1 Deal structure

1.1 How are private and public M&A transactions typically structured in your jurisdiction?

Private M&A transactions are typically structured as share purchase, share subscriptions or asset purchase agreements.

Public M&A transactions are typically structured as share subscription agreements or negotiated takeover bids in accordance with the procedures set out in the capital markets legislation. In the recent past, we have also witnessed mergers of listed entities implemented by way of shareholder-sanctioned share swaps.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

With respect to private M&A deals, share purchase and subscription agreements are generally more straightforward to implement than asset deals, as there are fewer moving pieces. Only the shares need to move, subject to obtaining the relevant regulatory and third-party consents. In an asset deal, ensuring that that material contracts and financing arrangements are properly secured by the new entity, and that the requisite licences are in place, can be a drawn-out process. The transition of employees is also a delicate matter, as Kenyan laws are yet to be updated to allow for the automatic transfer of employees on a transfer of business.

Asset deals, however, allow the buyer to cherry pick the assets that are of interest and, more significantly, to leave out liabilities. Leaving out liabilities – particularly those relating to tax – is critical, as the tax authorities are vigilant in recovering any unpaid taxes where there is word of a company being involved in M&A activity. In a share deal, the liabilities continue to attach.

Although, there are rules that would allow the transfer of tax liabilities (historical and current) to the transferee entity in an asset deal depending on how the deal has been structured.

To shore up dwindling revenue collection as a result of the adverse effects of the COVID-19 pandemic, the government has done away with Value Added Tax (VAT) exempt status for transactions that are a transfer of business as a going concern. This means that the VAT treatment with respect to asset deals is a bit fluid, i.e. VAT at 16% may be applicable on the full value of the business transferred or VAT applied depending on the VAT status of the individual assets being transferred. The actual VAT treatment needs to be analysed on case by case basis. This has certainly dampened the interest in implementing asset deals.

It will also be important to consider the stamp duty and capital gains tax (CGT) implications of the structure. CGT applies on the transfer of shares at 5% of the gain (other than for entities in the upstream oil exploration and mining space as these are subject to different rules). CGT is not an issue on the subscription of shares. From a stamp duty perspective, stamp duty applies at the rate of 1% of the market value of the shares. A similar rate applies on the increase in share capital on a subscription of shares, but the stamp duty payable can be reduced where shares are issued at a premium. In an asset deal, CGT will apply on the transfer of specific assets and stamp duty will also be assessed on specific instruments prepared to move over the assets at a rate ranging from 2% to 4%. Any excess consideration paid by the transferee above the value attributed to the individual assets could be deemed to be goodwill and therefore subject to CGT (and possibly also VAT).

Where the seller is based offshore, the existence of a Double Tax Treaty between Kenya and the jurisdiction of the seller could offer some relief from CGT.

1.3 What factors commonly influence the choice of sale process/transaction structure?

As indicated in question 1.2, how to manage the liabilities seating in the target – particularly those relating to tax – is a key driver in the choice of transaction structure. In other cases, the ease of implementation of the transaction with respect to obtaining regulatory approvals, for instance, will determine the transaction structure. Tax and stamp duty planning measures may also decide the route that a transaction takes.

2 Initial steps

2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?

It is common for parties to sign a term sheet setting out the general terms of the M&A transaction prior to the preparation of the underlying agreements. It is also usual for a non-disclosure agreement to be signed prior to the release of information required by the acquirer in order to carry out its due diligence.

2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?

Break fees are permitted and are invariably a seller protection. The fee is triggered if a party fails to support obtaining regulatory approvals where there is an obligation to do so or fails to make payment at closing. A portion of the purchase price may be placed in escrow at signing to ensure payment. There are no legal restrictions on the formulation of break fees.

2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?

M&A transactions are largely financed through equity where the acquirer has privately sourced funds such as private equity funds, venture funds and so on. However, there are limited instances in which M&A transactions are financed by debt.

2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?

Parties considering engaging in an M&A transaction should involve legal, tax and finance/commercial advisers, to ensure that they receive holistic advice.

2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?

The prohibition on giving financial assistance by a private company for the purchase of its shares was abolished when the new Companies Act came into force in 2015. There are consequently no rules that prohibit the target in a private M&A transaction from paying adviser costs where this has been contractually agreed upon.

Public companies are still prohibited from giving financial assistance to members to acquire their shares.

3 Due diligence

3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.

(a) Commercial/corporate

While Kenyan companies law provides that entry in a company's register is conclusive as to ownership of shares, it is common practice to have this tally with the records maintained at the Companies Registry and an official search obtained. The records at the Companies Registry are not always up to date and obtaining an updated official search may be time consuming.

(b) Financial

A Collateral Registry was established in 2017 under the Movable Properties Security Rights Act in relation to securities over moveable property. A security right in any moveable asset is effective against third parties if a notice with respect to the security right is registered. It is therefore important to carry out a search at this recently established registry.

(c) Litigation

The decisions of the Kenyan labour courts are heavily skewed in favour of employees. A conservative approach should be taken in the event of litigation liability in relation to employee disputes.

(d) Tax

M&A activity is likely to trigger an audit by the Kenya Revenue Authority after completion of the transaction. The authority has been increasingly aggressive in its conduct of tax audits in such circumstances. It is prudent to carry out a comprehensive tax due diligence on the target prior to acquisition.

(e) Employment

See question 3.1(d).

(f) Intellectual property and IT

The Kenya Industrial Property Institute is undertaking a clean-up of its Trademark Register. The institute has listed 2,496 trademarks that it intends to remove from the register if they are not renewed by their owners. It is important to ensure that the intellectual property held by the target is registered and the registration is current.

(g) Data protection

Kenya recently enacted the Data Protection Act, 2019, but is yet to develop regulations to operationalise the new law. However, targets that handle personal data either as data processors or data controllers ought to ensure they are compliant with principles of fairness, transparency, purpose limitation, etc under the Data Protection Act.

(h) Cybersecurity

Cybersecurity will largely be dealt with under the data protection legislation, as this will be covered under an entity's protocols in place to enforce data protection.

(i) Real estate

Under Kenyan law, agricultural land cannot be held by a foreign company or a company that is under the control of foreign persons. There are also restrictions on foreigners dealing in shares of a company that holds agricultural land. It is therefore important to carefully consider the structure of a transaction where one of the target's assets is agricultural land.

3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?

Parties often carry out the following public searches as part of their due diligence process:

  • a company search at the Companies Registry;
  • a search on any real property held by the target at the relevant Lands Registry;
  • a search at the Collateral Registry to confirm whether any security has been created over the moveable property of the target;
  • a search at the Kenya Industrial Property Institute to verify whether the intellectual property held by the company is validly registered; and
  • searches at court registries to confirm any cases filed against the target.

3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?

It is not unusual for vendor legal due diligence to be carried out, particularly in auction sales. While firms will accept the release of their reports to third parties, they rarely give reliance on the reports to purchasers.

4 Regulatory framework

4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?

Subject to meeting the applicable thresholds, the Competition Authority of Kenya (CAK) has oversight over the implementation of M&A transactions, regardless of the industry. Notification or approval requirements may apply.

Where the transaction has a regional dimension, there may be a need to obtain approval from the Common Market for Eastern and Southern Africa Competition Commission. Dual approval requirements no longer apply, but the CAK will need to be informed where an application is made to the commission.

Transactions in the financial services, telecommunications, insurance, mining, energy and pharmaceutical industries may also require approval from the industry-specific regulator in order to implement. The Capital Markets Authority also has some level of oversight where transactions involve listed entities.

4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?

p>As indicated in question 4.1, the CAK holds general regulatory oversight. It has broad powers in relation to antitrust, consumer protection and market supervision. These powers include:

  • approval of M&A transactions;
  • imposition of financial penalties for breach of law;
  • grant of exemptions from certain restrictive trade practices;
  • powers of entry and search on investigations;
  • powers to grant interim relief on conduct that may constitute infringement of prohibitions; and
  • powers to enter into settlement agreements with offenders.

The Communications Authority of Kenya also has broad powers in relation to the regulation of competition in the telecommunications industry under sector-specific regulations. The powers of this authority include:

  • giving orders to licensees to stop unfair competition;
  • imposing fines on licensees; and
  • declaring any anti-competitive agreements null and void.

The CAK and the Communications Authority have signed a memorandum of understanding to address apparent overlaps in the regulation of the telecommunications industry.

4.3 What transfer taxes apply and who typically bears them?

Stamp duty is a tax borne by the transferee. In relation to the transfer of shares, this is payable at the rate of 1% on the higher of the consideration or the value of the shares as determined by the target's auditor. In the case of a transfer of assets, stamp duty will be payable on instruments to transfer at rates ranging from 1% to 4% of the value of the assets being transferred.

Capital gains tax (CGT) is payable by the seller at the rate of 5% of the gain realised on the disposal of assets such as shares and real property.

As explained in question 1.2, VAT at 16% could apply on asset sales, although the extent of the liability/impact would essentially depend on how an asset deal is structured. The seller has the obligation to account for VAT. VAT is typically a cost for the purchaser, however, in some cases, the purchaser may be able to recoup the VAT costs depending on the VAT profile of the business.

The transfer of listed securities is exempt from stamp duty and CGT (subject to meeting certain conditions).

5 Treatment of seller liability

5.1 What are customary representations and warranties? What are the consequences of breaching them?

Common representations and warranties given by sellers in M&A transactions are those relating to:

  • title of the assets;
  • legal capacity to enter into the transaction;
  • the truth and accuracy of the information disclosed; and
  • tax liabilities.

It is usual for a full suite of warranties to be provided in a share purchase agreement.

Breach of warranties would give the aggrieved party a right to damages resulting from such breach, while misrepresentation affords the aggrieved party the same remedy, in addition to termination of the transaction.

5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?

It is usual to negotiate caps and hurdles to warranty and indemnity claims based on time and financial limits. Ultimately, liability will be capped at the entire consideration, particularly where this relates to breach of fundamental warranties that go to the heart of the transaction, such as title to sale shares.

5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

Warranty and indemnity insurance in not common in Kenyan M&A transactions. This is, however, gaining traction, particularly on large transactions, with the underwriting of the risk mainly done abroad.

5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

A portion of the purchase price may be retained in escrow and released upon lapse of the agreed claim period.

5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?

Yes, non-compete covenants are common for reasonable periods of time. The Kenyan courts have held that restrictive covenants are generally enforceable within the territory of Kenya and for a limited period of time, such as one year.

5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

Yes, it is common to have conditions that should be satisfied prior to completion of a transaction, such as the following:

  • The necessary regulatory approvals have been obtained;
  • There have been no MAC events; and
  • The warranties at signing are true at closing.

However, what constitutes a MAC event will be closely negotiated, to ensure that this does not give the purchaser an easy walk-away opportunity.

6 Deal process in a public M&A transaction

6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?

Where the transaction involves the acquisition of effective control (at least 25%) of a listed entity, the takeover regulations under Kenyan capital markets law will be triggered, ushering a series of steps prescribed in law. These steps, linked to milestones of the transaction process, generally involve:

  • making public announcements;
  • submitting notices to the target and regulators;
  • making a recommendation to the shareholders in relation to the offer; and
  • effecting completion of the offer if accepted by the shareholders.

Closely following the prescribed timelines under the Kenyan takeover regulations, the process takes approximately four to six months to complete.

6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?

Prior to the transaction, the buyer can build up a stake below the effective control threshold of 25%. Where there is an intention to pass this threshold, the process under the takeover regulations will be triggered.

6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?

The takeover regulations and the Companies Act allow the purchaser to squeeze out dissenting shareholders where the purchaser acquires up to 90% of the share capital of the target. Minority shares are acquired at the higher of the market price or the value offered to the other shareholders.

6.4 How does a bidder demonstrate that it has committed financing for the transaction?

The takeover regulations place this obligation on the financial adviser of the transaction. The adviser must satisfy itself that the takeover offer will not fail due to insufficient financial capacity of the offeror.

6.5 What threshold/level of acceptances is required to delist a company?

Subject to obtaining regulatory approvals, a 75% shareholder approval threshold is required to delist a company. It is usual for a purchaser to indicate in its public announcement that it intends to delist the company where it crosses this threshold.

6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?

Bumpitrage is not a common feature of public takeovers in Kenya.

6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?

Not as such; however, the takeover regulations require the board of the target to appoint an independent adviser to give an opinion as to the merits of accepting or rejecting the takeover offer. This includes carrying out a valuation of the shares and determining whether the offer is at the fair value or at a premium. Where the offer is below the fair value of the shares, the board may recommend that the shareholders reject the takeover offer.

6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?

The are no restrictions on bidders including MAC conditions. We have seen MAC clauses in offer documents based on reduction in net asset values or failure to hold a material licence.

6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?

Shareholder irrevocable undertakings to accept a takeover offer are not uncommon in Kenya. Disclosure of such undertakings may be indicated in the offer document.

7 Hostile bids

7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?

Kenyan legislation does not specifically contemplate hostile bids, and as such does not set out a process by which these are to be carried out. In most cases, where the offer price is below the fair value of the shares, the board will not recommend that the shareholders accept the takeover offer. We have seen public M&A transactions in these circumstances flop.

7.2 Must hostile bids be publicised?

Please see question 7.1.

7.3 What defences are available to a target board against a hostile bid?

Please see question 7.1.

8 Trends and predictions

8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

While there has been reduced M&A activity as a result of the negative effects of the COVID-19 pandemic, this is expected to bounce back as countries and business implement post-pandemic recovery measures. The key sectors will continue to be financial services and healthcare, particularly where the target businesses have technology and mobile capabilities. There has also been a marked focus on the renewable energy sector.

To address operational inefficiencies, boost profits and strategise for potential investments and buyouts, we have also seen increased interest in internal business reorganisations.

Significant deals over the last 12 months include:

  • the acquisition of 51% of Mayfair Bank by Commercial International Bank of Egypt;
  • the acquisition of 24.1% of ICEA Lion Insurance Holdings by Eastern Africa Holdings, which is being used by UK-based private equity firm Leapfrog Investments; and
  • the acquisition of 90% of Jamii Bora Bank by the Cooperative Bank of Kenya.

8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?

It will be interesting to see the effect of the African Continental Free Trade Area (AfCFTA), which is now in force. AfCFTA aims to create the world's largest free trade zone and therefore boost intra-African trade by allowing for the free movement of people and capital.

On a more local front, there is a bill in Parliament aimed at regulating mobile loan providers. Further, the Competition Authority of Kenya (CAK) has issued draft guidelines with respect to joint ventures. In the past, these did not specifically require CAK approval. However, under the new guidelines, it is proposed that joint ventures will require approval of the CAK where they meet certain thresholds.

Given the current state of the global economy, we expect to see increased investment in 2021 in local and regional businesses, as the value of many viable businesses may be understated by a concealed discount as a result of the negative effects of the COVID-19 pandemic.

9 Tips and traps

9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?

Targets should be more amenable to carrying out a vendor due diligence review aimed at addressing any glaring gaps that may either make a potential M&A transaction drawn-out or result in a discount on the consideration if discovered at the buyer due diligence phase. Changing the corporate structure in a manner that is more inviting to foreign investment should also be considered.

It is also important to engage well-coordinated legal, tax and financial advisers at an early stage, to ensure that there is a holistic view of the transaction so as to have timely implementation of the M&A transaction.

Co-Authored by Sunny Vikram, Associate Director

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