MWANGI: Fine print that is costing Kenyan SMEs their businesses

Yet behind the term sheets and handshakes, a quietly damaging pattern is taking hold. Kenyan entrepreneurs are entering cross-border partnerships without appreciating one uncomfortable reality: a poorly structured deal can transfer effective control of a business long before the founder realises what has happened.

Across the market, SMEs are routinely surrendering equity leverage, intellectual property rights and governance control through shareholder agreements they barely negotiated, and in some cases, barely read. The problem is rarely the investment itself. It is the legal scaffolding beneath it.

Cautionary court ruling

A recent High Court decision brought this danger into sharp focus. Minority shareholders moved to court alleging oppressive conduct by majority shareholders, including exclusion from governance, insider dealings and breaches of fiduciary duty. The court found, however, that the shareholders had years earlier signed agreements requiring all disputes to be resolved through international arbitration seated in Mauritius.

In effect, they had unknowingly signed away their preferred route to justice in the moment they were celebrating their deal.

That ruling is not an anomaly. It reflects a growing trend in cross-border ventures involving Kenyan founders. Foreign investors typically arrive with sophisticated legal advisers and transaction teams. Local entrepreneurs, eager for capital and growth, tend to focus on valuation and funding timelines, overlooking governance provisions buried deep within transaction documents.

The court reaffirmed that carefully drafted shareholder agreements can override other governance instruments entirely, channelling disputes into foreign arbitration forums.

Intellectual property blind spot

The vulnerabilities extend well beyond dispute resolution. Intellectual property protection remains a critical blind spot in Kenyan cross-border transactions — and one of the least appreciated sources of value erosion.

Many founders contribute far more than equity into a partnership. They bring proprietary software, customer networks, operational systems, local market intelligence and brand equity built over years. Where agreements fail to clearly assign and protect ownership of these assets, they can gradually migrate into offshore holding companies or joint venture vehicles controlled elsewhere.

The result is a founder who continues to operate the business while no longer owning its most valuable components.

Governance not a legal luxury

A separate decision by Justice Wilfrida Okwany similarly underscored the vulnerability of minority shareholders where governance structures are poorly designed. The court examined how majority-controlled companies can sideline minority investors through exclusion from management, dilution of shareholding and abuse of voting power.

The broader message from the bench is becoming increasingly clear: governance rights are not technical legal formalities. They are commercial survival tools.

Kenyan SMEs and founders must therefore begin treating legal structuring as strategic infrastructure, not an afterthought to be addressed once the money is in the bank.

Scrutinise before signing

Before entering any cross-border partnership, founders should give close attention to several provisions that are routinely underweighted: board composition and voting thresholds; dispute resolution clauses and the jurisdiction they designate; intellectual property ownership and assignment provisions; dilution protections and anti-dilution mechanisms and exit rights, including drag-along and tag-along provisions

Equally important is understanding which country's laws govern the transaction. Just because a deal is negotiated and concluded in Nairobi does not mean Kenyan law applies. Many cross-border agreements default to English or Mauritian law, a detail with significant practical consequences when disputes arise.

It is worth noting that robust legal frameworks do not deter investment, they attract it. Sophisticated investors consistently prefer businesses with properly structured governance systems because they reduce uncertainty and the prospect of future conflict.

The most dangerous words in business remain: “We’ll sort it out later.” By the time a dispute surfaces, the agreements have already allocated power, rights and remedies, usually with ruthless precision.

In today’s cross-border economy, the founders who endure will not necessarily be those who secured the largest investment cheques. They will be those who negotiated the strongest protections before putting pen to paper.

The writer partner at G&A Advocates LLP