Dominic Rebelo and Wangui Kaniaru of Anjarwalla & Khanna assess the regulatory landscape for mergers and acquisitions in Kenya
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A in your jurisdiction?
Public companies listed on the Nairobi Securities Exchange (NSE) are regulated by the Companies Act (chapter 486, Laws of Kenya) and the Capital Markets Act (chapter 485A, Laws of Kenya) and associated regulations. Non-listed companies are only subject to the Companies Act. Both may be subject to sector-specific legislation governing entities such as banks, insurance and telecommunications providers, and other regulated industry players. Merger activity resulting in a deemed change of control may require regulatory approval from either or both of the Competition Authority of Kenya (CAK) and the Comesa [Common Market for Eastern and Southern Africa] Competition Commission (CCC) for regional transactions.
1.2 How, by whom and what measures, are takeover regulations (or equivalent) enforced?
For listed companies, the Capital Markets Authority (CMA) enforces the requirements of the Capital Markets Act and associated takeover rules. The Capital Markets Tribunal (CMT) hears appeals concerning actions by the CMA on any matter relating to the Capital Markets Act. While there are no takeover regulations applicable to non-listed companies, the CAK enforces Kenya's antitrust and merger approval regime. In regulated industries, prior notification to or approval from the relevant sector regulator may also be required, particularly where foreign investors are concerned.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Friendly acquisitions are structured as negotiated offers between the parties or through an informally-structured bidding process between the target and the bidders. An investor may also subscribe for new shares, thereby diluting existing shareholders. Listed company acquisitions are governed by the CMA with takeover rules requiring an acquirer who has accumulated a certain percentage ownership (whether through a single acquisition or by a creeping acquisition) to make an offer to all the remaining shareholders.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
The choice of structure is determined by whether the company is listed or not. Thereafter, tax and commercial and regulatory considerations come into play. Companies operating in regulated sectors may be subject to restrictions on the foreign ownership of shares which affect the manner in which cross-border transactions can be entered into.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
For listed companies, between announcement and completion of a takeover offer, the bidder is required to issue: a Notice of Intention to the CMA, the CAK, the NSE and the target (within 24 hours of the decision to acquire effective control of a listed company); a Statement of Takeover Scheme to the target (within 10 days of issuing the Notice of Intention); and, a Takeover Document filed with the CMA (within 14 days of issuing the Notice of Intention and issued to the target upon approval by the CMA). The CMA typically halts trading in the target's shares after the Statement of Takeover Scheme is issued to the target to crystalise the target's shareholding upon the first communication of the terms of the bid. The CMA must approve the Takeover Document within 30 days and typically makes its initial response to the Takeover Document within 14 days.
Competing bids may be served for up to 10 days before the offer period ends. When competitive bidding ensues, the CMA may vary the timeframes to require all bids and variations to be received within a fixed period.
The offer period runs for 30 days from the date that the Takeover Document is served by the bidder on the target. Bids that are conditional on receiving a minimum percentage of shares become unconditional after 30 days end.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
There are no restrictions on the price offered or its form. The bidder's Notice of Intention must disclose the existence or non-existence of actual or potential funding arrangements for cash consideration. The bidder's Takeover Document must also contain a confirmation from the bidder's financial advisers that the bidder has the financial capability to accept and carry out the takeover.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
For listed companies where the bidder receives acceptances for 90% or more of the target's voting shares, the bidder must offer to buy out the remaining shareholders for the higher of the prevailing market price of the voting shares or the price offered to the other shareholders. As foreign shareholders cannot hold more than 75% of the shares of a publicly listed company, they typically would not benefit directly from the takeover regulations' squeeze-out provisions, unless the target is delisted.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
For listed companies, bidders are required to offer the same price to all potential sellers of the target's shares. The bidder's Notice of Intention must specify the number, description and amount of marketable securities held by the bidder in the target at the time the statement is issued. The Takeover Document must also detail the number of target shares held directly or indirectly by the bidder and its directors, shareholders, associated persons, and any persons who have entered into voting agreements with the bidder before the Takeover Document is issued. Bidders are required to disclose details of any voting agreements between the bidder and its current or past directors or shareholders that may have an interest or dependence on the takeover offer.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
While a bank guarantee is not required, the Takeover Document must state that the bidder and the bidder's financial advisers are satisfied that the takeover offer will not fail due to the bidder's insufficient financial capability and that every shareholder who wishes to accept the takeover offer will be paid in full. Conditional offers are permitted. Generally, such conditions relate to the minimum percentage of shares to be taken up in the offer, regulatory approvals under the Competition Act or other foreign regulatory approval for foreign bidders and the minimum percentage of shareholding requirements by the general public to satisfy continuing listing eligibility requirements.
3. TAX CONSIDERATIONS
3.1 What are the basic tax consideration and trade-offs?
Sales of shares in publicly-listed companies are exempt from stamp duty on their transfer. However, as of January 2015, capital gains tax is payable on the sale of all shares. Other tax considerations generally revolve around the structuring of the acquiring entity.
3.2 Are there special considerations in cross-border deals?
Double tax treaties with other jurisdictions should be taken into account to ensure that the acquisition structure is as tax efficient as possible.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
A competing bid from a strategic investor is often the most attractive form of anti-takeover defence. Target companies may also make counter-offers to purchase the shares held by the bidder at a premium. A target entity may modify its capital structure and force a re-evaluation of the deal's attractiveness or seek white knight offers from other players in the relevant industry. Further anti-takeover defences may be prescribed in a listed company's articles of association.
4.2 How do targets use anti-takeover defences?
Targets may persuade the existing shareholders to reject the offer based on the independent adviser's evaluation. The target's board of directors must appoint an independent adviser after receiving the Statement of Takeover Scheme and communicate an objective evaluation of the offer to shareholders within 14 days of receiving the Takeover Document. Once a takeover offer is announced, target companies may not dispose of or acquire their assets or those of their subsidiaries or enter into contracts outside the ordinary course of business. Issuing authorised but unissued shares, granting options on unissued shares of the target, or issuing or permitting the creation or subscription of any shares in the target is also prohibited.
4.3 Is a target required to provide due diligence information to a potential bidder?
4.4 How do bidders overcome anti-takeover defences?
Bidders will keep the proposed takeover offer as confidential as possible prior to the announcement to reduce the possibility of anti-takeover defences. The bidders may also enter into arrangements with existing shareholders prior to or shortly after announcing the intended takeover, although such arrangements must be disclosed.
4.5 Are there many examples of successful hostile acquisitions?
Hostile acquisitions are rare in Kenya. In 2014, a competitive bidding situation arose between three potential acquirers for shares of Rea Vipingo Properties. The two unsuccessful bidders challenged the CMA in court regarding the scope of the CMA's authority to set a timeframe for conclusion of the bidding process and sought judicial interpretation of the effect of an appeal to the CMT challenging the CMA's decision. Kenya's takeover regulations are relatively thin and a lack of supporting case law does not assist in providing guidance when there are gaps in the legislation.
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
Keeping the proposed bid as confidential as possible until it is announced generally assists in protecting the deal. Entering into voting agreements to secure the minimum percentage of shares to be taken up may help encourage a friendly deal.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
Break fees and expense reimbursement terms are not prohibited by law, but would be subject to the listed company's ongoing disclosure obligations. Issuance of additional shares or options to acquire shares or assets would require shareholder approvals and would be disclosable.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
Notifiable mergers include mergers where the bidder and the target have a minimum combined threshold of KSh1 billion ($11 million) and the target's turnover is above KSh100 million.
6.2 When will mergers falling below those thresholds be investigated?
The Competition Act requires all mergers to be notified to the CAK. Parties typically apply for an exclusion using the prescribed form if the transaction falls below the stated thresholds. However, the CAK may investigate any merger which has not been notified or any merger which has been notified where new information arises or is brought to the CAK's attention.
6.3 Is antitrust notification filing mandatory or voluntary?
Antitrust notification is mandatory for all merger transactions subject to the thresholds set out above.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
There is no prescribed deadline within which a merger notification must be filed. Mergers which proceed without an authorising order from the CAK have no legal effect and are unenforceable in legal proceedings. Any person who implements a merger without CAK approval may be liable for fines not exceeding KSh10 million or a prison term not exceeding five years or both. The CAK may also impose a financial penalty not exceeding 10% of the preceding year's gross annual turnover of the undertaking or undertakings in question.
6.5 How long are the antitrust review periods?
The CAK must decide on a proposed transaction within 45-60 days of notification. This timeframe may be extended where further information is required or the merger is deemed to be of a complex nature.
6.6 At what level does your antitrust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
The CAK has the authority and jurisdiction to review and impose penalties at all levels. The determination as to whether a transaction has a competitive effect is at the discretion of the CAK and not the parties to the merger.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other government regulation?
Listed companies are required to reserve at least 25% of their listed ordinary shares for investment by individual or institutional shareholders from Kenya, Uganda, Tanzania, Rwanda and Burundi (the East African Community partner states). Companies in regulated sectors are also required to obtain regulatory consents prior to the transfer of shares. The Banking Act restricts ownership of more than 25% of the beneficial interest in the shares of a banking institution, unless owned by another banking institution. The Insurance Act requires a local shareholding of one-third of the minimum paid up capital, shares or voting rights of an insurance company. Telecommunications operators are required to maintain a 20% local shareholding, unless a waiver is obtained from the Cabinet Secretary in charge of telecommunications and ICT matters.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
The relevant domestic statutes are the Penal Code (chapter 63, Laws of Kenya), the Anti-corruption and Economic Crimes Act 2003 (ACEC Act), and the Public Officer Ethics Act 2003. The international instruments are the United Nations Convention Against Corruption, African Union Convention on Preventing and Combating Corruption and the International Code of Conduct for Public Officials contained in the annex to the General Assembly resolution 51/59 of December 12 1996.
7.2 What are the potential sanctions and how stringently have they been enforced?
For bribery and corruption offences, the Penal Code prescribes a fine not exceeding KSh1 million or to imprisonment for a term not exceeding 10 years, or both. The ACEC Act prescribes a fine not exceeding KSh1 million or imprisonment for a term not exceeding 10 years, or to both, and an additional mandatory fine if, as a result of the conduct that constituted the offence, the person received a quantifiable benefit or any other person suffered a quantifiable loss.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
High profile cases of employee litigation in the context of merger transactions have increased with employees obtaining injunctive relief to prevent mergers from proceeding until employee rights are secured with respect to redundancy and terminal benefits.
8.2 What are the key recent M&A developments in your jurisdiction?
The Companies Bill 2014 is under Parliamentary review. The bill is intended to update the existing company law framework adopted in 1948 and draws heavily from the UK Companies Act 2006. The East African Community has issued draft directives concerning various aspects of capital market regulation, including takeovers, which are intended to harmonise capital markets regulations and promote cross-listings.
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Anjarwalla & Khanna
About the author
Dominic Rebelo is a partner at Anjarwalla & Khanna. He has wide-ranging experience in corporate mergers and acquisitions, capital markets, energy and natural resources and environmental law. Prior to joining Anjarwalla & Khanna, Rebelo was a partner at Daly & Figgis Advocates.
Rebelo has advised domestic, regional and international private and publicly listed companies on a variety of commercial transactions, including share acquisitions, privatisations and public listings. He has also assisted a variety of foreign investors in the energy sector in setting up operations in Kenya.
Anjarwalla & Khanna
About the author
Wangui Kaniaru is a senior associate with Anjarwalla & Khanna. Her practice mainly focuses on corporate and commercial law. She has advised acquirers and targets in various commercial transactions, including structuring joint ventures in multiple jurisdictions, asset purchase acquisitions, disposals of businesses and share purchase acquisitions, undertaking due diligence investigations and group restructurings in regulated and unregulated industries. Kaniaru has also advised on various telecommunications and data protection matters.