Maneno Ltd is a Nairobi Stock Exchange Listed company in the business of manufacturing consumer products. The founder, Michael Monga, was a well-respected businessman with multiple interests in various industries some of which interests have led to obvious potential conflicts. As Monga was quite alive to the effect of negative publicity on his business interests, he often appointed proxies to the boards of companies in which he was a substantial owner. Maneno Ltd had three such directors, who were senior employees in Monga’s other companies. Monga, being a very shrewd player, was also careful to select independent non-executive directors that could be prevailed upon to play ball where required.
Due to a fairly loose enforcement regime, cheap imports of the same consumer products that Maneno manufactured had started to flood the Kenyan market and management were spending valuable time firefighting with the relevant government agencies. Prudent past management had ensured that a significant amount of cash had been set aside and invested in money market instruments in anticipation of a strategic plant expansion that had been planned in the 5 year strategy. Monga instructed his three directors to support the Managing Director’s board paper recommending an interim dividend. That seemed strange as the financial projections indicated that the company was going to make a loss that year due to shrinking sales. The paper was approved and a special dividend was paid. The company went ahead to make losses and the following year a hefty final dividend was declared that essentially wiped out the healthy cash reserves that Maneno had been holding. As sordid stories go, within no time Maneno was bleeding cash, as management was unable to stem the effect of cheap imports versus their own locally manufactured products in an aging plant with high labor costs. The company filed for insolvency within two years of the final hefty dividend payout.
What potential remedies exist for the minority shareholders who were held at glorious ransom by the corporate shenanigans of Michael Monga? Both Kenya and Uganda have recently revamped their company laws from the archaic 1948 UK Companies Act that formed the basis of local company law. Uganda passed the Companies Act 2012 and Kenya followed suit with the Companies Act 2015 both of which laws essentially aligned company law with modern norms such as the concept of a shadow director. Company law defines a shadow director as someone who has not been formally appointed as a director but in accordance with whose directions or instructions the directors of a company are accustomed to act.
If you’re struggling to picture one, think of a multinational company in Kenya, whose board is regularly instructed by “group” via the managing director, on when to declare dividends or when to postpone making critical provisions on their financial statements. It can also be the finance director of a Kenyan company that has regional subsidiaries and demands the same financial behavior of the subsidiary boards. [It bears noting that the Tanzanian Company Act 2002 does not expressly define shadow directors.] It can be a cabinet secretary who regularly issues instructions to the board of a limited liability company with significant government ownership. In the Maneno Ltd example, Michael Monga is a classic example of a shadow director. Not only was he giving express instructions to the non-executive directors, but he also ensured that he indirectly controlled the board through the appointment process. For all intents and purposes, Monga was the board.
Company law recognizes that while de jure directors (directors by law) have fiduciary duties to the company including the duty to act in the best interests and promote the success of the company, de facto directors (directors in fact) also owe the company fiduciary duties and can therefore be held accountable for their acts in the same vein as the directors on record. This premise was established in the 2013 landmark United Kingdom case of Vivendi SA and Centenary Holdings Ltd versus Murray Richards and Stephen Bloch. In the case, as succinctly summarized on the Helix Law website, a shareholder of a company in trouble used his influence to make the sole director of the company pay him a salary and other money from the company, without providing any benefit or services back. These payments were made while the company was insolvent. The company went into liquidation and its receiver claimed compensation from the shareholder claiming that a) he was a shadow director b) a shadow director owed the company fiduciary duties as if he had been formally appointed as a full de jure director and c) the shareholder had breached those duties. A Burges- Salmon blog on the shadow director subject matter summarized the court’s findings thus: On the first issue, the court found that the sole director was accustomed to acting in accordance with the shareholder’s instructions and therefore the shareholder satisfied the test for shadow directorship. On the second issue it was found that in giving instructions to de jure directors, a shadow director assumed responsibility for a company’s affairs. However while a shadow director’s duties were not statutorily provided for, the consequences of being found to be a shadow director must evidence Parliament’s perception that a shadow director could bear responsibility for a company’s affairs. The court also observed that a shadow director’s role in a company’s affairs might be just as significant as a de jure director, and that public policy pointed towards statutory duties being imposed on shadow directors.
What does this mean for Michael Monga and many like him?
Company Law now provides extraordinary personal consequences to the shadow director including: a liability to contribute to the company’s assets following the company’s insolvency, disqualification from being a director of any company in Kenya following the company’s insolvency as well as criminal sanctions and personal liability for violations of director’s duties.
As a parting shot, while de jure directors may rely on Directors and Officers insurance cover, the shadow director is most definitely not covered under the same. If you sit on a Kenyan or Ugandan board, now would be a good time to look over your shoulder and find those shadows.
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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]