A prenuptial agreement (prenup) is a contract made between two people before marrying that establishes rights to property and support in the event of divorce or death. Hollywood actor Tom Cruise, who infamously jumped on Oprah Winfrey’s couch in delirious joy while describing his love for his soon-to-be third wife Katie Holmes, signed a prenuptial agreement with the blushing bride before their marriage in 2006. Katie was to receive $3 million dollars for every year of marriage. One week past their five year anniversary, Katie filed for divorce and amicably walked away with $15 million. Meanwhile Tom Cruise’s second wife Nicole Kidman married country singer Keith Urban in the same year 2006. The Hollywood actress who is reportedly worth $250 million put in a clause in the prenup to protect herself from Urban’s apparent struggles with drug and alcohol. In the event of divorce, Urban would earn $600,000 for every year of marriage but only if he kept his drug addiction under control. According to Rolling Stone magazine, Urban checked himself into a rehabilitation centre months after their wedding and has remained sober since.

In 2017 when the Kenyan Companies Registry went digital and provided online registration for companies, a few lawyers were up in arms, chomping at the bit and frothing at the mouth in a rabid frenzy. The reason for their angst: ordinary wananchi could now register their own companies following clearly articulated steps. The simplified process gave access to anyone who had the patience to navigate an online system a way to submit documentation without the need to read the almost  3 kilogram tome that is the Kenyan Companies Act. Yet the need for a lawyer has never diminished in company related matters, as the formation of a company between two individuals still requires a prenuptial arrangement.

Just like the onset of any marriage, individuals who come together to do business are crazy in love with the idea of joining forces to start off a commercial venture that is anticipated to succeed.  The idea of creating mad profits together is the tantalizing outcome of the business consummation, just like children are the natural outcome of a marriage consummation. It is all peaches and cream between business (and marriage) partners, until it is not. A shareholder’s agreement is the business equivalent of a prenup. A marriage prenup is a post mortem arrangement, envisaging that the marriage will come to an end and providing clarity on how that institution will be buried in dignity with all parties walking away from the cemetery happy. The shareholder’s agreement on the other hand governs how parties will engage during the lifetime of the business. It can cover voting requirements for major decisions like borrowing, dividend distribution or big capital expenditure spend or even how board seats will be allocated according to shareholding. The shareholder’s agreement envisages that the business will remain a going concern and that if one party wishes to realize the value that the company has created by selling their shares, a methodology for selling all or part of that value is defined without killing the goose laying the golden egg as it were.

Clauses such as “first right of refusal” can be put in the shareholder’s agreement so that the original shareholders get a bite of the cherry first and protect them from being forced into a business marriage with a partner not of their choosing. Defining how such an exit will occur is absolutely critical because the last thing shareholders want is to destroy a business that has a wide number of stakeholders such as employees, customers and suppliers all in the name of separation. A key issue that always emerges at the point of voluntary separation is how to value the shareholding. The shareholder’s agreement should therefore provide a mechanism for what methodologies of valuation will be used thus ensuring that there is fairness to all sides. This is better done at the honeymoon stage of the business marriage rather than at the “nil-by-mouth sleeping in separate bedrooms” stage.

Furthermore, the agreement should envisage what would happen in the event the majority shareholder wishes to exit after being wooed by an attractive investor who is really not feeling the vibe of the minority shareholder. “Drag along”” clauses are a useful way of protecting the majority shareholder from a petulant minority shareholder while “tag along” clauses protect the minority shareholder from being left at the mitumba pricing lights. For more details on this, dial star “next Monday on the Nitpicker” hash.

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Twitter: @carolmusyoka