Shareholder Rights vs. Regulator Powers: A collision course?

6th October, 2025

Author: Michael Kontos

In a recent decision that raised some eyebrows in Kenya’s corporate governance landscape, the Capital Markets Tribunal ruled that the Capital Markets Authority had overstepped its mandate by attempting to vet and reject directors of Limuru Tea PLC, a publicly listed company. The Tribunal held that while CMA may issue governance recommendations, it cannot override shareholder decisions unless expressly empowered by law.

This ruling opens the door to a broader and more provocative question:

Can a regulator override shareholder rights in the appointment of directors?

And if so, under what legal authority?

Under the Companies Act, shareholders enjoy the sacrosanct right to appoint directors. This is a cornerstone of corporate democracy: owners electing stewards to manage their enterprise.

But in the banking sector, where the stakes are higher, this right is not absolute.

The Banking Act and the Prudential Guidelines issued by the Central Bank of Kenya impose a “fit and proper” test on directors of licensed institutions. CBK has the power to vet proposed directors against a mix of subjective and objective criteria such as integrity, competence, financial soundness, and reputation. While the Banking Act does not expressly confer a “veto”, the requirement of prior clearance means that any director failing the fit and proper test cannot assume office.

This creates a legal tension:

What happens when shareholders elect a director whom CBK deems unfit?

The Banking Act explicitly empowers CBK to veto board appointments in the interest of financial stability and depositor protection.

This is not merely a procedural safeguard, but a substantive override of shareholder will.

While this may seem undemocratic, it reflects a policy choice: in sectors where public trust and systemic risk are paramount, regulatory oversight must trump ownership control.

Can these two statutes coexist? Yes, but not without friction.

The Companies Act provides the general framework for corporate governance. The Banking Act, on the other hand, is sector-specific and tailored to the unique risks of financial institutions. In legal interpretation, sector-specific legislation prevails over general law in cases of conflict.

Thus, while shareholders retain the right to nominate directors, CBK holds the final say in regulated entities.

The Limuru Tea decision reminds us that regulatory power must be grounded in statute. But it also invites reflection on where that power is not only grounded, but entrenched.

In banking, the regulator’s veto is not a breach of shareholder right but rather a guardrail for the public interest. While the CMA retains similar statutory veto rights to the CBK in the licensing of capital markets intermediaries (such as stockbrokers, dealers and investment banks), its powers over listed company governance are more circumscribed.

As governance debates evolve, especially in sectors where regulation is tightening, companies and shareholders must navigate a landscape where legal rights are not always synonymous with practical authority.

This article is published for general information and academic commentary. It reflects the author’s independent analysis of legal developments as at the date of publication and does not constitute legal advice or advocacy of any particular position in any current or future matter.

 The views expressed do not necessarily represent those of the firm or any of its clients. Readers should seek specific legal advice before acting on any information herein.