternative Investment

Market Segment (AIMS) and Fixed Income Securities Market Segment (FISMS). The different market

segments have different eligibility requirements.

New foreign investor regulations were enacted in 2002. They provided that there would be a 25%

minimum reserve of the issued share capital for locals, while the balance of the 75% would be for all

types of investors. A local investor is defined as an individual who is a citizen of Kenya, a company

incorporated under the Companies Act of Kenya or any other body corporate established or

incorporated in Kenya under the provision of any law in which Kenyan citizens or the Government of

Kenya have beneficial interest in 100% of its ordinary shares.

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The functions of the NSE are regulated by the Capital Markets Act, and are therefore directly

supervised by the Capital Markets Authority (CMA). Largely the function of the NSE is to facilitate

the Kenyan economy to trade in securities.

The NSEs Board of Directors or otherwise called the Board of Directors of the Exchange has the

authority, subject to the NSE Management & Membership Rules and NSE Listing Manual, to:

a) Review and approve application for the admission to listing of new and additional

securities in any market segment.

b) Review compliance with continuing listing obligations by listed companies and make

recommendations to the CMA, any necessary action for non-compliance including penalties

and other sanctions provided under the Listing Manual.

c) Recommend suspension of listing securities and restore such security.

d) Review application and make approvals for admission of new members to the Exchange.

(b) The Capital Markets Authority

The Capital Markets Authority (CMA) is a statutory body that was established under the Capital

Markets Authority Act (renamed the Capital Markets Act in 2000), which became operational from

December 1989. The CMA is responsible for the licensing, regulation and supervision of all operators

in the capital markets.

Its role as regulator has been to ensure that securities can be issued and traded in a transparent and

efficient manner. Its role has recently been on the spotlight, with the capital markets experiencing a

good run, after Kenyans ventured heavily in the capital markets over the last five years.

The CMA has the authority as a regulator of the capital markets to inter alia:

a) List and de-list any securities on the Security Exchange (Nairobi Stock Exchange).

b) Request disclosure about security transactions by the stockbrokers and dealers.

c) Demand regular reporting by all persons approved or licensed by it, of their affairs,

which include proper maintenance of books, records, accounts and audits.

d) Regulate the operations of bodies corporate and persons dealing with capital market

instruments.

e) Approve securities exchange at the Nairobi Stock Exchange.

f) Issue, renew and revoke licenses to stockbrokers, dealers, investment advisors, fund

managers, investment banks, authorized security dealers and/or authorized depository.

g) Approve Take-overs and Mergers of Companies.

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h) Approve public offers listings and disclosure.

i) Regulate foreign investors.

j) Regulate the central depository.

The CMA is charged with the mandate of licensing participants in the capital markets. Among others

the following institutions have been licensed:

a) A credit rating agency to assess the credit worthiness of companies wishing to be listed at

NSE.

b) A stock exchange the NSE.

c) A venture capital fund to lend money to and acquire stake in newly established companies.

d) A central depository.

The CMA has powers to appoint a statutory manager in respect of any person licensed under the Act

as well as remove any employee of any of the licensed institutions, if it forms the opinion that his/her

activities are prejudicial to the welfare of investors., levy financial penalties, issue public reprimands

as well as suspend companies from trading at the NSE.

From the foregoing, it is apparent that the powers of the CMA are meant to safeguard the interests of

investors in the capital markets and do not contain any express rights based approach.

The Capital Markets Tribunal has powers to review decisions that are made by the CMA. The CMA has

a committee known as the Capital Markets Advisory Committee which consists of appointed

representatives from the private-sector organizations and ex-officio members representing the CMA,

NSE and other non-commercial organizations. The mandate of the committee is to act as a forum for

discussion between the Authority and stakeholders, on all matters pertaining to capital markets.

The Central Depository and Settlement Corporation

In 2002, an agreement was reached for the establishment of the Central Depository and Settlement

Corporation (CDSC). The CDSC is the legal entity that owns the automated clearing, settlement,

depository and registry system (CDS).

The CDSC was a joint creation of the CMA and NSE. It is a central depository for Kenyan equities,

government and corporate debt. The CDSC is regulated by the CMA under the Central Depository Act

and the Central Depositories (Regulations of Central Depositories) Rules 2004.

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As a company, the CDSCs authority is restricted to facilitation of electronic accounts to current and

prospective investors. The CDSC is creature of the NSE and CMA, and thus relies heavily on the

regulations and rules passed by the CMA.

With the introduction CDSC investors have now opened share and bond accounts, in electronic

accounts, which has made buying and selling of shares and bonds much easier and faster.

5. Does the jurisdiction have a stock exchange?

Yes, the Nairobi Stock Exchange, details of which have been provided above.

INCORPORATION AND LISTING

6. Do the concepts of "limited Liability" and "separate legal personality exist?"

Yes, the concepts of limited liability and separate legal personality exist in Kenya. The concepts

are captured under section 4 of the Companies Act (Chapter 486 Laws of Kenya 1964.) The liability

may be limited by shares or guarantee. In Kenya a corporation consists of a body of persons who

collectively form one, but who have a separate existence distinct from that of the corporation itself.

The corporation has, therefore, a legal personality of its own, distinct from that of its members. The

individual members have rights and liabilities of their own apart from those of the corporation.

A Company incorporated as a limited liability company implies that the companys liabilities only

extend to the assets held by the company and that the personal property belonging to the

shareholders cannot form part of the pool from which the companys liabilities are satisfied.

In Kenya a limited liability Company, which can be either public or private, comes into existence by

complying with the provisions of the Companies Act (Chapter 486 of the Laws of Kenya) which is

substantially, the English 1948 Act. Persons, who wish to form limited companies in Kenya, have to

register the company with the Registrar of Companies. In applying for registration, the persons

applying (at least seven in the case of a public company, at least two in the case of a private company)

have to subscribe their names to a memorandum and articles of association. The articles of

association regulate the organisation and management of the company. It is this document which is

of greatest interest to those members of the public who wish to enter into contracts with the

company. If the articles of association and the memorandum of association are in order, the Registrar

of Companies will register the documents and certify that the company has become incorporated.

The company is now a legal person in its own right. Incorporation therefore confers upon the

company a legal personality separate from that of its shareholders.

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7. Did incorporation or listing historically, or does it today, require any recognition of a duty to

society, including respect for human rights?

None of the requirements for incorporation relate to the companys duty to the society neither do the

rules and regulations made under section 12 (1) of the Capital Markets Act, with regard to listing,

make reference to such a requirement.

All the requirements stipulated by the Companies Act and the Capital Markets Authority Listing Rules

are designed to safeguard the welfare of the shareholders. For instance, Listing Rules require the

issuer to have a minimum stipulated capital, to have published audited financial reports compliant

with the International Accounting Standards Three (3) months prior to the date of issue, as well as

disclosure of the competence and suitability of the directors and management among others.

8. Do any stock exchanges have a responsible investment index, and is participation voluntary?

No, there is no responsible investment index in Kenya.

DIRECTOR'S DUTIES

9. To whom are directors duties owed (i.e. to the company, non-shareholders etc)?

The directors duties are owed to the shareholders and to the company. The duties mainly entail

obligations to avoid conflict of interests and not to breach the fiduciary trust, of the shareholders.

10 Are there duties to avoid legal risk and damage to the company's reputation? If so, are they

duties in their own right or are they incorporated into other duties?

The duty to avoid legal risk and damage to the companys reputation may implicitly be imposed upon

the directors under the duty of care, skill and diligence. Such a duty, does not, however, stand on its

own outside reasonable duty of care, skill and diligence.

11. More generally, are directors required or permitted to consider the company's impacts on non-

shareholders, including human rights impacts on the individuals and communities affected by the

company's operations? Is the answer the same where the impacts occur outside jurisdiction? Can or

must directors consider such impacts by subsidiaries, suppliers and other business partners, whether

occurring inside or outside jurisdiction?

The Companies Act does not contain any stipulations on this issue analogous to the stipulations of

section 172 of the UKs Companies Act, 2006. However in practice, many corporations have provisions

in their Corporate Social Responsibility codes that permit directors to have regard to the impact of the

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company operations on the community. Most of these codes are couched in a vague manner like the

company will strive to promote responsible corporate citizenship.

12. If directors are required or permitted to consider the impacts on non-shareholders, to what

extent do they have discretion in determining how to do so?

In relation to the National Environmental and Management and Co-ordination Act, there is very

limited discretion, if at all, as concerns the manner of preparing the report on company impacts on

the environment. Under Section 58 of the Act the said reports are to be prepared by experts

authorised under the Act and the mode of conducting the Environmental Impact Assessment must

comply with the regulations, guidelines and procedures issued under the Act.

13. What are the legal consequences of failing to fulfil any duties described above; and who may take

action to initiate them? What defences are available?

The company may by ordinary resolution remove the director who has breached any of his/her

fiduciary duties. The majority shareholders may also apply to the court for redress and the court may

issue an order for removal of the director responsible or some other appropriate order. The court

may additionally order that such person be barred from being a director of the company for a period

not exceeding 5 years.

Separately under the National Environmental and Management and Co-ordination Act, complaints,

concerning allegations against any person, touching on the condition of the environment may be

made to the Public Complaints Committee, set up under Section 31 of the stated Act, by any member

of the public. The stated committee will investigate the complaints and forward them to the National

Environmental Council. Eventually, the matter may find its way to the Tribunal set up under the Act or

even the High Court. As pertains to criminal offences related to the right to a clean and healthy

environment, the state takes the initiative to commence prosecution, but civil law claims such as

nuisance may be brought before a court of law without using the mechanisms set up under the Act.

For failure to submit a project report or an EIA Report or making fraudulent and false statements in

such reports, persons are liable to imprisonment for twenty four (24) months and a fine of Kenya

Shillings 2,000,0002 or either the fine or the imprisonment term alone, under Section 138 of the Act.

Defences may include lack of knowledge, actual or constructive, of the falsity of the statements

2 At the time of writing this paper the exchange rate for the Kenya Shilling to the United States Dollar is 80:5.

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contained in the respective reports. Prima facie, it would be hard to raise a defence against evidence

that no report was ever made.

14 . Are there any other director's duties which might encourage a corporate culture respectful of

human rights?

Yes, all the directors duties be they fiduciary duties or the duty of care, skill and diligence, together

with the nature of business require that the company is seen to be respectful of human rights. It

would not be in the best interests of the company for a director to cause the company to be

implicated in human rights violations - this would go against the spirit of all the duties imposed upon

the directors and may have a negative impact on the company's profitability. It would indeed be

imprudent for a company's director to allow the company to be seen to be engaging in human rights

violations.

15. For all the above, does the law provide guidance about the role of supervisory boards in cases of

two tier board structures, as well as that of senior management?

Under the existing laws, there is no stipulation as to the division of roles, relating to promotion of

human rights, being environmental rights or other rights, within the boards of a company or business

enterprise. However, clearly, the duty to conduct projects, in a manner that is not injurious to the

environment, falls on companies or enterprises undertaking to carry out such a project. There is

however, no apportionment of roles in realising this within such company or enterprise management

structures.

The law here differs depending on the type of corporation. For statutory corporations, the statute

forming the corporation will in most circumstances give guidance to the supervisory board, but there

is no such guidance in other corporations.

REPORTING

16. Are Companies required or permitted to disclose the impacts of their operations (including

human rights impacts) on non-shareholders, as well as any action taken or intended to address

those impacts or actions of subsidiaries, suppliers and other business partners, whether as part of

financial reporting obligations or a separate reporting regime?

No. there is no such requirement. All the Kenyan companies are required to do, is comply with the

International Financial Reporting Standards.

In Kenya, disclosure of the impact of a business enterprise on human rights is not generally included

as part of a financial report, as matter of law or practice, but such businesses are at liberty to do so.

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There is no duty on companies to make disclosure on impacts of their operations (including human

rights impacts) on non-shareholders or other third parties under any other legal regime.

Under the National Environmental and Management and Co-ordination Act, EIA reports are made

before the (business) project is undertaken. However, requests for the making of new reports may

be made to the persons undertaking the said project where it is found necessary. For example, that

there are substantial changes in the project itself that have occurred since the making of the initial

report. If there is no such request, there is no duty upon the persons undertaking the projects to

make such reports.

It is noteworthy that the grant of an EIA licence does not shield the holder of such a licence from

criminal or civil litigation that relates to the manner in which the project is actually undertaken.

17. Do reporting obligations extend to such impacts or actions outside the jurisdiction; to the

impacts or actions of subsidiaries, suppliers and other business partners, whether occurring

inside or outside the jurisdiction?

The companies Act requires consolidated financial reports for a group of related companies. However

the reporting obligations as indicated above do not entail impacts of a non-financial nature.

18. Who must verify these reports; who can access reports; and what are the legal

consequences of failing to report or misrepresentation?

Each company is required by law to have an external auditor who verifies the financial reports. The

auditor prepares a report which must be annexed to the financial reports. Moreover, the auditor has

a right to be invited for the Annual General Meeting of the company and has a right to address the

shareholders.

If a director fails to take reasonable measures to ensure compliance with the requirements of the Act

regarding Financial Reporting obligations, he/she will be liable to imprisonment for one year or fine.

All the shareholders and creditors of a company are entitled to receive copies of the financial

statements. These reports are not made publicly available on the regulators website. Companies do

not include the report on their websites. As regards the project reports and EIA Reports under the

National Environmental and Management and Co-ordination Act, the National Environmental

Management Authority (NEMA) examines the reports. Penalties for failure to make the report or

misrepresentation within the report include a KShs.2,000, 000 fine and/or imprisonment for 24

months.

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STAKEHOLDER ENGAGEMENT

19. Are there any restrictions on circulating shareholder proposals which deal with impacts on non-

shareholders, including human rights impacts?

No.

The Companies Act has not envisaged such a scenario and gives no guidelines whatsoever on the

issues.

20. Are institutional investors including pensions funds required or permitted to consider such

impacts in their investment decisions?

There are no express legal requirements obliging such investors to have human rights considerations

in making their investments decisions.

Apart from situations where investments are made in illegal ventures, there are no requirements that

investors should consider the social impact of their investments, including on human rights. However,

investors are at liberty to consider such impacts.

21. Can non-shareholders address companies' annual general meetings?

As a general rule, non-shareholders have no right to attend or to address a companys Annual General

Meeting. However, a company may choose to invite a non-shareholder to address the AGM - such

invitees are generally prominent persons in government or outside of government or experts who

may be invited to advise the shareholders on matters which a company considers important and

which it believes should be brought to the shareholders opinion.

OTHER ISSUES OF CORPORATE GOVERNANCE

22. Are there any other laws, policies, codes or guidelines related to corporate governance that might

encourage companies to develop a corporate culture respectful of human rights, including

through a human rights due diligence process?

The Institute of Corporate Governance was established several years ago, to guide individuals and

companies on laws and policies on corporate governance. The Institute has established a Code of

Ethics.

In Kenya as is often the case elsewhere in the world, corporate governance is largely concerned with

holding the balance between economic and social goals and between individual and communal goals.

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In our view, this approach of running organizations has been adopted in Kenya in both public and

private sector. The Government in its effort to enhance corporate governance in public institutions

and parastatals has imposed Performance Contracts. The aim of this initiative is to promote

transparency and enhance service delivery to Kenyans.

The private sector has shown some recent initiative in improving Kenyan companies corporate

governance and adherence to social and environmental values. In our view, this has likely been

brought about by globalization. Kenyan companies have in recent times received international

awards for demonstrating the highest standards of corporate governance. On the flip side, it is our

experience that there have been concerns regarding governance structures and corruption in Kenyan

companies, thus potentially deterring foreign firms and equity funds from partnering with small and

medium scale enterprises.

23. Are there laws requiring representation of particular constituencies (i.e. employees,

representatives of affected communities) on company boards?

Generally company boards constitute elected persons from among the body of shareholders. As a

rule, there is no requirement for representation of particular constituencies but such representation

may exist coincidentally, in other words, because members of such affected communities are

shareholders of the company and they actually got elected and appointed to the company boards.

24. Are there any laws requiring gender, racial/ethnic representation; or non-discrimination generally,

on company boards?

There are no laws requiring gender, racial/ethnic representation on company boards, but the

Companys Articles of Association may make provision for such representation. However, all persons,

of whatever gender, race or ethnicity, are entitled to stand for election and if elected to form part of

the company board. Freedom from discrimination is a protected right under Section 82 of the

Constitution.