By Juliet Umeh

As Kenya’s small and medium-sized enterprises, SMEs, increasingly attract foreign investors and regional partners, legal experts have raised concerns over a growing trend of entrepreneurs unknowingly signing away critical business rights through poorly negotiated cross-border agreements.

According to legal practitioners, many founders are losing governance control, intellectual property rights, and access to preferred dispute resolution mechanisms because they focus primarily on securing investment while paying insufficient attention to the legal structures underpinning their deals.

Robert Mwangi, Partner at G&A Advocates LLP, said recent court decisions have exposed the commercial risks facing founders who enter investment partnerships without fully understanding the legal implications of shareholder agreements and other transaction documents.

“Kenya’s private sector is in the middle of a capital moment. Fintech startups, agribusinesses and manufacturing ventures are attracting foreign investors, regional partners and private equity funds at an unprecedented pace,” Mwangi said.

“However, behind the term sheets and handshakes, a quietly damaging pattern is emerging. Entrepreneurs are entering cross-border partnerships without appreciating that a poorly structured deal can transfer effective control of a business long before the founder realises what has happened.”

He explained that many SMEs routinely surrender equity leverage, governance rights and intellectual property ownership through agreements they either fail to negotiate adequately or do not fully understand.

According to him, the problem is often not the investment itself but the legal framework supporting it.

Mwangi cited a recent High Court ruling involving minority shareholders who accused majority shareholders of oppressive conduct, including exclusion from governance, insider dealings and breaches of fiduciary duty.

However, the court found that the parties had previously signed agreements requiring disputes to be resolved through international arbitration in Mauritius.

“In effect, they had unknowingly signed away their preferred route to justice at the very moment they were celebrating the deal,” he said.

He noted that the ruling reflects a broader trend in cross-border transactions where foreign investors typically arrive with experienced legal advisers and sophisticated transaction teams, while local entrepreneurs focus mainly on valuations and funding timelines.

“The court reaffirmed that carefully drafted shareholder agreements can override other governance instruments entirely and channel disputes into foreign arbitration forums,” Mwangi added.

Beyond dispute resolution, he identified intellectual property ownership as one of the most significant yet overlooked risks in cross-border partnerships.

“Many founders contribute far more than capital. They bring proprietary software, customer networks, operational systems, local market knowledge and brand equity developed over many years,” he explained.

“Where agreements fail to clearly define ownership and protection of these assets, they can gradually migrate into offshore holding companies or joint venture structures controlled elsewhere.”

He warned that the consequence is often a founder who continues running the business but no longer owns its most valuable assets.

Mwangi also referenced another court decision highlighting how minority shareholders can be disadvantaged where governance structures are weak or poorly designed.

According to him, the judiciary is increasingly emphasizing that governance rights should not be viewed as legal technicalities but as essential tools for business survival.

“The message from the courts is becoming clearer. Governance rights are not legal luxuries. They are commercial survival tools,” he said.

He urged founders to treat legal structuring as strategic business infrastructure rather than an afterthought.

Before signing any cross-border partnership agreement, Mwangi advised entrepreneurs to carefully scrutinize provisions relating to board composition, voting rights, dispute resolution mechanisms, intellectual property ownership, anti-dilution protections and exit clauses such as drag-along and tag-along rights.

He further stressed the importance of understanding the governing law of a transaction.

“Just because a deal is negotiated and signed in Nairobi does not mean Kenyan law will apply. Many agreements default to English or Mauritian law, and that can have major implications when disputes arise,” he noted.

Mwangi argued that strong governance frameworks should not be seen as barriers to investment.

“Robust legal structures do not deter investors. In fact, sophisticated investors often prefer businesses with well-defined governance systems because they reduce uncertainty and the likelihood of future conflict,” he said.

He concluded that while investment capital remains important for growth, founders must pay equal attention to the contractual details that determine who ultimately controls the business.

“Capital may build a business, but control is preserved in the fine print,” Mwangi said.

“The most dangerous words in business remain, ‘We’ll sort it out later.’ By the time disputes emerge, the agreements have already allocated power, rights and remedies, usually with ruthless precision.”

He added that in today’s increasingly interconnected economy, the entrepreneurs most likely to succeed will not necessarily be those who raise the largest amounts of capital, but those who negotiate the strongest protections before signing on the dotted line.