Court of Appeal Clarifies Scope of Derivative Actions, Minority Shareholder Protection and Directors’ Fiduciary Duties

CM Advocates LLP wishes to draw the attention of company directors, shareholders, investors and corporate advisors to a significant decision of the Court of Appeal in Raindrops Limited & 3 others v Joseph Munyoki Nzioka [2025] KECA 1570 (KLR), delivered at Mombasa on 3 October 2025. 

Background 

The dispute arose from allegations by a minority shareholder and director that controlling shareholders and directors had oppressed him, excluded him from management, breached fiduciary duties, and misapplied company funds. The High Court dismissed a preliminary objection challenging jurisdiction and allowed the matter to proceed as a derivative action. The decision was appealed. 

Key Issues Before the Court 

The Court of Appeal was called upon to determine, among others: 

• Whether the suit was properly a derivative action under the Companies Act, 2015; 

• Whether filing a derivative suit contemporaneously with an application for leave was fatal; 

• Whether the dispute fell within the jurisdiction of the Employment and Labour Relations Court; 

• Whether the company could be sued as a defendant in a derivative claim; and 

• Whether additional directors could be joined without prior service of the joinder application. 

The Court of Appeal’s Determination 

The Court dismissed the appeal in its entirety and upheld the High Court’s rulings, making the following important pronouncements: 

1. Nature of Derivative Actions 

A derivative claim is one brought by a member of a company in respect of a cause of action vested in the company and seeking relief on behalf of the company. The Court reaffirmed that minority shareholders have locus standi to sue where directors or majority shareholders engage in conduct involving negligence, default, breach of duty or breach of trust to the detriment of the company. 

2. Leave to Institute Derivative Suits 

Filing a plaint contemporaneously with an application for leave to commence a derivative action is not fatal. The requirement for leave under sections 238 and 239 of the Companies Act is procedural and subject to the court’s discretion, provided a prima facie case is disclosed. 

3. Jurisdictional Clarity 

The Court firmly rejected the argument that disputes touching on directors’ allowances or benefits automatically fall within the Employment and Labour Relations Court. Where the gravamen of the dispute concerns corporate governance, shareholder oppression and fiduciary breaches, jurisdiction properly lies with the High Court. 

4. Joinder of the Company and Directors 

The inclusion of the company as a defendant does not defeat a derivative suit. Misjoinder or non-joinder of parties is curable and cannot invalidate proceedings. Further, the Court confirmed that additional parties may be joined under Order 1 Rule 10 of the Civil Procedure Rules without prior service of the joinder application where their presence is necessary for effective adjudication. 

Regulatory and Practical Implications 

This decision has far-reaching implications for corporate governance in Kenya: 

• Directors and majority shareholders must exercise heightened care in managing company affairs, mindful that courts will intervene to protect minority interests. 

• Minority shareholders are assured of judicial protection against oppressive conduct and misuse of corporate power. 

• Companies and boards should strengthen internal governance frameworks, financial transparency and dispute resolution mechanisms to mitigate derivative litigation risk. 

• Investors and advisors should reassess shareholder agreements, board structures and reporting obligations in light of the clarified standards. 

Conclusion 

The Raindrops Limited decision is a strong reaffirmation of judicial support for minority shareholder protection and accountability of directors under the Companies Act, 2015. It underscores the courts’ willingness to look beyond technical objections in favour of substantive justice and sound corporate governance. 

Practice Group Contacts 

For advisory, transactional or dispute-related support arising from this decision, please contact: 

Corporate–Commercial & Regulatory (CCR) Practice Group 
E: commercial.corporate@cmadvocates.com 

Dispute Resolution & Appellate (DRA) Practice Group 
E: disputeresolution@cmadvocates.com 

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This Regulatory Alert is for general information purposes only and does not constitute legal