Business Partner Law Guide for Foreign Equity Deals

A foreign investor can own a large percentage of a company and still have surprisingly little practical control over what happens to the money, the board or the business. That is why investing with a local partner should not be treated simply as a question of who owns 51 per cent and who owns 49 per cent. The more important question is what each percentage actually allows its holder to do when the relationship is working, and what happens when it stops working.

Across Kenya, Uganda, Rwanda and mainland Tanzania, company law gives shareholders and directors legal rights and duties, but it does not design a commercial relationship for the parties. The safest investment therefore combines the law, the company’s constitutional documents and a carefully written shareholder agreement. A foreign investor should think of these as three layers of protection. If one layer is weak, the others should not be expected to repair every problem later.

Start with control, not just the percentage

The first document to examine is the proposed ownership table. It should state who will hold the shares, how many each person will own, what class will be issued and what voting rights attach to them. The investor should also confirm that the local partner is contributing the money, property, licence, intellectual property or commercial value that was promised. The word “partner” is not a substitute for recorded legal rights and obligations.

Before money is transferred, the investor should also check whether the business operates in a regulated sector with special licensing, local ownership, local content or approval rules. General company law may permit a particular shareholding structure while a sector-specific law does not. This matters in areas such as financial services, mining, telecommunications, insurance and other regulated activities. The correct question is therefore not only whether a foreigner can own shares in a company, but whether the proposed ownership and control arrangement is lawful for that particular business.

Put the commercial bargain into the right documents

A shareholder agreement is useful because it can deal with matters that ordinary company registration documents may not explain in enough detail. It can state who contributes what capital, who appoints directors, what decisions require both sides’ consent, how bank accounts are controlled, what information each shareholder receives, how shares may be sold and how the parties separate.

However, the agreement should not be drafted as though company law does not exist. Some statutory rules cannot simply be contracted away. The company’s articles, memorandum or incorporation documents may also determine how decisions are legally taken. Where an important protection depends on the company itself, the investor should consider whether the same protection also needs to appear in the constitutional documents and in formal board or shareholder resolutions.

Uganda makes this point particularly clear. Section 19 of the Companies Act, Cap 106, provides that the registered memorandum and articles bind the company and its members. Kenya’s Companies Act and Companies (General) Regulations similarly place substantial weight on the company’s articles in determining governance and share rights. Rwanda’s Law No. 007/2021 governing companies works through the company’s incorporation documents, while Tanzania’s Companies Act, Cap 212 R.E. 2023, continues to give the memorandum and articles an important role in a private company’s internal structure.

Decide which matters one shareholder cannot decide alone

A common mistake is to give one shareholder a large percentage of the shares and assume that every important decision will automatically require discussion. It may not. The shareholder agreement should identify “reserved matters”: decisions that cannot be taken unless the specified shareholders agree.

The list should reflect the actual business. It may include issuing new shares, borrowing above an agreed amount, giving guarantees, changing the business activity, buying or selling major assets, approving an annual budget, entering large contracts, changing bank signatories, appointing senior managers, paying unusual management fees, entering transactions with a shareholder or related company, starting major litigation, declaring dividends or winding up the company.

The voting threshold must be chosen deliberately. In Kenya, an ordinary resolution is generally passed by a simple majority while a special resolution requires at least 75 per cent. Uganda also uses a three-fourths threshold for a special resolution. A shareholder with enough votes may therefore pass important decisions even where the relationship was described commercially as a “partnership”. Reserved matters should use carefully chosen consent thresholds that remain consistent with mandatory law.

A board seat is useful, but it is not a complete veto

Foreign investors often protect themselves by requiring the right to appoint a director. That is sensible, but a board appointment should not be confused with permanent control. In Kenya, section 139 of the Companies Act permits a company to remove a director by ordinary resolution at a meeting despite a contrary agreement, subject to the statutory procedure. Uganda’s Companies Act contains a similar rule on removal by ordinary resolution. Tanzania’s current Companies Act, Cap 212 R.E. 2023, also provides in section 196 that a director may be removed by ordinary resolution notwithstanding an agreement with that director.

The practical lesson is that a nominee-director clause should be supported by wider governance protections. The agreement can require each shareholder to vote for the other side’s nominee, establish a minimum board composition, define quorum, specify which board decisions need affirmative approval from both groups and provide consequences if one side wrongfully removes or blocks the other side’s nominee.

The investor should also remember that a director is not merely an agent sent to protect one shareholder. Directors have legal duties to the company. A shareholder who wants a personal veto over certain matters should therefore create that protection at shareholder level rather than asking a director to disregard the director’s legal duties.

Control the bank account before the first large payment

Many shareholder disputes become serious only after money has moved. A foreign investor should therefore treat the bank mandate as part of the investment documentation, not as an administrative form to be completed after closing.

The company should agree in writing who can open and close bank accounts, who can add or remove signatories, what payment limits apply and whether one or two authorised persons must approve transfers. For a joint venture, it may be sensible to require one authorised person connected to each shareholder for payments above an agreed threshold. The investor can also require direct access to bank statements, electronic viewing rights and prompt notice if the bank mandate is changed.

A shareholder agreement cannot force a bank to operate an account contrary to the mandate the bank has accepted. The corporate resolutions, account-opening forms and bank mandate should therefore match the shareholder agreement. A clause requiring joint approval is of little practical use if the bank has been instructed that one person may transfer all the company’s money alone.

Do not rely on ownership alone for access to accounts

A shareholder who has invested substantial money should not assume that share ownership automatically gives unrestricted access to the company’s accounting system, invoices and bank records.

Kenya’s Companies (General) Regulations state that a person is not entitled to inspect a company’s accounting or other records merely because that person is a member, unless access is authorised by law, the court, the directors or an ordinary resolution. Uganda is similarly important. Under its Companies Act and model regulations, accounting books are open to directors, while a member who is not a director does not automatically have a general right to inspect every account or document unless the right comes from law, the directors or the company in general meeting.

Rwanda provides stronger express inspection mechanisms. Current company-law materials based on Law No. 007/2021 recognise shareholder inspection of specified company records and a route to court where access is wrongly refused. The difference between these systems is precisely why information rights should be written into the investment documents rather than left to assumption.

A useful clause should require monthly or quarterly management accounts, annual financial statements, budgets, bank statements, tax filings, material contracts and notice of regulatory correspondence, with clear delivery dates. A board nominee should also receive the records needed to discharge the director’s duties.

Protect against dilution and unexpected share transfers

An investor can lose influence without selling a single share. If the company issues new shares to the local partner or to a third person and the foreign investor does not participate, the investor’s percentage can fall. The agreement should therefore address new share issues, pre-emption rights and whether any new class of shares may carry superior voting or economic rights.

The same care is needed when an existing shareholder wants to leave. Private companies commonly restrict transfers, but the precise procedure depends on the law and constitutional documents. Kenya’s company regulations contain share-transfer procedures and, for applicable private-company articles, pre-emption mechanisms. Uganda’s private-company framework restricts share transfers through the articles. Rwanda’s Law No. 007/2021 provides a formal process for transferring shares, including delivery of transfer documents and entry of the transferee in the share register. In mainland Tanzania, a private company is characteristically structured with restrictions on transfer of its shares.

The shareholder agreement should make the commercial result clear before a transfer is attempted. It can provide a right of first offer or first refusal, permitted transfers to group companies, restrictions on transfers to competitors, a tag-along right allowing a minority investor to join a sale by the majority and, where appropriate, a drag-along mechanism allowing a qualifying majority to deliver the whole company to a genuine buyer. The valuation method and payment timetable should be written down rather than left for negotiation after a dispute begins.

Design the deadlock clause for a real disagreement

A 50:50 company can be attractive because neither side dominates. It can also become paralysed. Deadlock should therefore be treated as a foreseeable governance event, not as evidence that someone has necessarily breached the agreement.

A practical clause should first define what counts as a deadlock. One missed meeting should not automatically trigger a forced sale. The process can require the matter to be reconsidered by senior representatives, followed by a short negotiation period and then mediation if appropriate. Only after those steps fail should the clause move to an exit mechanism.

Buy-sell clauses need particular care. A so-called shotgun mechanism, under which one shareholder names a price and the other must either buy or sell at that price, can look fair in theory but favour the party with greater access to cash. An investor should ask whether both sides could realistically finance a purchase. In many East African joint ventures, an independent valuation followed by a put option, call option or agreed sale process may be more balanced.

Write the exit before you need it

An exit clause should answer more than “either party may sell”. It should explain when a shareholder can leave, who must buy, how the price is calculated, how long payment may take and what happens to guarantees, shareholder loans, licences, intellectual property, employment positions and confidential information.

The agreement can distinguish an ordinary voluntary exit from serious default. Fraud, diversion of company business, persistent refusal to provide agreed information, unlawful competition, insolvency or a material breach that is not cured may justify different consequences from a shareholder simply wishing to retire from the investment.

The investor should be cautious with clauses that impose an automatic severe discount on a departing shareholder. Such clauses may generate further litigation if they operate as an excessive penalty or conflict with applicable law. A defensible valuation mechanism is normally more useful than a punishment that looks attractive only while the parties are still friendly.

Choose dispute resolution with enforcement in mind

A dispute clause should identify the governing law, the forum, the seat of arbitration if arbitration is chosen, the language and the method of appointing the tribunal. It should also deal with urgent relief. A party may need an injunction to stop an unauthorised share transfer, preserve company money, prevent disposal of assets or protect records before the main dispute is finally decided.

Court remedies also remain relevant. Kenya’s Companies Act allows members to seek relief where company affairs are oppressive or unfairly prejudicial. Uganda’s current Companies Act contains remedies concerning oppressive and unfairly prejudicial conduct, including orders that can regulate future affairs or provide for the purchase of shares. Tanzania’s Companies Act, Cap 212 R.E. 2023, also contains an unfair-prejudice remedy. Rwanda’s current company law provides judicial mechanisms through which shareholders can challenge unlawful or prejudicial corporate conduct.

Those remedies are valuable, but they are a poor substitute for careful drafting after money and trust have already been lost.

The practical protection test

Before a foreign investor releases capital, the transaction documents should allow simple answers to a few questions. Who can spend company money? Who can appoint and remove directors? Which decisions cannot be made without the investor? How quickly must accounts and bank statements be provided? Can new shares dilute the investor? Can the local partner sell to a stranger or competitor? What happens if neither side can agree on the budget? How does the investor recover value if the relationship ends?

If the answers depend on goodwill, WhatsApp messages or an expectation that “we will work it out”, the investment is not yet properly protected. A local partner can be one of the strongest assets a foreign investor has in East Africa. The legal objective should not be to remove trust from that relationship. It should be to ensure that trust is supported by rules that remain useful on the day trust is under pressure.

Source note

This article is based on Kenya’s Companies Act 2015 and Companies (General) Regulations, Uganda’s Companies Act, Cap 106, as consolidated through 31 December 2023, Rwanda’s Law No. 007/2021 governing companies as subsequently amended and current Rwanda Development Board investment materials, and Tanzania’s Companies Act, Cap 212, Revised Edition 2023, together with current BRELA and Tanzania Investment Centre materials. It also refers to the statutory shareholder remedies and company-record rules discussed in those sources. Laws, regulations and sector-specific investment requirements should be checked again before a particular transaction is signed.

Suggested citation: 

Ronald Serwanga, “Business Partner Law Guide for Foreign Equity Deals” East Africa Legal Insight (3 September 2026).