At the start of the year, the Central Bank of Kenya (CBK), the regulator of banking business in the country, had projected that Kenya’s economy would grow by 6.2% in 2020, up from 5.8% in 2019. CBK has since revised this down to 3.4% as a result of the disruption caused by the global pandemic, COVID-19, while McKinsey estimates that GDP growth will decline to 1.9%. Due to the uncertainty in the financial markets and the impact of COVID-19 on most business operations and revenues, M&A activity is expected to slow down with efforts being focused on ensuring safety of employees and survival of businesses.
Economic growth will continue to be driven by the agricultural sector, small and medium enterprises, and the informal sector, which provides livelihoods to millions of Kenyans. Growth in credit to the private sector is expected, following the repeal of the interest rates cap and the lowering of the CBK Cash Reserve Ratio from 5.25% to 4.25%. The government is expected to continue driving its transformative development plan, known as the "Big Four" agenda, which is focused on the manufacturing sector, ensuring food security, and making both housing and healthcare affordable for the citizens of Kenya. It is likely that this ambitious agenda will be negatively affected by the global pandemic as resources are diverted to deal with it and its impact on the economy. The government has also been progressively undertaking policy and administrative changes geared towards improving ease of doing business in Kenya. One of the positive outcomes of the global pandemic is that both businesses and government will move faster to implement technology and the use of online services.
According to the data provided by I&M Burbidge Capital in its Annual East Africa Financial Review of 2019, there were 110 disclosed deals in the East Africa private capital markets sector in 2019, amounting to USD1.74 billion. The highest volume of these deals happened in Kenya, with 76 disclosed deals amounting to USD1.038 billion.
The latter part of 2019 was characterised by significant deals in the banking sector. The CBK continues to encourage consolidation in the banking sector through mergers in order to create bigger and more resilient institutions which can weather shocks, fund large infrastructure projects and charge affordable rates of interest. The highlight in the banking sector in 2019 was the merger of NIC Group Plc with Commercial Bank of Africa Ltd creating NCBA Group, now the third largest bank in Kenya in terms of assets. The acquisition of National Bank of Kenya Limited, a listed bank with a substantial public sector shareholding by KCB Group, also a listed bank with a government shareholding, through a share swap was also a significant transaction in 2019.
There were notable transactions in private equity concluded in 2019 such as the disposal by Centum Investment Company Plc of a controlling stake in Almasi Beverages Limited and Nairobi Bottlers Limited. Actus Equity, acting through its Kenyan subsidiary Actus Education Holding AB (Actus Holding), acquired 22.32% of the issued share capital of the Riara Group of Schools, giving Actus Holding a controlling stake.
Rubis Energie SAS (Rubis), a subsidiary of Rubis SCA, a French international firm that deals in the storage, distribution and sale of petroleum, liquefied petroleum gas, food and chemical products, was involved in the 100% acquisition of KenolKobil Plc.
There was significant M&A activity in the banking sector in 2019 and this is expected to be the continuing trend in 2020. The food and beverages sector also had significant activity in 2019, the highlights of which included the disposal by Centum of its shareholding in King Beverage Limited to Danish Brewing Company E.A. Limited and the 50:50 joint venture between fast food operator Kuku Foods Limited and oil marketer Vivo Energy Investments B.V. This trend is expected to continue in 2020.
Equity Group Holdings Limited is expected to conclude an agreement to purchase four banks in Rwanda, Zambia, Mozambique and Tanzania from Atlas Mara Limited, a London-listed investment firm, in exchange for shares equivalent to a 6.72% stake in Equity Bank. Access Bank Plc, Nigeria’s biggest lender, is also expected to conclude its acquisition of a controlling stake in Transnational Bank Limited after receiving approvals from both the Competition Authority of Kenya (CAK) and the CBK. Egypt’s public listed Commercial International Bank is expected to conclude its recently announced acquisition of a controlling stake in Mayfair Bank Limited, making it the latest entrant into Kenya’s banking sector.
The growing technological space in Kenya was reflected in the proposed merger between the second and third largest mobile service companies in Kenya. The merger of Airtel Networks Kenya Limited and Telkom Kenya Limited is expected to be completed in 2020, having received the green light from both the CAK and the Communications Authority of Kenya (CA), although the transaction has faced some significant challenges and the parties have appealed some of the conditions given by the CAK. Furthermore, Safaricom Plc, the largest telecommunications provider in Kenya, announced that it had entered into a joint venture with Vodacom Group Limited to acquire the M-PESA brand, product development and support services from Vodafone Group Plc with the aim of expanding M-PESA into new African markets. M-PESA is an award-winning mobile money transfer, payments and micro-financing service.
The most widely used approach for acquiring a company in Kenya is through the purchase of shares. Listed companies can also be acquired by making an offer to the shareholders under the Capital Markets (Takeovers and Mergers) Regulations, 2002.
In a unique transaction in 2016, in which KN Law LLP acted as a legal advisor, Centum Investment Company Plc acquired a majority stake in Longhorn Publishers Plc, also a listed entity, through a rights issue in which some shareholders renounced their rights in its favour.
It is also possible to make an acquisition in Kenya through the transfer of business or the transfer of assets. In both of these instances, the acquirer does not take over the company, which is left in the hands of the original shareholders, or dissolved. An acquirer may choose this method in order to shield itself from the liabilities of the company. In order to do so, the acquirer (transferee) is required to publish a notice under the Transfer of Business Act, indicating that he or she does not take over the liabilities of the transferor.
The acquisition of a business would primarily involve the transfer of key assets, premises, contracts, equipment and employees under the Transfer of Businesses Act, 1930, as amended, with a view to carrying on the business substantially in the same format, whether under the same or a different name.
Although rare, an acquisition may also be achieved through the transfer of cherry-picked or specific assets of a business, such as where the intention is only to acquire a division rather than the entire business. This was the case in the State Bank of Mauritius’s acquisition of part of Chase Bank Kenya Limited (in receivership) and the sale of certain assets in Stanlib Kenya, a fund management firm, to ICEA Lion Asset Management.
There are a number of regulators for M&A activity in Kenya:
There are also sector-specific regulators who regulate all aspects of entities under their purview. These include the Communications Authority, the Capital Markets Authority (CMA), the Insurance Regulatory Authority, the Retirement Benefits Authority, the Energy and Petroleum Regulatory Authority, the Sacco Societies Regulatory Authority and the Ministry of Mining in consultation with the Mineral Rights Board, in matters related to mining.
While there is no blanket restriction on foreign investment, specific industries have restrictions on shareholding. Examples of restrictions on foreign investment, and incentives exclusively available to local investors, include the following:
The Competition Act is the primary legislation regulating anti-trust in Kenya. The CAK is mandated under the Act to enhance the welfare of Kenyans by promoting and protecting effective competition in markets and preventing misleading market conduct throughout Kenya.
Pursuant to the COMESA Competition Regulations, 2004, mergers with a regional dimension require notification to the COMESA Competition Commission.
There will be a third layer of regulation when the East African Competition Authority, established under the EAC Competition Act, 2006, becomes operational.
There are a number of laws enacted to promote the rights of employees, govern labour relations and create arbitration and enforcement mechanisms. The Constitution of Kenya provides that every person has the right to fair labour practices, including the right to form, join or participate in the activities and programmes of a trade union.
The other laws include the Employment Act (No 11 of 2007); the Labour Relations Act (No 14 of 2007); the Employment and Labour Relations Court Act (No 20 of 2011); the National Hospital Insurance Fund Act (No 9 of 1998); the Industrial Training Act (Cap 237); the National Social Security Fund Act (No 45 of 2013); Work Injury Benefits Act (No 13 of 2007); and the Retirement Benefits Act (No 3 of 1997).
The Employment Act defines the rights of employees. The Labour Relations Act provides for the registration, regulation and management of trade unions and employers’ organisations. The Employment and Labour Relations Court Act establishes the judicial organ that deals with employment and labour disputes. The National Social Security Fund Act establishes the National Social Security Fund to provide for contributions and payments of benefits out of the fund. The Industrial Training Act establishes the National Industrial Training Authority, which is responsible for industrial training. The National Hospital Insurance Fund Act establishes the National Hospital Insurance Fund to provide for contributions to, and the payment of benefits out of the Fund. And last, the Retirement Benefits Act establishes the Retirement Benefits Authority for the regulation, supervision and promotion of retirement benefits schemes.
In making a determination in relation to a proposed merger, the CAK considers the extent to which the proposed merger is likely to affect employment. Despite these labour laws not providing expressly for the protection of employees in M&A transactions, it is typical for the CAK to grant approvals subject to undertakings that employees will be retained for a minimum duration, typically three years. For example, the CAK approved the acquisition of a controlling stake in Almasi Beverages Limited by Coca-Cola Sabco (East Africa) Limited from Centum Investments Company Plc on the condition that, among other factors, following a three-year period after completion of the proposed transaction, 1,749 employees out of the total 1,760 permanent employees would be retained. In 2019, there was a proposal by the Kenya Law Reform Commission to amend the Employment Act to protect employees and ensure no jobs are lost as a result of mergers. The proposal has not yet made any progress.
The legal framework on M&A does not expressly provide that national security shall be a consideration in the determination of proposed mergers. However, the Competition (General) Rules, 2019 provides that the CAK may consult with other government agencies in the assessment of a merger. Furthermore, the CAK Consolidated Guidelines on the Substantive Assessment of Mergers under the Competition Act allow the CAK to apply both competition and public interest tests in determining whether a merger should be approved, declined or approved with conditions.
Legislation and Guidelines
The Statute Law (Miscellaneous Amendments) Act, No 12 of 2019 amended the Companies Act, 2015 and now requires the consent of all existing shareholders in a private company before any other person becomes a shareholder in that company.
The Competition (Amendment) Act, 2019 came into force on 13 December 2019. The Amendment Act clarifies the definition of "buyer power" and empowers the CAK to monitor the activities of the sector, note incidences of abuse of buyer power and ensure compliance by imposing reporting and prudential requirements. Furthermore, the Amendment Act allows the CAK to mandate industries and sectors, in which instances of abuse of buyer power are likely to occur, to develop a binding code of practice. In investigating abuse of buyer power complaints, the CAK will take into account agreements between a buyer undertaking and a supplier undertaking. Such agreements will be required to contain certain terms such as the terms of payment, the payment date, the interest rate payable for late payment and the mechanism for the resolution of disputes.
Through legal notice No 176 of 2019, the Competition (General) Rules, 2019 (the Rules) were gazetted and subsequently came into force on 6 December 2019. One of the elements of the Rules is that they expand the definition of the term "implementation of a merger". Under the Act, an acquirer is deemed to have implemented a merger only when he or she has paid the full price. According to the Rules, the following shall also be deemed to constitute implementation of a merger:
Under the Merger Threshold Guidelines, in an M&A transaction where undertakings have a minimum combined turnover or assets of KES1 billion and the turnover of the target undertaking is above KES100 million, such a transaction would need to be approved by the CAK. The Rules have amended the guidelines to provide for higher merger notification thresholds. A merger will only be notifiable where the combined turnover or combined assets (whichever is higher) of the merging parties equals or exceeds KES1 billion and the turnover or the assets (whichever is higher) of the target undertaking is above KES500 million, a welcome departure from the previous regime. In addition, for mergers with a regional dimension, undertakings will now only be required to inform the CAK within 14 days of submitting a COMESA merger filing rather than the previous mandatory requirement for notification to both the CAK and the COMESA Competition Commission.
In the merger between Commercial Bank of Africa Limited (CBA) and NIC Group Plc, which involved the acquisition of the issued share capital in CBA in exchange for shares in NIC, the CAK defined the relevant product market as retail and corporate banking services as well as insurance intermediaries. The CAK’s view was that the proposed transaction was unlikely to lead to a lessening of competition in either the market for retail and corporate banking services or the sale of insurance products in Kenya. The CAK noted that the transaction would likely have negative public consequences to the extent to which the proposed merger would impact on employment opportunities. Thus, the merger was approved on the sole condition that none of the 1,872 employees would be declared redundant for a period of 12 months from the date of closing of the transaction in Kenya.
In the acquisition of KenolKobil Plc by Rubis Energie SAS, where Rubis made a cash offer of KES23 per share for 1,182,968,076 shares resulting in Rubis taking 100% control of KenolKobil, the CAK held that the transaction would be unlikely to have a negative impact on the structure and concentration of the market. This was because – although Rubis is involved in the distribution of petroleum products, liquid petroleum gas and bitumen across Europe, the Caribbean and Africa – it does not directly or indirectly control any undertakings in Kenya and therefore has no relevant turnover or assets in Kenya. The CAK thus approved the acquisition as the market had witnessed entry and exit through mergers & acquisitions, indicating that the market was contestable and that there were no prohibitive barriers to entry. Additionally, the proposed transaction was unlikely to raise negative public interest issues since the acquisition was being implemented as a going concern.
The Statute Law (Miscellaneous Amendments) Act came into force on 23 July 2019. The Act amended the Companies Act takeover provisions by providing that where the offeror has acquired or unconditionally contracted to acquire:
the offeror may give notice to the holder of any shares to which the offer relates, and that the offeror has not acquired or unconditionally contracted to acquire, that the offeror intends to acquire those shares. Previously, the threshold in both instances stood at 90%.
The provisions were objected to as being potentially oppressive to minorities. As a result, Parliament has enacted the Business Laws (Amendment) Act, which has reinstated the threshold to 90%with effect from 18 March 2020. Thus, as a result of the amendment, an offeror of shares must acquire at least 90% of the shares under offer before they can exercise squeeze out provisions as provided under Section 611 of the Companies Act.
There has been stakebuilding in a few listed companies. In some instances, investors increasing their stakes have published notices as required by the CMA Take-Over Rules, indicating that they have no intention to make a takeover bid. However, we have also seen minority investors increase their stakes in listed companies that are a target of an acquisition (with proposed de-listing thereafter), with a view to reaping higher returns or blocking the de-listing resolution. In 2018, two listed entities failed in their bid to takeover and de-list a target entity, due to this strategy employed by minority shareholders.
All companies are required to file annual returns under the Companies Act (No 17 of 2015, Laws of Kenya). The shareholders of the company are listed in these returns, and any shareholder with more than a 5% shareholding is also indicated. Additionally, the beneficial ownership of shares is to be disclosed in the company’s register of shareholders/members.
The Takeover Rules under the Companies Act state that the CMA has the power to require disclosure of documents specified in the notice and non-compliance results in a fine not exceeding KES1 million.
Under the Capital Markets (Licensing Requirements) (General) Regulations 2002 (the Licensing Regulations), Regulation 75, a listed company should file a monthly report with the Nairobi Securities Exchange (NSE) disclosing:
Under the Code of Corporate Governance Practices for Issuers of Securities to the Public 2015, an issuer is required to disclose its top ten direct shareholders in its annual report.
Under the Competition Act (No 12 of 2010, Laws of Kenya), the target company and the acquirer are required to notify the CAK where a transaction results in the acquisition of control, which occurs where there is an acquisition of a majority of the shares. The CAK will also consider the purchase or lease of shares, acquisition of an interest, or purchase of assets as a merger where it results in the acquiring undertaking holding 20% or more of the total shares or voting rights of the undertaking, even where there is no acquisition of direct or indirect control of the undertaking whose shares or voting rights are being acquired.
Unless there is a statutory provision allowing the company to exercise its discretion in certain processes, a company cannot alter requirements of the law through its articles. For instance, pre-emption rights provided under the Companies Act, 2015 are an impediment to stakebuilding. Existing shareholders are given the right of first refusal (pre-emption rights), proportionate to their stake in the company, in the allotment of shares or transfer of shares by other shareholders. However, the Act allows the company to exclude the pre-emption rights through its articles.
A sectoral restriction on ownership of shares is also a hurdle to stakebuilding. For example, shareholding in a market intermediary is capped at 33.3% of the shares (unless it is a corporate shareholder where no beneficial owners are entitled to more than 25%).
There are cost and time implications in the approval process of the transfer of shares, given the multiple regulators. For instance, where the parties to a merger or an acquisition have operations in more than one COMESA member state, they may, in addition to the requirement to obtain the approval of their primary regulator, also require the approval of the CAK and the CCC.
Dealings in derivatives are permitted and the Capital Markets (Derivatives Markets) Regulations, 2015 provide for the regulation of the derivatives market in Kenya. There are plans for a derivatives exchange to be set up in the first half of 2019. In 2018, the CMA licensed a pilot derivatives exchange (NEXT) for a six-month trial period and allowed trading in equity index futures and single stock futures. Following this pilot phase, the CMA gave the Nairobi Securities Exchange regulatory approval to launch and operate the derivatives market. NEXT officially began trading on 11 July 2019 with the aim of investors being able to manage risk and diversify their investments through the first derivatives market in the entire East African region. At the launch of NEXT, Safaricom, KCB Group, Equity Bank, KenGen and East African Breweries Limited were listed on the market, with Barclays Bank of Kenya being the sixth single stock listed as at the end of 2019.
The CMA regulates dealings in derivatives through the Capital Markets (Derivatives Markets) Regulations, 2015. Regulation 19 provides that a derivatives exchange is required to disclose the shareholding pattern of the derivatives exchange on a quarterly basis, within 15 days from the end of each quarter, to the CMA in the format it specifies. The Regulations also state that the disclosure must include the names and the number and percentage of shares held by each of the ten largest shareholders. Regulation 20 further states that a derivatives exchange must, in addition to the requirements under any other laws, retain and preserve all the books, registers and minutes of the board meetings, plus other documents for a period of not less than seven years.
The Second Schedule to the Capital Markets (Takeovers and Mergers) Regulations, 2002 state that in the take-over offer document, the offeror is required to disclose:
Pursuant to the Capital Markets (Takeovers and Mergers) Regulations, 2002, Regulation 4, the offeror – having serviced a notice of intention on the target company, the CMA, the NSE and the CAK – must announce the proposed offer by notice in the press. The offeror is then required to serve a statement of the take-over scheme on the target company within ten days of the close of the offer pursuant to the Capital Markets (Takeovers and Mergers) Regulations, 2002, Regulation 4(4).
M&A transactions relating to private companies or unregulated entities are usually disclosed once the definitive agreements are executed, but there is no hard and fast rule on this. Some transactions are not disclosed at all and only come into the public domain once the CAK publishes the approval, exemption or rejection (rare) in the Kenya Gazette.
While notifying the CAK, parties may claim confidentiality with respect to the information provided to make the determination.
Listed entities often make disclosures once they are sure that there is a real deal on the table or when there is a risk of leakage. This is because the information is market-sensitive and premature disclosure may impact the transaction itself, the image of the entity and the share price.
Comprehensive due diligence is normally undertaken, with professionals engaged to carry out the task. However, the scope may vary depending on the mode of acquisition and whether the transaction is public or private. Generally, all information either publicly available or supplied in response to an acquirer’s request (via a disclosure letter) will form part of the due diligence.
Due diligence involves the following:
There are other forms of due diligence to be carried out and these include financial, market/commercial, technical, operational and management due diligence.
The nature of the transaction will usually inform exclusivity arrangements, and in high-profile M&A it is common for parties to sign an agreement to prevent the information leaking.
The Capital Markets (Takeovers and Mergers) Regulations, Regulation 32 provides that in the event of a takeover, the trading of the security of the offeree will be suspended to enable the offeree to disclose information on the takeover offer or as may be directed by the CMA for the purpose of obtaining material information on the offer.
Tender offer terms and conditions may be documented in agreements for private M&A transactions. For public companies, the terms and conditions of a takeover offer must be in writing and are usually set out in a take-over offer document rather than definitive agreements. The directors circulate an information memorandum or "circular", containing details of the offer to the shareholders for their approval at a general meeting, upon approval by the CMA.
The nature of the process of acquiring or selling a business in Kenya generally depends on the complexity of the transaction and the preparedness of the parties. A simple M&A deal will typically be concluded in less than three months. A complex transaction (eg, one involving multiple regulators) could take a year or more to conclude.
Regulation 4 of the Capital Markets (Take-overs and Mergers) Regulations, 2002 briefly summarises the process as follows:
The Competition Act, Section 44 provides the period for the CAK making a determination in relation to a proposed merger. The CAK will render a decision within 60 days of receiving the notification or any additional information it may have requested, or within 30 days of concluding a hearing, if one has been convened. The CAK may extend the approval period but the extension may not exceed 60 days. Under the Competition (General) Rules, where an undertaking applies to be considered for exclusion, the CAK shall respond within 14 days.
For regional M&A deals that require CCC approval, according to Article 25 of the COMESA Competition Regulations, the CCC must examine a merger as soon as the notification is received and must make a decision on the notification within 120 days of receiving the notification. This means that if the CCC does not make a decision on the merger within 120 days, the parties can consider the merger approved. However, if the notification is incomplete, the examination period begins on the day following receipt of complete information.
The Capital Markets (Take-overs and Mergers) Regulations, 2002, Regulation 3(2) provides instances where a person shall be presumed to have a firm intention to make a bid for a takeover of a listed company and will be required to comply with the takeover procedures set out in Regulation 4.
A person is prima facie presumed to intend to take over a listed company where he or she:
Both cash and shares are used in Kenya as consideration. It is not uncommon for transactions to have a combination of the two, particularly for reverse acquisitions.
A takeover offer under the Capital Markets (Take-overs and Mergers) Regulations, 2002 requires the offeree to state whether the shares are to be acquired wholly or partly for cash, the timeframe for payment and the method in which it will be made. Where it is either a whole or part cash offer, it must include a confirmation by an offeror’s financial adviser that the offeror has the financial capability to accept and complete the transaction. If the shares are to be acquired through a share swap, the proportion of the share swap and the period within which the offeree’s shareholders shall receive the new shares must be divulged.
The most common conditions in Kenyan M&A are:
The Capital Markets (Take-overs and Mergers) Regulations, 2002, Regulation 8 prohibits the offer being conditional upon the offeree approving or consenting to any payment or other benefit being made or being given to any director of the offeree, or to any other person that is deemed to be related to the offeree, either as compensation for loss of office or as consideration for, or in connection with, his or her retirement from office.
Under the Companies Act, if a takeover bid is made for an opted-in company, the offeror may, by making a request to the directors of that company, require them to convene a general meeting of the company if, at the date at which the request is made, the offeror holds shares amounting to not less than 75% in value of all the voting shares in the company.
Furthermore, the Companies Act, section 611, grants the offeror the right to buy out minority shareholders. This happens where the offeror has acquired or unconditionally contracted to acquire:
The Capital Markets (Takeovers and Mergers) Regulations, 2002, Regulation 22 prohibits a person making a takeover bid or giving notice or publicly announcing that he or she intends to make such an offer if he or she has no reasonable or probable grounds for believing that he or she will be able to perform his or her obligations if the offer is accepted.
The Regulations seek to protect the process by stating that where the takeover offer is for cash, either partly or wholly, the offer must include a confirmation by the offeror’s financial adviser that the offeror has the financial capability to accept and complete the takeover.
The Schedule to the Regulations also provides that the offer document should include a statement that the offeror and the offeror’s financial advisers are satisfied that:
The Takeovers and Mergers Regulations allow competing offers to be made prior to the expiry of the offer period and the target company’s board may seek alternative bidders to make competing bids, although they would have to act within their statutory duties. Nonetheless, the Regulations prohibit bidders from making arrangements to buy the target’s shares on more favourable terms than those contained in the Takeover Document, either during a takeover or where a takeover is in reasonable contemplation.
Typically, the bidder may seek control by having the right to nominate the majority of the board members, the right to propose the persons to be appointed in key senior management positions, and engaging in "shareholder-reserved" matters where there is a shareholders' agreement.
The Companies Act lists a person appointed as proxy of a member of the company in relation to the meeting as a qualifying person for the company.
The Companies Act, Section 114 provides for the exercise of rights of members, among them the right to appoint a proxy to act at a meeting. By this, a proxy can exercise the rights of the member and can vote on a company resolution on behalf of the member.
The Companies Act, Section 611, entitled "squeeze in and sell out", provides that an offeror who has, as a result of acceptance of their offer, acquired or unconditionally contracted to acquire more than 90% of the shares offered for purchase, may notify the remaining shareholders of his or her intention to acquire their shares.
A holder of voting shares to which an offer relates, who has not accepted the offer, may require the offeror to acquire their shares if, at any time before the end of the offer period:
An offeror is entitled to, and also bound, to acquire the shares of the remaining shareholders on the terms of the offer or on such terms as may be agreed to by the shareholders and the offeror.
When a takeover bid is made for a company that has passed an opting-in resolution, the effect of the resolution is to essentially waive any restrictions that would apply, and which would work to frustrate the takeover process. A company may, by a special resolution, opt in if the following two conditions are satisfied:
Where an offeror exercises the squeeze-out provisions, minority shareholders can apply to the High Court for an order:
Additionally, where a minority shareholder exercises the sell-out provisions, then either the offeror or minority shareholder may apply to the High Court for an order specifying the terms on which the offeror is entitled and bound to acquire the shares.
On hearing the applications above, the High Court may, however, not:
It is common to obtain commitments to tender or vote; otherwise the bidder may not be able to ascertain the chances of success. Most acquisitions have the express support of the principal shareholders, and in some cases the shareholders may be acting in concert with the bidder. Negotiations for support will often take place before the offer is put in writing and made public.
For public listed companies, the offeror announces the offer within 24 hours of the board resolution to make an acquisition by press notice and serves a notice of intention to the target entity, the securities exchange where the shares are listed, the CMA and the CAK.
There is no requirement for the parties to make an announcement of private M&A deals but the CAK is required to publish its determinations in the Kenya Gazette.
The type of disclosure will depend on whether it involves a listed entity. The key issue is around change of control or acquisition of a significant shareholding, rather than the method used.
The Competition Act provides that where a merger is proposed, each of the undertakings involved shall notify the CAK of the proposal in writing or in the prescribed manner. The merger notification forms prescribed by the CAK require that the notice be accompanied by hard copies of undertakings’ audited financial statements for the last three years.
The First Schedule to the Capital Markets (Take-overs and Mergers) Regulations, 2002 sets out the information required to be included in the offeror’s statement. There has to be a statement containing a summary of the latest audited financial statements, including:
The financial statements and audited financial statements are normally in the International Financial Reporting Standards (IFRS) format as an internationally accepted accounting practice.
The CAK states that hard copies of the following documents must be provided:
Note that parties can claim confidentiality over the documents regarding the transaction, for instance because CAK typically publishes the turnover of merging entities.
The Competition Act, Section 47 states that any person who, being a party to a merger:
commits an offence and shall be liable on conviction to a fine not exceeding KES10 million or to imprisonment for a term not exceeding five years, or to both.
The CCC requires the merging parties to submit:
The board of directors of the offeree has an obligation to issue a circular to the holders of voting shares in the offeree to which the takeover offer relates, indicating whether or not the board of directors of the offeree recommends to holders of the voting shares acceptance of the offer(s) made by the offeror under the takeover scheme.
Furthermore, the board of directors of the offeree shall appoint an independent adviser on receipt of the offeror’s statement. The independent adviser shall be an investment bank or a stockbroker licensed by the CMA, and the substance of the advice must be made known to the holders of the class of the voting shares to which the takeover offer relates via a circular.
The duties of the directors are owed to the company first and not to shareholders or stakeholders. The Takeovers and Mergers Regulations, Regulation 9 provides that the board of directors of the offeree is required to issue a circular to shareholders with its recommendation on whether or not to accept the offer, and in doing so they would be required to consider the merits of the deal and their duties to the company. This is done within 14 days from receipt of the takeover offer. However, where a company’s solvency is in question, the directors’ duties shift to the appointed liquidator and the directors cease to have powers in relation to the company.
There is no requirement under the Takeover and Mergers Regulations to establish takeover committees by the offeror or offeree. On the contrary, it is the CMA that is mandated by the regulations to form an ad hoc committee to advise on takeovers on a case-by-case basis.
Deferral by a court, to the business judgement of a board of directors, has not been seen in M&A transactions in Kenya as far as is known.
The Capital Markets (Takeovers and Mergers) Regulations 2002, Regulation 10 states that the board of directors of the offeree must appoint an independent adviser, either an investment bank or a stockbroker licensed by the CMA. The substance of any advice given to the board of directors of the offeree shall be made known to all the shareholders by the offeree in a circular.
In addition, the board of directors of the offeror must appoint an independent adviser where the takeover offer being made is a reverse takeover. This is also the case where the board of directors of the offeror is faced with a conflict of interest situation that must be divulged to all the holders of voting shares of the offeror.
Conflicts of interest relating to directors of companies in Kenya have been subject to investigation by regulators, including the CMA and the Institute of Certified Secretaries of Kenya. There have also been successful applications to Kenyan courts by implicated directors for the quashing of regulators’ decisions.
Provisions against conflicts of interest are provided in the Companies Act, 2015, which sets out the duties of directors. Some of the duties of a director are to promote the success of the company, to exercise independent judgement and to avoid conflicts of interest. In a public company, where the value of the transaction in conflict exceeds 10% of the value of its assets, the declaration should be made in a general meeting and by notice. A director is required to disclose a conflict of interest, and cannot vote in relation to a transaction in which he or she has a conflicting interest.
For listed companies and issuers, the Capital Markets Authority Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya, 2015 provides additional guidelines. A company should maintain a register of declared conflicts of interest.
There are no restrictions on hostile takeovers in Kenya, although there have been no such takeovers yet completed so this lack of restriction has not been tested. There have been attempts at hostile tender offers, such as when Centum Investments Company Limited attempted, in 2015, to take over all ordinary issued shares of Rea Vipingo Plantations, but the offer was withdrawn.
Directors are not allowed to use defensive measures in Kenya. The Capital Markets (Takeovers and Mergers) Regulations, 2002, Regulation 27 prevents the offeree from:
These actions may be seen as interference from the directors to prevent a takeover offer prevailing. The most they can do is make a recommendation to shareholders to reject an offer.
The Takeovers and Mergers Regulations do not allow the offeror, through its directors, to frustrate the offer with defensive measures. The Capital Markets (Takeovers and Mergers) Regulations, 2002, Regulation 27 prohibits the offeror from undertaking the following measures to dilute the offeror’s stake in the target company or make the offer unattractive to the offeror:
Directors have a duty to act within their powers, and as previously mentioned, they are prohibited from enacting defensive measures. Thus, anything meant to frustrate the M&A process should be avoided and directors should act in good faith and provide shareholders with the chance to make the decision.
Directors cannot "just say no" without following due process in performing their functions and exercising their powers. However, they may, in their recommendation to shareholders on whether to accept a takeover offer, lay out the reasons they do not support the takeover and why they refuse to endorse it. However, the shareholders are not bound by the directors’ recommendations.
Litigation is not common in the M&A field in Kenya. However, there are a few high-profile cases of employee litigation that have prevented transactions from proceeding until employee rights were secured with respect to redundancy and termination benefits. For instance, when Vivo Energy Holdings entered into an agreement with Engen Holdings to takeover Engen’s business, employees of Engen went to court seeking to block the completion of the transaction. In 2008, a defaulting borrower who had sued one of the banks in the CfC and Stanbic merger attempted to stop the transaction on the basis that there would be no entity to pay his award if he won.
The Competition Act, Section 48 gives the right to a person prevented from proceeding with a proposed merger or, conversely, allowed to proceed with a proposed merger but subject to conditions prescribed by an order, to appeal to the Competition Tribunal. On appeal, the Tribunal may, within four months from the date on which the application for a review was made, make a determination either:
For listed companies, the CMA ensures compliance with the Capital Markets Act and its regulations. Aggrieved parties can appeal to the Capital Markets Tribunal.
If dissatisfied with the decision of the Competition Tribunal, the CAK may appeal to the High Court. In the same breath, parties aggrieved by the decisions of the Capital Markets Tribunal may appeal to the High Court.
Shareholder activism is an important force in Kenya. There is no specific focus as most activism is ad hoc, usually around governance issues and dissatisfaction with recommendations made by directors on matters such as dividend policies and offer prices in takeover bids.
Activists encouraging companies to enter into M&A transactions is not something that has been seen as yet in Kenya. This may be partly because the investing public is relatively unsophisticated.
There are instances where shareholders may interfere with the completion of M&A transactions. This is particularly so where the terms are not considered favourable to them, with regard to, for example, the offer price or the acquirer’s intentions for the target once the transaction is complete. Shareholders have a right to approach the High Court for an order regarding the terms on which the offeror will obtain his or her shares. They must, however, prove that the terms of the proposed takeover offer are unfair.
Activists also play a role in the completion of M&A deals, primarily through objections or representations to regulatory authorities. The CAK gave a conditional approval to the proposed merger between Airtel Networks Kenya Limited and Telkom Kenya Limited, the conditions given for the merger were that the merged entity should retain about half of the target employees and that the merged entity would be restrained from entering into any form of sale agreement within the next five years. Both Airtel and Telkom have raised an objection to the Competition Tribunal seeking a review of the decision by the CAK. Under the Competition Act, the Competition Tribunal has four months to investigate and can overturn the decision of the CAK, amend the decision of the CAK by ordering restrictions or including conditions, confirm the decision of the CAK, or can refer the matter back to the CAK for reconsideration on specified terms.