Directors’ fiduciary duty: Acting in best interest of a party

There are a number of incorporated companies in Kenya with a large majority of them being small and medium-size enterprises (SMEs) where in most cases, the shareholders and directors are the same people.

In growing companies and those with a more complex structure, it is common to find that the directors of the company and the shareholders are different people.

In some cases, the shareholders may also sit on the board or may appoint a director to represent their interests in the board.

Directors are sought for the expertise and experience and their core duty is to manage the company for the best interest of the shareholders and also to maximise shareholder investment in the company.

Despite the existence of the duty of directors to shareholders set both in statutory law and common practice, Kenya is racked with many corporate scandals both in the public and private sector.

The corporate scandals involve directors misappropriating funds, illegally awarding tenders, conflict of interest, nepotism and other malpractices.

It seems that for this class of directors, directorships and leadership positions are a way of actualising self-interest, forgetting that the primary interest to focus on is the shareholders.

Directors have a lot of power in the management of a company’s affairs, but the powers of directors are delegated by the shareholders and those powers are to be utilised within the context of the law.

For example, the law provides that any two directors can dispose of a company’s property.

There have been cases where directors have conspired to sell off the company assets without the shareholders ‘knowledge and authority therefore devaluing the company.

A director has a common law and statutory duty to shareholders known as a fiduciary duty. A fiduciary duty is a duty set by law to act in the best interest of another party.

Under the Companies Act, directors are required to act in good faith and to act in a manner that promotes the best interest of the shareholders.

In the event a director acts contrary to the fiduciary duty placed on him by law, then the shareholders can take action.

Read: How directors can cover themselves against liability risks

Supposing you bought shares in a listed company and the company directors acted in breach of their fiduciary duty. Do you have any redress against them? I will highlight some of the actions you can take to hold such directors accountable.

The first is to ask for information pertaining the director’s decisions and directors’ resolutions. Shareholders no matter how small, have the right to ask for any information pertaining to management of the company at any time.

Secondly is to seek explanations and if the explanations are not satisfactory, then you have the right to seek more information. During the company Annual General Meeting you can raise any issues of concern.

If these are still not satisfactory, you can apply for an independent investigation of the company or even an independent forensic audit of the company. These are rights provided under Companies ‘laws.

In the event that a director is found to have breached fiduciary duty, then you can file a lawsuit against such a director setting out the incidence of malpractice.

There are a number of court orders available for example a court order stopping the malpractice, an order for compensation of loss, an order for restitution and even an order to pay the company general damages. There is a technical procedure to be followed in such lawsuits.

In the event of criminal activity then a criminal complaint can be made.

Ms Mputhia is the founder of C Mputhia Advocates.

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