The Kenyan acquisition finance market is a dynamic space fuelled by a combination of local and international financial institutions. Foreign financial institutions will usually be prevalent in big ticket deals involving large and mid-market companies. Private credit funds are also increasingly providing acquisition financing. Local banks play a much smaller role.

A weakened shilling and increased inflationary pressure coupled with global economic downturn post the COVID-19 pandemic has meant that Kenyan companies continue to be undervalued but it has still not resulted in an uptick of acquisitions by corporations or management. The lack of strong cash reserves by corporates, high interest rates by local banks and a preference for equity investment by private equity buyers has also driven contributed to this.

English law is the customary choice for transactions involving foreign financial institutions and private credit funds. On the other hand, if the funds originate from local banks, Kenyan law will likely govern the financing documents. While the financing transactions will be governed by English law or the law of the financier’s jurisdiction, the security documents will usually be governed by Kenyan law.

Foreign financial institutions or private credit funds will usually use LMA facilities agreements or simplified versions of it based on their own established standard and practice. Most local banks will typically not use LMA and instead utilise simple facility letters.

Kenya has two official languages: English and Swahili. However, there is no requirement in Kenya regarding the language used in acquisition finance documentation and they will invariably be drafted in English.

Legal opinions will normally be required as a condition precedent to completion. The specific focus of these legal opinions can vary depending on the transaction, but they generally address the following:

• Validity and Enforceability – confirmation that the financing documents constitute legally binding agreements and enforceable under the relevant jurisdiction.
• Borrower’s Capacity – confirmation that the borrower has the legal authority to enter into the agreements and in the case of a company, has taken the requisite action including passing resolutions authorising entry into the agreements.
• Security Interests – confirmation on the effectiveness of Kenyan law security documents in securing the financing.

Local banks often differ from foreign financial institutions and private credit funds in that they sometimes do not require legal opinions as part of the financing.

The complexity of the transaction will depend on the nature of the transaction and its parties. Corporate acquisitions will normally be financed through debt by drawing down on existing facilities or obtaining new facilities for the acquisition. Where a leveraged transaction is utilised, it will usually be a more complex structure.

Senior loans will usually be provided by the foreign financial institution or local bank. Local banks will normally only want to participate in an acquisition finance as senior lenders despite the amount of financing provided. These loans will typically be secured, and the senior lenders will have priority over other debtors. These ranking arrangements will normally be agreed contractually in an intercreditor agreement or by way of security structure granting the junior lenders less favourable security.

Mezzanine debt typically sits behind senior debt in the financing hierarchy such that mezzanine lenders often receive a second claim on the assets of the SPV created for the acquisition, and potentially on the target company’s assets as well. A typical structure will normally be a term loan that is subordinated in terms of priority payment and security behind the senior debt. It is not common to have mezzanine debt in Kenya structured with an equity kick or payment in kind.

The use of bridge loans is possible, but their usage is not widespread. They will normally be structured as unsecured short-term loans, typically lasting up to six to twelve months, and will usually be refinanced as senior long-term debt once the transaction is completed.

High-yield bonds seldom used for acquisitions in Kenya. The issuance process for these bonds normally requires regulatory approval which may result in delays and unwanted public disclosures making them a less attractive tool compared to other financing methods used in deal-making.

Private placement and loan notes are not usually used in Kenyan acquisition transactions.

The preference for local bank is asset-based lending for all types of lending including acquisition finance. Foreign financial institutions and private credit funds tend to be more flexible in their approach and it is common to arrange for financing against receivables and other movable assets. The structure will depend on the nature of assets although fixed asset charges are common with local banks.

Intercreditor agreements set out how to make decisions, the order of repayment of principal, interest, costs and fees between different lenders in an acquisition finance transaction. In Kenya, the local lenders prefer a pari passu approach in terms of ranking of the securities created by the borrower.

Where local banks are involved, it is common that a security trustee will not be used but rather different banks will take security over the assets of a borrower and then work out the appropriate ranking in an intercreditor agreement. Alternatively, different asset classes will be carved out to be secured to specified lenders.

Foreign financial institution-led transactions typically involve a senior lender (usually a prominent foreign bank), junior lenders, hedge counterparties who mitigate risk through financial instruments, mezzanine lenders who occupy a risk-reward position between senior and junior lenders and security trustee who acts as a neutral custodian of collateral.

Typical elements include:

• Subordination – a clear hierarchy is established, dictating that junior or subordinated lenders have their claims satisfied only after senior lenders are repaid in full.
• Payment Waterfall – The order in which creditors receive their entitlements (principal, interest, fees) in the event of enforcement of security on the borrower’s assets is outlined. This ensures a predictable flow of funds and avoids potential disputes over disbursement. It is worth noting that in the case of a Kenyan borrower, certain preferential debts should be paid prior to that of secured creditors.
• Security Enforcement and Consultation Procedures – The rights of each creditor group regarding the enforcement of security (collateral) pledged by the borrower(s) in the event of default are defined. This clarity minimises potential conflicts during a distressed scenario.

These are typically not used in acquisition transaction in Kenya.

The use of hedge counterparties is seldom used in Kenyan acquisition finance transactions.

Acquisition finance transactions in Kenya are normally secured. The specific type of security is tailored to each unique deal, considering factors such as the financing size, number of lenders involved, industry specifics, type of borrower, the applicable law and the overall complexity of the transaction.

Charges

Charges are the main form of security used in acquisition financing. A charge creates an encumbrance over general assets or a specific asset. This grants the lender (secured party) a right in the asset(s) to either seize and sell the asset to recover the outstanding debt if there is default by the borrower.

There are two primary types of charges:

Fixed charge

This attaches directly to a clearly identified asset at the time the charge is created restricting the chargor from dealing with that asset. The lender gains significant control over this specific asset and the chargor is required to deposit with the lender the original document of title or ownership in relation to the asset.

Floating charge

This acts as a broader security interest, encompassing all or a category of assets or a specific asset and the chargor is permitted to deal with those assets in the ordinary course of business without permission from the lender until there is an event that causes the charge to change into a fixed one.

A further important difference between a floating charge and a fixed one is that the floating charge that is a “qualifying floating charge” over all or substantially all the assets of the chargor entitles the holder to the right to appoint an administrator.

Charges can be applied to a wide range of assets relevant in acquisition financing:

Real estate

This category includes security interests over land and buildings, and other attached property such as plant and machinery can be secured through a fixed charge. It is uncommon to take a legal or equitable mortgage over land.

Movable assets

This category includes:

• Shares – A fixed charge can be used to secure the lender’s interest in the target company’s shares.
• Inventory – Both fixed and floating charges can be applied depending on the specific circumstances surrounding the inventory. This usually takes the form of a debenture.
• Receivables – A floating charge in the form of a deed of receivables can be used to secure a company’s outstanding receivables.
• Intellectual Property (IP) – Intangible assets like patents, copyrights and trademarks can be secured through a floating charge.
• Bank Accounts – Cash deposited in specific bank accounts can be secured using a floating charge or a fixed charge in the case of a blocked account.

Pledge

A pledge involves physically delivering possession of an asset or a document of title relating to such asset to the creditor as security for a debt. While the borrower retains ownership, the creditor holds the asset until the debt is repaid. Pledges are only suitable for assets that can be physically delivered, such as share certificates, documents of title or bearer securities.

Assignment

An assignment involves transferring ownership rights in intangible property (assets that cannot be physically held) from the borrower to the lender. This method is used for assets like receivables, where the lender gains the legal right to collect outstanding payments directly from the debtors.

A legal assignment is an assignment that meets certain legal criteria. The existing legal framework does not expressly provide for the formalities for a legal assignment. Previously, the Transfer of Property Act 1882 of India (now repealed), provided that a legal assignment was effective if: (i) it was in writing (not necessarily a deed); and (ii) express notice was given to the obligor. However, the Movable Property Act provides for the registration of notices in relation of security rights in movable assets, including intangible property. Upon registration, third parties would have notice of the security right and security right (such as an assignment) would be effective against the third parties.

In general, an assignment which did not comply with these requirements was as an equitable assignment.

Following a legal assignment, only the assignee can pursue the claim and the assignee is regarded as being the sole owner of the property assigned. In an equitable assignment, the equitable assignee cannot bring an action in its own name against the third party, but must join the assignor as party to any action against the third party.

There is generally no prescribed form that the charge should take expect in the case of land charges where a particular form must be used, and which has been further refined with practice to include certain prescribed requirements and protections for lenders. In acquisition transactions, it will typically be the case that the lender will take a debenture containing fixed and floating charges over all of the assets of the chargor.

Shares in a public listed company can be pledged by lodging a duly completed Securities Pledge Form (CDS5) with the Central Depository and Settlement Corporation (CDSC).

Prior to registration, the applicable security document will usually need to be stamped with stamp duty or marked as exempt by the Collector of Stamp Duty. Please see Section 8 (Stamp Taxes).

Registration

Different types of securities are registrable at different registries in Kenya. These are the Companies Registry, Lands Registry and Collateral Registry.

Companies Registry

The Companies Act, 2015 (“Companies Act”) mandates registration of charges on specific assets with the Companies Registry. These assets include:

• land or any interest in land;
• uncalled share capital;
• book debts;
• company’s property or undertaking;
• ships or aircraft;
• goodwill; and
• intellectual property.

Charges over these assets must be registered within 30 days of being created failure to which the charge is void against the administrator, liquidator or a creditor. If the charge is created by a party that is outside Kenya, the charge must be registered within 21 days from the date which the charge is received in Kenya.

Registration of the charges involves submission of the original signed and stamped charge to the Companies Registry together with a signed statutory form setting out the details of the charge. The registration fee at the Companies Registry is determined by the amount secured by the charge and ranges from KES2,000 – KES14,000 (approximately USD16.70 – USD116.70).

Lands Registry

Charges over real property require registration at the relevant Lands Registry. While there is no specific time limit, registration determines effectiveness and priority among charges and it will therefore normally be registered as soon as possible after stamping with stamp duty.

Currently, the Ministry of Lands and Physical Planning has embarked on the exercise of migrating titles issued under repealed land regimes to a unitary land registration regime as provided the Land Registration Act 2012. In this regard, various registered proprietors of land parcels situated in Nairobi have applied for and obtained converted titles upon surrendering their existing title documents. With the converted titles, transactions over land including charges are now being conducted on the digital platform known as Ardhisasa.

For converted titles, the registration of charges over land is achieved by making an application for registration of the charge on Ardhisasa. This entails uploading copies of the signed charge and the title. The original title is then submitted physically to the land registry for the registration of the entry relating to the charge against the original title. Stamp duty assessment and payment is processed electronically.

In the case of unconverted parcels of land, registration entails submitting to the land registry, the original charge document stamped with full duty as assessed by the collector of stamp duties together with two counterparts of the charge stamped with nominal duty, the real property’s original title document, stamp duty payment slips, a completed prescribed booking form, and payment of the prescribed registration fees.

A charge on real property also requires registration at the Companies Registry as mandated by the Companies Act.

Collateral Registry

The Movable Property Security Rights Act, 2017 provides for the registration of security interests over certain movable assets (tangible or intangible) with the Collateral Registry. This online registry is accessible through the government platform “eCitizen”.

Registration involves completing an online form specifying details like parties involved, particulars of the movable assets comprising the collateral, secured amount, and other relevant information such as consent of the grantor being obtained and the period for which the security right is valid. The initial period for validity is ten years.

Upon submission of the form, an initial notice with a unique reference number will be generated on the eCitizen platform and the security interest is considered registered.

In addition to the registration of securities over various movable assets at the Companies Registry, it is common to also register such security rights with the Collateral Registry since registration of the initial notice is what creates priority.

The provisions set out in 5.5 Financial Assistance and 5.6 Other Restrictions apply to the provision of upstream security.

Financial assistance to acquire the shares of the target or to reduce or discharge a liability incurred for the purposes of that acquisition is restricted by the Companies Act. The restrictions apply in the following instances:

• if the target is a public company, neither the public company nor any of its subsidiaries (whether public or private) may give financial assistance; and
• if the target is a private company, a subsidiary that is a public company may not give financial assistance.

In addition to the financial assistance rules and the registration requirement, an assessment of corporate benefit must be made and will usually be recorded in the resolutions of the chargor. Where the directors do not have the power or mandate to approve a particular transaction (for example where the shareholders have reserved the right to approve borrowing of a particular amount) then it would fall on the shareholders to resolve to approve that transaction. 

Enforcement of security in acquisition finance hinges on the type of asset that is subject to security. Transaction documents, and in some instances statutory provisions, dictate the process and the triggers and manner of enforcement.

Real Property

The Land Act 2012 and Land Registration Act 2012 govern enforcement of charges over land. The secured party (chargee) can only initiate proceedings after a one-month default by either the borrower (in the case of a charge that secures facilities advanced to a third party) or the registered proprietor of the land (chargor).

A formal notice demanding rectification of the default must then be served on the chargor, the borrower and such other persons as may require to be notified such as the spouse of the chargor or any lessee or tenant on the land.

If the default persists for two months (or three months for payment defaults), the chargee gains several options:

• Sue the chargor/borrower for the outstanding amount – this is a straightforward legal action to recover the owed sum.
• Appoint a receiver of income – a court-appointed receiver manages the property’s income to settle the debt.
• Lease the land – the chargee can generate income by leasing the property.
• Take possession of the land – this grants the chargee direct control over the property.
• Sell the land – the secured party can sell the land privately at the market price as determined by a valuer or at a reserve price which should not be less than 75% of the market value of the property in the case of a public auction, subject to specific notice and valuation requirements.

Movable Assets

The Movable Property Security Rights Act offers similar enforcement rights to the chargee holding security over movable assets (cars, equipment, etc) as those available under the Land Acts. These rights include:

• Sue for the owed amount – Similar to real estate, legal action can recover the outstanding debt.
• Appoint a receiver of income – A court-appointed receiver manages income generated by the movable asset to settle the debt.
• Take possession of the movable asset – The secured party can take direct control of the asset.
• Sell the movable asset – The chargee can sell the asset privately or through public auction.
• Any such other enforcement option as provided in the security agreement.

Debenture

When a debenture is used for security, its terms typically outline the enforcement procedure. If it is a floating charge over all or substantially all of the assets of the chargor (a “qualifying floating charge”), the lender will have the ability to appoint an administrator without the approval of the court to enforce its security. The entry into administration also triggers a moratorium that prevents enforcement of creditor claims. The administrator is tasked with rescuing the chargor or to achieve a better outcome for the creditors of the chargor than if the company were wound up.

Guarantee and Indemnity

A guarantee from a third party requires a formal demand notice based on the Deed of Guarantee and Indemnity. If the principal obligor fails to fulfill the obligation under the facility documents, the guaranteed party can initiate a lawsuit to enforce the guarantee. The document will normally be drafted such that a lender can pursue the guarantor without first pursuing the principal debtor in the event of default.

Security over Shares

Enforcement of a charge over shares involves utilising a power of attorney and the blank undated share transfer form duly executed and provided by the borrower upon perfection of the security interest.

These documents allow the secured party to transfer the shares to itself or a designated nominee. Following the transfer, the share transfer form needs to be stamped, and the Companies Registry must be notified of the new ownership. Finally, the company secretary of the share-issuing company updates their records to reflect the secured party’s ownership interest.

In an acquisition finance transaction, guarantees are typically provided by the target company and other material group companies. Such guarantees may be supported by securities over the guarantor assets or indemnification obligations on the guarantor.  There are no substantive differences between Kenyan law-governed guarantees and those used in other common law jurisdictions.

The restrictions which apply to the provision of security (see 5.5 Financial Assistance and 5.6 Other Restrictions) also apply to guarantees.

There is no requirement for guarantee fees in Kenya.

The Insolvency Act, 2015 (“Insolvency Act”) provides a narrow window that a court can use to lower the priority of a claim of a creditor and delay its payment until other creditors are paid. In this regard, the High Court of Kenya has discretion to order their claim be subordinated where (a) there is wrongful or fraudulent trading and (b) the party is also a creditor. However, this requires (i) a creditor to be so closely involved they are treated as a shadow director, (ii) the company to enter liquidation or administration and (iii) the high burden of proof for wrongful or fraudulent trading to be satisfied.

Under the Insolvency Act, there are certain historical transactions that, if they occurred during a certain period, may be challenged in court upon application by either the administrator, liquidator or official receiver and set aside. These include:

Transactions at an Undervalue

This occurs if a company gives away assets as a gift or enters into an agreement where it receives significantly less in return than the value it provides. The Insolvency Act allows courts to reverse such transactions if they took place within (i) two years before the company’s insolvency proceedings begin, or (ii) between the application for and making of the order for appointment of the administrator, or (iii) the time between the filing by a creditor with the court of a notice of appointment and the making of the appointment of the administrator. In addition, the court will only make an order for setting aside if satisfied that the transaction was not in good faith and was not for the commercial benefit of the company.

Preferences

A preference occurs when a company prioritises one creditor or surety/guarantor of the company’s debts over others during or preceding insolvency. The Insolvency Act allows courts to claw back preferential transactions for unrelated creditors if they were made within six months of insolvency. This period extends to two years for connected parties (eg, affiliates). For the claw back to occur, the company must have been insolvent at the time of the transaction or become insolvent as a direct result of it and must have entered into the transaction within the period specified in the Act.

Extortionate Credit Transactions

This refers to credit transactions with grossly exorbitant payment terms in respect of the credit provided to the company or credit transactions which go against fair dealing principles. The Insolvency Act allows the court to set aside such transactions and the looking back period is three years prior to the onset of insolvency proceedings.

Invalid Floating Charge

A floating charge created by a company may be invalid if two conditions are met:

• First, the charge must be created within a suspicious timeframe before insolvency, either two years for someone connected to the company or twelve months for any other creditor. Exceptions exist for specific situations during administration.
• Second, for charges created outside the connected party window (ie, within twelve months of insolvency), the company must be demonstrably unable to pay its debts at the time of the charge creation, or the transaction itself must have caused this inability to pay.

Please note that even if deemed largely invalid, some portions of the charge might be salvageable, such as the value of fresh money or goods/services provided to the company, or any debt reduction that occurred concurrently with, or after, the charge creation. Interest on these valid portions can also be claimed.

The Stamp Duty Act, Chapter 480 of the Laws of Kenya (“Stamp Duty Act”) specifies instruments that are chargeable with duty as well as instruments that are exempted from stamp duty upon the relevant application for stamp duty exemption being approved by the Collector of Stamp Duties.

Foreign law governed agreements such as loan and intercreditor agreements, do not require stamping to be enforceable in Kenya, but it is not unusual for parties to have them stamped. Where such documents are to be stamped the duty payable is nominal, typically around KES200 (USD1.70).

Other documents subject to Kenyan law such as debentures, charges over land and guarantees require stamping with stamp duty within 30 days of the date of execution of the documents or within 21 days after receipt in Kenya where they are executed outside Kenya. Late stamping of documents attracts a penalty of 5% for every quarter that the stamp duty remains unpaid, although the aggregate the penalty that accrues should not exceed twice the stamp duty that was initially payable. The rate for stamp duty on security documents such as a debenture or land charge is 0.1% of the amount secured but exemptions from duty do exist, for example where the charge is over movable assets.

Kenyan law imposes a 15% withholding tax on interest payments made by a Kenyan borrower. This tax is not applicable to local banks and it is exempt for a foreign lender that is financing projects in energy, water, roads, ports, railways or aerodromes.

The thin capitalisation rules in Kenya have changed materially so that interest is only deductible to the extent that the borrowings are used for the purpose of trade. Such deductions are limited to a maximum of 30% of Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). These interest deduction provisions do not apply to entities such as local banks, listed holding companies and certain categories of manufacturers.

Several industries in Kenya, such as telecommunications, banking, insurance, aviation and energy, are subject to regulatory oversight. Acquiring a company in a regulated sector often requires approval from the relevant regulatory body if the acquisition results in a “change of control”.

In addition, depending on the size and potential market dominance of the proposed acquisition, national or regional competition authorities may have jurisdiction and require clearance before the deal can proceed.

When significant or lengthy regulatory approvals are required, it would be prudent for the parties to an acquisition finance transaction to consider the potential impact of regulatory approvals on the sources of financing and structure for the transaction.

The Capital Markets (Takeover and Mergers) Regulations, 2002 (“Takeover Regulations”) govern acquisitions of listed companies in Kenya. Takeover of listed companies are typically arranged as contractual offers rather than schemes of arrangement.

The Takeover Regulations place specific requirements on bidders, particularly concerning their financial capability to complete the takeover.

“Certain Funds” Concept

The bidders must have “certain funds” to secure a successful takeover. This translates to a demonstrably strong financial position to fulfill the obligations of the offer, should it be accepted by the target company’s shareholders.

Bidder Requirements

• Financial Capacity Proof – Bidders cannot announce an offer without reasonable belief in their ability to meet its financial commitments. They must demonstrate sufficient funds to their financial advisor to ensure the offer’s viability.
• Offer Document Disclosure – The bidder’s offer document, submitted to the Capital Markets Authority (CMA), must include a statement assuring shareholders that adequate funds are available to complete the takeover and pay them in full upon acceptance of the offer.

Companies are required to maintain a register of the ultimate beneficial ownership of shares of persons holding at least 10% of the issued shares of the company (whether directly or indirectly) or exercising at least 10% of the voting rights of a company (whether directly or indirectly or having the power to appoint or remove a director and exercising significant influence over the company such as participating in the finances and financial policies of the company.

The Companies Act was further recently amended to provide for recognition of nominee directors. These are individual or legals entities that routinely exercises the functions of directors in a company on behalf of and subject to the direct or indirect instructions of directors. Companies are now required to maintain a register of nominee directors, and notify the Registrar of Companies of any change to register.

In addition, a private company or company limited by guarantee that does not have either a company secretary or a resident director to appoint a contact person to maintain copies of records relating to directorship, shareholding, beneficial ownership and any other information required to be kept by the company under the Companies Act. The contact person must be a natural person with a permanent residence in Kenya.