Drag-Along and Tag-Along Rights Agreement (Kenya)

A Drag-Along and Tag-Along Rights Agreement in Kenya governs the relationship between the parties by fixing what each must do.

The Companies Act No. 17 of 2015 does not prescribe drag-along or tag-along rights by default — these rights arise entirely from private contractual agreement between shareholders, typically embedded in a Shareholders' Agreement or a separate Drag-Along and Tag-Along Rights Agreement registered with the company's constitutional documents. Section 33 of the Companies Act No. 17 of 2015 permits a company's Articles of Association to contain restrictions on the transfer of shares, and drag-along and tag-along provisions are commonly incorporated into the Articles to give them binding effect on all current and future shareholders.

For companies with shares listed on the Nairobi Securities Exchange (NSE), the Capital Markets Act (Cap. 485A) and the Capital Markets (Takeovers and Mergers) Regulations, 2002 impose mandatory offer obligations. A party acquiring more than 25% of shares in a listed company must make a mandatory offer to all remaining shareholders under Regulation 4 of the Takeovers and Mergers Regulations — effectively a statutory tag-along mechanism for listed companies. The Capital Markets Authority (CMA) supervises compliance with mandatory offer obligations, and drag-along provisions in listed company shareholders' agreements must be structured to avoid conflict with the CMA's mandatory offer regime.

For private companies — including startups receiving funding from members of the Kenya Private Equity and Venture Capital Association (KEPVCA) or angel investors affiliated with the East Africa Venture Capital Association (EAVCA) — drag-along and tag-along rights are standard investment terms. The Kenya Private Equity and Venture Capital Association model term sheet includes drag-along provisions requiring a defined majority (typically investors holding 60% or more of the company's shares on a fully diluted basis) to be able to compel a sale. The Standard Investment Bank, Britam Asset Managers, and other Kenya-based institutional investors consistently require tag-along rights as a condition of minority equity investment.

A Drag-Along and Tag-Along Rights Agreement should be read together with the Shareholders' Agreement, the company's Articles of Association, and any Share Purchase Agreement in the event of a transaction. These documents govern the same corporate relationship from different angles — the Shareholders' Agreement sets the ongoing governance rules, the Drag-Along and Tag-Along Rights Agreement activates when an exit event is triggered, and the Share Purchase Agreement documents the terms of the specific transaction.

A Drag-Along and Tag-Along Rights Agreement is needed whenever a Kenya company has two or more shareholders with different ownership stakes and wishes to establish clear exit mechanics that protect both the majority's ability to execute a sale and the minority's right to participate in any liquidity event.

A Drag-Along and Tag-Along Rights Agreement is required at the time a private equity fund, venture capital firm, or angel investor takes an equity stake in a Kenya company. Investors regulated under the Capital Markets Act (Cap. 485A) or affiliated with the Kenya Private Equity and Venture Capital Association (KEPVCA) typically require drag-along and tag-along provisions as non-negotiable investment conditions before committing funds.

A Drag-Along and Tag-Along Rights Agreement is needed when a Kenya company's founders hold a controlling stake alongside institutional co-founders or strategic investors who hold smaller minority positions. Without drag-along rights, a minority shareholder can block a sale by refusing to tender their shares, destroying deal certainty and depressing the sale price achievable from an acquirer who requires 100% ownership.

A Drag-Along and Tag-Along Rights Agreement is required when a family-owned company registered with the Business Registration Service (BRS) plans succession by selling the business to a third party. Family members holding minority shares may have divergent succession interests — drag-along rights give the majority family shareholders the ability to execute the sale without unanimous consent.

A Drag-Along and Tag-Along Rights Agreement is needed when a Kenya company is a joint venture between two corporate shareholders under the Companies Act No. 17 of 2015 and both parties wish to define exit mechanics in advance of any future dispute about the company's direction or valuation.

A Drag-Along and Tag-Along Rights Agreement is required at the time of a company restructuring under Section 234 of the Companies Act No. 17 of 2015 (scheme of arrangement), where the restructuring involves a change in the shareholding structure and new investors are introduced who require protection of their exit rights from the outset.

Parties in Kenya should prepare a Drag-Along and Tag-Along Rights Agreement (Kenya) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under the Companies Act No. 17 of 2015, the Registrar of Companies at the Office of the Attorney General maintains the register of Kenyan companies. Section 3 of the Law of Contract Act (Cap. 23) governs contractual obligations. The Competition Authority of Kenya (CAK) enforces the Competition Act No. 12 of 2010. The Kenya Revenue Authority (KRA) administers corporate tax under the Income Tax Act (Cap. 470). The High Court of Kenya has unlimited original jurisdiction under Article 165 of the Constitution of Kenya 2010. Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.

A Drag-Along and Tag-Along Rights Agreement for a Kenya company under the Companies Act No. 17 of 2015 must contain the following essential elements to create clear, enforceable exit rights for all shareholders.

Parties and Shareholding Schedule: Full legal names of all shareholders, their National Identity Card (NIC) numbers or company registration numbers from the Business Registration Service (BRS), their current shareholding (number of shares, class of shares, and percentage of issued share capital), and the company's full registered name and Companies Registration Number (CRN). A shareholding schedule should be attached to the agreement and updated each time new shares are issued.

Drag-Along Rights: The drag-along threshold — typically expressed as a percentage of the total issued share capital (e.g., shareholders collectively holding 75% or more) — that activates the drag-along obligation. The mechanism: the dragging shareholders must give written notice to the dragged minority shareholders specifying the proposed acquirer, the price per share, the payment terms, and the proposed completion date. The dragged shareholders must execute all documents required to transfer their shares on the same terms within the notice period. The dragged price must not be less than the price received by the dragging shareholders — Section 115 of the Companies Act No. 17 of 2015 governs the rights of shareholders receiving payment from a company, and the same principles of equal treatment apply.

Tag-Along Rights: The tag-along trigger — typically any transfer of shares representing more than a defined percentage of the issued share capital (e.g., 30% or more) to a third-party acquirer. The mechanism: the selling shareholder must give written notice to all other shareholders of the proposed transfer, the acquirer's identity, the price per share, and the other terms. Tag-along shareholders have a specified period (typically 20 business days) to elect to sell their shares to the acquirer on the same terms. The acquirer must purchase the tag-along shares at the same price and on the same terms as the majority sale shares.

Exceptions and Carve-Outs: Categories of transfers exempt from drag-along and tag-along obligations — typically intra-group transfers between wholly owned subsidiaries under Section 234 of the Companies Act No. 17 of 2015, transfers to family members of individual shareholders, and transfers to approved permitted transferees listed in the Shareholders' Agreement.

Valuation Mechanism: The agreed method for determining the price per share where the consideration is not all-cash — including earn-out payments, deferred consideration, shares in the acquirer, or contingent consideration. The agreement should specify whether an independent valuer (preferably registered with the Institute of Certified Public Accountants of Kenya (ICPAK) or a recognised valuation firm) will be appointed to confirm the fairness of the consideration where a majority shareholder triggers the drag-along.

Capital Gains Tax and Stamp Duty: The agreement should acknowledge that the transfer of shares in a Kenya company is subject to Capital Gains Tax at 15% on the gain under Section 3(2)(f) of the Income Tax Act (Cap. 470) and stamp duty at 1% on the consideration under the Stamp Duty Act (Cap. 480). Each party is responsible for their own Capital Gains Tax obligations as sellers. The agreement should specify who bears the stamp duty on the share transfer instrument.

Constitutional Documents Alignment: A confirmation that the drag-along and tag-along provisions in the agreement are consistent with the company's Articles of Association and, if not, that the parties undertake to pass the necessary special resolution under Section 53 of the Companies Act No. 17 of 2015 to amend the Articles to reflect the agreed rights. The forms-legal.com Drag-Along and Tag-Along Rights Agreement template covers all seven elements and is aligned with KEPVCA model term sheet standards for Kenya private equity transactions.

Governing Law: Kenya law shall govern the agreement, with disputes referred to the Commercial Division of the High Court of Kenya or the Nairobi Centre for International Arbitration (NCIA) under the Nairobi Centre for International Arbitration Act No. 26 of 2013.