High Court Clarifies The Law on Nominee Shareholder Agreements, Profit-Sharing Obligations, and Directors' Duties in Investment Contract Dispute.

Waboga David
Sep 27
14 min read

Introduction

The principle governing nominee shareholder agreements is well-established in corporate law; such agreements are private contracts between parties that designate a nominee to hold shares on behalf of beneficial owners, but they do not inherently bind the company unless explicitly ratified by it. This principle ensures that while beneficial owners may hold equitable interests, their rights are enforceable against the company only upon formal acknowledgment, preserving the company’s autonomy in recognizing shareholders listed in its register.

The law on investment agreements further clarifies that investors are entitled to returns as stipulated in the contract, provided they fulfill their obligations. These returns may take the form of profit-sharing arrangements, where payments are contingent on the company’s profitability, or guaranteed returns, which are fixed and independent of financial performance. The enforceability of such agreements hinges on clear contractual terms, the parties’ conduct, and the company’s capacity to deliver the promised returns.

Directors, as fiduciaries, owe duties of care, loyalty, good faith, and disclosure to the company. Their decisions, particularly regarding profit distribution, are protected by the business judgment rule, which presumes decisions are made in good faith, with due care, and in the company’s best interests. However, this presumption is rebuttable in cases of self-dealing, bad faith, or failure to fairly consider profit distributions, especially in closely held corporations where conflicts of interest may arise.

The High Court of Uganda, in the case of Chen Jian Wen & Others v. Uganda Bangcheng Investment Co. Ltd. & Another, has provided significant clarity on these principles. The court addressed a dispute involving Chinese nationals who invested in a Ugandan mining company under a nominee shareholder agreement and a subsequent investment agreement. The decision clarifies the enforceability of nominee agreements, the nature of profit-sharing obligations, the standards for directors’ duties, and the evidential requirements for proving profit entitlement in civil cases.

Facts

The plaintiffs, Chinese nationals, claimed that in 2016, the 2nd defendant, Li Jianguang, a director of the 1st defendant, a Ugandan private limited liability company engaged in stone mining and quarrying, approached them in China with a business proposal.

They were enticed to invest in the 1st defendant’s business with a promise of regular profits.

Between 2015 and 2019, the plaintiffs allegedly remitted CN¥ 20,383,627 (approximately US$ 2,861,535.09) through intermediaries for land acquisition, machinery purchases, and operational costs, including salaries.

On April 28, 2015, a Nominee Shareholder’s Agreement was signed with Chen Jianfang, a majority shareholder, designating the plaintiffs as beneficial owners of 71% of the company’s shares.

This arrangement was formalized on September 25, 2019, through an Investment and Share Agreement, guaranteeing the plaintiffs 71% of the company’s profits. The plaintiffs received partial payments between 2018 and 2020, but alleged that the defendants ceased communication and profit remittances despite the company’s profitability.

The defendants denied receiving funds, claimed the agreements were invalid or unenforceable, and asserted that the company’s assets were financed through loans and equity, not plaintiff contributions.

Issues

Whether the plaintiffs performed their obligations under the contract.
Whether the defendants are liable to pay the plaintiffs' profit and return on investment under the contract.
Whether the plaintiffs are entitled to the reliefs sought.

Submissions

Plaintiffs’ Submissions

Counsel for the plaintiffs argued that the Investment and Share Agreement of September 25, 2019, was valid and binding, preceded by a Nominee Shareholder’s Agreement dated April 28, 2015.

They submitted evidence of CN¥ 21,835,000 remitted for land, machinery, and salaries, supported by bank statements, sales agreements, and shipping documents. The plaintiffs contended that the 2nd defendant, Li Jianguang, instructed remittances through intermediaries due to his inability to operate bank accounts, citing his conviction for dishonesty in China.

They argued that the defendants’ partial payments from 2018 to 2020 estopped them from denying the agreement, and the company’s profits entitled the plaintiffs to 71% of CN¥ 316,776,279 (approximately US$ 44,470,321.15).

Defendants’ Submissions

Counsel for the defendants argued that the Investment and Share Agreement was contingent and void due to the plaintiffs’ failure to pay the agreed sums by September 25, 2019, as required by Clause 2.3.

They denied receiving funds, asserting that the company’s assets were acquired through Bank of Africa loans totaling US$ 4,216,199.69.

The defendants claimed the agreements lacked legal validity, were not signed by authorized officers, and were unenforceable in Uganda.

They further alleged that the 2nd plaintiff was indebted to the 2nd defendant and fabricated claims to mislead the court.

Court’s Findings

On the First Issue

The court observed that in a claim for returns on a private investment agreement, the plaintiffs must prove on a balance of probabilities the following;

(i) a valid investment agreement;

(ii) proof of their investment;

(iii) the company’s failure to provide the agreed-upon returns;

(iv) evidence that those returns were within the company’s control to deliver; and

(v) quantifiable damages resulting from the breach of contract.

The court reaffirmed that a contract may be oral, written, or implied from conduct, stating, A contract may be oral or written or partly oral and partly written or may be implied from the conduct of the parties (see section 10 (2) of The Contracts Act).

a. The existence of a valid investment agreement

The court clarified that the Nominee Shareholder’s Agreement of April 28, 2015, made the plaintiffs beneficial owners of 71% of the shares held by Chen Jianfang, quoting key clauses; "Party A holds 71% equity of Uganda Bangcheng Investment Co. Ltd. and entrusts Party B as the nominal holder of the 71% equity... Party B promises to transfer all the investment income... to Party A."

It established that while companies are not obligated to recognize such private agreements, ratification binds the company; "Ratifying a nominee shareholder’s agreement makes it a legally binding contract for the company..."

The court observed that the Investment and Share Agreement of September 25, 2019, ratified the earlier agreement, noting the consistent 71% shareholding; "The fact that this agreement was signed in furtherance of the terms of the Nominee Shareholder’s Agreement of 28th April, 2015 is corroborated by the fact that the total shareholding of the plaintiffs... is maintained at 71%..."

The court clarified the distinction between inferred and implied terms; "There is a distinction between inferred terms on the one hand, which a court concludes were agreed between the parties... and implied terms on the other, which were not, in fact, agreed, but would have been agreed had the parties turned their minds to it."

It established that the 2019 agreement inferred ratification; "The consistency between the two agreements, taken alongside the conduct of the parties, before and after both contracts establishes an inferred agreement for the latter to formalise the initial nominee agreement."

The court reaffirmed that directors' actions can bind the company; "The 1st defendant Company held out the 2nd defendant as the person who was managing its day-to-day business and, therefore, had authority to enter, on its behalf, into contracts..."

It clarified that even without express authority, ratification occurred; "By executing the “Investment and Share Agreement” of 25th September, 2019, the defendants ratified the “Nominee Shareholder’s Agreement of 28th April, 2015."

The court observed that the suit's cause of action arose in Uganda, making the signing location inconsequential.

b. The plaintiffs’ status under the Investment and Share Agreement

The court clarified that the plaintiffs remained beneficial owners, not registered shareholders; "A beneficial owner of shares whose name does not appear in the register of shareholders of the company cannot be a “shareholder”..."

It established that beneficial owners cannot directly claim dividends but can enforce returns contractually; "The obligation of the company of payment of dividend is towards the member and not towards the beneficial owner."

The court observed that Chen Jianfang's share transfers without consent breached the agreement, but this did not affect the current issue.

c. Proof of investment by the plaintiffs, made under the agreement

The court established specific investments: remittance of CN¥ 2,600,000 for land acquisition, proven by timing and lack of defendant rebuttal; "On the balance of probabilities... the plaintiff’s explanation is the true version."

It clarified direct transfers to Li Kangyuan and intermediaries, supported by bank statements.

The court observed the 2nd defendant's Chinese judgment and blacklist status, explaining intermediary use.

It established machinery purchases totaling CN¥ 4,835,000, with detailed shipping documents; "The plaintiffs are in possession of originals of shipping documents showing that... they purchased... and shipped... an assortment of quarry machinery..."

The court clarified salary payments, supported by contracts and statements.

It established that defendants' loan evidence corroborated plaintiffs' prior contributions; "The defence version... instead corroborates the testimony... that... the quarry was functional by April, 2016..."

The court observed ambiguity in the 2019 agreement; "These expressions considered in their totality, create ambiguity in the contract..."

Applying the objective test, it clarified, "The proper construction of this contract is that it was fully executed by the plaintiffs as at the date of signing..."

The court established corroboration by subsequent payments; "Had the plaintiffs not made any contribution... there would not be any legal basis for these payments."

It reaffirmed acceptance by conduct; "By the defendants’ conduct, there was clear acceptance of the terms..."

In conclusion, the court held; "This issue is answered in the affirmative; the plaintiffs performed their obligations under the contract."

Court’s Findings on the Second Issue

On whether the defendants are liable to pay the plaintiffs' profit and return on investment under the contract. The court observed that liability arises from investment agreements promising returns; "The liability to pay a profit and return on investment under a contract depends on the specific terms of the agreement and the applicable laws. It is a general principle of the law of contract that once one party to a contract performs, that party is entitled to the benefits owed to that party under the contract."

The court reaffirmed that Clause 2.4 of the Investment and Share Agreement guaranteed shareholder rights based on ratios; "In essence, the Contract was an executory contract on the side of the defendants in which performance by the plaintiffs obligated the defendants to grant them a return on their investment in those specified percentages."

d. Nature of the return claimed; guaranteed return, assured return or profit sharing

The court clarified the types of returns; "Courts determine the nature of a return by interpreting the specific language of the agreement to understand the parties’ intent, considering whether the return is a fixed legal promise, a contingent obligation, or a sharing of variable profits."

It established that assured returns are conditional; "Assured returns are market-based promised returns that are not guaranteed. They are in the nature of a conditional obligation..."

The court observed that guaranteed returns are fixed; "Guaranteed returns offer a fixed, predetermined profit, providing safety and predictability..."

It clarified that the agreement was profit sharing; "Clause 2.4... is in the nature of an investment in the business’s success without a guaranteed or assured return."

The court established; "I find that the arrangement between the parties in the instant case is a profit sharing arrangement, where the return amount is not fixed but depends on the 1st defendant company’s profitability."

e. Evidence that the return claimed was within the company’s capacity to deliver

The court observed the need for proof; "The plaintiffs must provide evidence to show that the 1st defendant company had the necessary resources, capabilities, or control over the factors required to achieve the stated returns."

It clarified relaxed proof standards; "Proof in these cases need not be exact... all that is necessary in order to prove the capacity to pay returns is to furnish some reasonable basis or data on which to calculate them..."

The court established the company's profits from plaintiffs' evidence; "The total profit earned from the year 2016 to 2021 is CN¥ 96,670,024... Out of the total profit earned, the plaintiffs claim to be entitled to CN¥ 224,991,158 as their due share."

It observed defendants' disruptions but found plaintiffs' evidence reliable; "The evidence produced by the plaintiffs therefore collectively paints a picture of the 1st defendant company’s financial strength... It shows... that the company was equipped to fulfil its obligation to process and pay a return on investment."

a) The claim for dividends

The court clarified dividend requirements; "Dividends must be paid out of profits... A dividend is declared out of the surplus in the profit and loss account and out of profits of the financial year in which it is sought to be declared."

It established no unconditional right; "Shareholders generally do not have an unconditional right to receive a dividend... unless the dividend has been properly declared by the company’s board of directors."

The court observed; "There being no evidence of a dividend having been declared by the 1st defendant, there is no basis for the plaintiffs to claim a dividend."

b) The claim for wrongful suppression of dividends

The court reaffirmed directors' duties; "Directors are obliged to give genuine and regular consideration to the question of whether the company’s profits should be distributed to shareholders..."

It clarified judicial reluctance; "Courts have been hesitant to interfere with directorial discretion... Courts avoid being mired down in rehashing decisions that are inherently subjective..."

The court established the business judgment rule; "Under this standard, the Court will uphold the decision of a director or the board as long as it was made;

(i) in good faith,

(ii) with the care that a reasonably prudent person would use, and

(iii) with the reasonable belief that the director or the board was acting in the best interests of the corporation."

It further observed that "Where directors of a Company do not properly consider the payment of dividends... the Court may hold them in breach of their duties."

c) The claim for a return on investment

The court clarified; "A claim for a share of variable profits under a predetermined rule or pre-agreed-upon formula... does not depend on a company’s formal dividend declaration."

It established a contractual obligation; "The contract created an independent obligation for the 1st defendant company that does not require a separate declaration of a dividend to be enforceable." and observed, "The contract in effect gave the plaintiffs the right to share in the profits of the 1st defendant without necessarily granting them an ownership stake in the company."

f. The company’s unjustified failure to provide the agreed-upon returns

The court reaffirmed directors' duties; "Directors owe to the corporation the duty of care, the duty of loyalty, the duty of disclosure, and the duty of good faith."

It clarified the intrinsic fairness standard; "The intrinsic fairness standard is applied. This standard requires that the directors prove the decision not to pay a return on investment was fair and they dealt fairly with the investors..."

The court established that; "In the instant case, the plaintiffs contend that even though over the period of the last eight years which has been marked by a considerable accumulation of profits, no return on profits has been paid to them by the 1st defendant company, yet there is no proven intent on the part of the directors to utilise the accumulated profits for proper re-investment."

Court’s Findings on the Third Issue

On whether the plaintiffs are entitled to the reliefs sought. The court observed that in profit-sharing claims under a contractual formula, payments are from net profits; "In the case of a claim for a share of variable profits under a predetermined rule or pre-agreed-upon formula contained in a contractual agreement, payments come directly from the venture’s profits as specified in the contractual agreement. The payments are made out of the venture’s net profits, not as a guaranteed fixed amount."

The court critiqued the plaintiffs' profit calculations; "The plaintiffs’ calculation is faulty and misleading in that it is based on income rather than the profit earned by the 1st defendant. It does not take into account the 1st defendant’s operational costs and debt servicing obligations."

It established a more reliable method; "The more plausible approach in determining a company’s potential profitability is the Earnings Per Share (EPS) method which calculates how much money a company makes for every share that it issues."

The court clarified the actual profits; "The implication of the above figures is that for the period from the year 2016 to 2019 inclusive, the 1st defendant’s business profitability averaged CN¥ 16,666,666.67... The average profit per annum therefore being CN¥ 16,666,666.67, the actual profits for the years 2016 – to-date (a period of eight years and nine months is a total of CN¥ 145,833,333.36..."

It established the entitlement after deductions; "Out of this is deducted the combined acknowledged payments received by the plaintiffs in the sum of CN¥ 9,010,000... The plaintiffs, therefore, are entitled to CN¥ 94,531,666.70 as the outstanding return on their investment."

g. Interest on the delayed payment of returns

The court observed; "Under section 26 (1) of The Civil Procedure Act, where interest was not agreed upon by the parties, the Court should award interest that is just and reasonable."

It clarified the purpose; "Interest is a standard form of compensation for the loss of the use of money... The amount has been outstanding since January, 2021, for which reason the plaintiffs are awarded interest at the rate of 5% per annum from 1st January, 2021 until payment in full."

h. Quantifiable damages resulting from the breach of contract

The court established; "The plaintiffs have not established... grounds upon which the 2nd defendant may be held personally liable... On that account the suit against the 2nd defendant is hereby dismissed."

It clarified general damages; "Considering that the plaintiffs have not proved any damage apart from the late payment of money due to each of them under the contract, an award of interest should compensate the plaintiffs... An award of general damages would be tantamount to overcompensation. The claim for an award of general damages is accordingly rejected."

i. The costs of the suit

The court observed, "According to section 27 (2) of The Civil Procedure Act, costs of any action... follow the event unless the Court for good cause orders otherwise. The plaintiff, being the successful party in this case, is therefore entitled to costs of the suit."

Holding

On the 1st Issue

The court held that the plaintiffs performed their obligations under the contract, as they proved the existence of a binding Investment and Share Agreement, ratified by the 1st defendant, and demonstrated their capital contributions through financial remittances, machinery purchases, and salary payments.

On the 2nd Issue

The court held that the defendants are liable to pay the plaintiffs a return on investment under the profit-sharing arrangement in the Investment and Share Agreement, as the company had the capacity to deliver such returns, and the failure to do so was unjustified under the intrinsic fairness standard.

On the 3rd Issue

The court held that the plaintiffs are entitled to a return on their investment of CN¥ 94,531,666.70 from the 1st defendant, with 5% interest per annum from January 1, 2021, until payment in full, and costs of the suit. The suit against the 2nd defendant was dismissed, and no general damages were awarded.

Key Takeaways

The court reaffirmed that such agreements are private contracts not inherently binding on the company unless ratified, but ratification can make them enforceable against the company.
The court clarified that ambiguous contract terms are resolved using the objective test, considering the parties’ conduct and background knowledge at the time of contract formation.
Evidence in Civil Cases;
The court established that in civil cases, inferences are drawn based on the balance of probabilities, selecting the most plausible explanation supported by circumstantial evidence.
The court observed that beneficial owners, not listed in the company’s register, cannot claim shareholder rights directly but can enforce investment returns through contractual claims against the nominee or company.
The court clarified that the agreement constituted a profit-sharing arrangement, not a guaranteed fixed return, where payments depend on the company's profitability rather than a fixed promise.
The court reaffirmed that shareholders have no unconditional right to dividends unless formally declared by the board, and claims for undeclared dividends require proof of wrongful suppression or breach of duties.
The court established that directors' decisions, including on dividends, are protected if made in good faith, with due care, and in the company's best interests, but this presumption is rebuttable in cases of self-dealing or bad faith.
The court observed that in closely held corporations, directors must prove the fairness of decisions not to pay returns, especially when involving potential conflicts of interest.
The court clarified that exact mathematical proof of profits is not required; a reasonable basis or data suffices, with uncertainties resolved against the defendant withholding information.
The court established that beneficial owners can enforce contractual rights to profit shares independently of formal dividend declarations, overriding company articles if specified in the agreement.
The court clarified that in contractual profit-sharing, payments are variable from net profits, not fixed, and do not require a formal dividend declaration.
The court established that profits must account for costs and debts, preferring EPS over income-based methods, and resolved uncertainties against the defendant.
The court observed that interest compensates for delayed payments at a reasonable rate (5% here) when not contractually specified, considering economic factors.
The court reaffirmed that general damages are for direct consequences but rejected them where interest suffices to avoid overcompensation.
The court reaffirmed that costs follow the event for successful parties, and personal liability requires specific proof against individuals.