MERGERS & ACQUISITIONS IN KENYA: A LEGAL PERSPECTIVE

Mergers are pivotal in the corporate sphere, offering businesses a gateway to expansion, diversification, and enhanced operational efficiency. Defined under the Competition Act, a merger occurs when one or more entities gain control over another business, either fully or partially. This can be through purchasing shares, acquiring interests, or buying assets. The scope extends to taking over companies in receivership, controlling foreign entities with local subsidiaries, or acquiring segments of businesses capable of independent operation.

Understanding Control in Mergers

Control is at the heart of any merger, and it can be established when an individual or entity:

• Owns over half of the share capital or business assets.
• Holds the majority voting power, either directly or via a controlled entity.
• Has the power to appoint or veto the majority of directors.
• Wields significant influence over business policies, akin to a dominant shareholder.

Control can also manifest through trustee votes in a trust or by holding a majority interest in a nominee undertaking. This broad definition ensures that various forms of influence are comprehensively regulated in merger policies.

Types of mergers in the Kenyan market

Mergers come in various forms, each with distinct implications. These forms include but are not limited to the following:

1. Horizontal Merger: This involves companies that are direct competitors. Although they offer the advantage of economies of scale and synergy benefits, such mergers are scrutinized closely due to their potential to increase market power and reduce competition.
2. Vertical Merger: The merging companies are at different stages of production or distribution, such as a manufacturer and a supplier. This helps streamline their operations and enhances control over the supply chain, reducing costs and improving quality.
3. Product Extension Merger: Companies in the same market offering complementary products merge, expanding their product lines and market presence to cater to a broader customer base.
4. Market Extension Merger: Companies operating in different geographical markets but offering similar products merge, expanding their market reach and tapping into new customer bases.
5. Conglomerate Merger: Firms from unrelated industries merge for diversification, mitigating risks associated with market volatility by operating across diverse sectors.
6. Cogeneric Merger: Companies in related industries but offering different products merge, allowing for increased market share and leveraging shared technologies or distribution channels.
7. Reverse Merger: A private company merges with a public one to become publicly traded without the traditional IPO process, providing a quicker and less costly route to public markets.

Essential documents in mergers and acquisitions

To ensure seamless transactions and full legal compliance, mergers and acquisitions require a host of documents. The following is a non-exhaustive list of what you are most likely to encounter during such a transaction:

• Confidentiality Agreements (NDA): Protect sensitive information exchanged during the merger process.
• Letter of Intent (LOI) and Term Sheets: Outline the preliminary terms and conditions of the deal.
• Due Diligence Documents: Offer a comprehensive assessment of the legal and financial status of the involved entities.
• Regulatory Filings: Ensure compliance with relevant legal and regulatory requirements.
• Shareholder and Employment Agreements: Define the rights and obligations of shareholders and key employees post-merger.

Merger notification and regulatory thresholds

In Kenya, mergers must be notified to regulatory bodies like the Competition Authority of Kenya (CAK) and industry-specific regulators. Notification is required if the combined turnover or assets exceed certain thresholds.

Notifiable mergers

1. Mergers in specific industries must notify their respective regulators, such as the Capital Markets Authority for listed companies or the Central Bank for institutions under its regulation.
2. In an instance where undertakings have a combined turnover or assets, whichever is higher, in Kenya of 1 billion shillings and the turnover or assets, whichever is higher, of the target undertaking in Kenya is above 500 million shillings you have to give a full comprehensive notification to the CAK.
3. Additionally, you have to notify the CAK in a transaction where the turnover or assets, whichever is higher, of the acquiring undertaking in Kenya is above 10 billion shillings and the merging entities are in the same market or can be vertically integrated. This rule applies unless the transaction meets the Common Market for Eastern and Southern Africa (COMESA) Competition Commission Merger Notification Thresholds.
4. If the entities operate in the carbon-based mineral sector and if the value of the reserves, rights and the associated assets to be held as a result of the merger exceeds 10 billion shillings, you have to notify the CAK.
5. Where the COMESA Competition Commission Merger Notification Thresholds are met and 2/3 or more of their turnover or assets, whichever is higher, is generated or located in Kenya, you have to notify the CAK.

Mergers that can apply for an exemption

1. We have cases where the combined turnover or assets, whichever is higher, of the merging entities are between 500 million shillings and 1 billion shillings. The parties to mergers of this nature can apply to the CAK for exclusion from the notification requirements.
2. Further, if the undertakings are engaged in prospecting in the carbon-based mineral sector, they can apply for an exemption regardless of their asset value.

Mergers that are exempt from notification to the CAK

1. Some mergers are excluded from notification to the CAK. This happens in instances where the combined turnover or assets (whichever is higher) of the merging undertakings in Kenya do not exceed 500 million shillings.
2. Finally, the undertakings will be exempt if they meet the COMESA Competition Commission Merger Notification thresholds and at least 2/3 of turnover or assets (whichever is higher) is not generated or located in Kenya.

After the notification: what happens next?

Once a merger is notified, it cannot proceed without CAK approval. The CAK examines the merger’s impact on competition, market dominance, public benefits, employment, and market access. Unauthorized mergers are legally void and can result in severe penalties, including substantial fines and imprisonment.

The CAK has 30 days to request additional information after notification. It must then make its decision within 60 days, with a possible extension for complex cases. The CAK can approve, reject, or approve the merger with conditions.

Resolving disputes: appeals and review processes

If aggrieved with the CAK’s decision, you can contest it at the Competition Tribunal by applying for its review within 30 days. The Tribunal can confirm, amend, or overturn the decision and must notify the parties in writing. Further appeals can be made to the High Court within 30 days, with the High Court’s ruling being final.

Emerging issues in mergers and acquisitions

1. Merger Referral

The right of referral is provided for under the COMESA Competition Regulations. A COMESA member state, upon learning of a merger notification submitted to the COMESA Competition Commission, can request the Commission to refer the merger to that member state’s own competition authority if the state believes the merger is likely to significantly and disproportionately harm competition within its territory or any specific region within it.

The Competition Authority of Kenya recently exercised this right, successfully obtaining the COMESA Competition Commission’s approval to refer part of the proposed acquisition by Access Bank Plc of the entire issued share capital of National Bank of Kenya (NBK) Limited for review under Kenya’s national competition law.

2. Competition (Amendment) Bill 2024

The Competition (Amendment) Bill, 2024 introduces several updates to strengthen competition law enforcement. Key proposals include a broadened definition of abuse of superior bargaining power, particularly in digital markets. The bill enhances the Competition Authority of Kenya’s (CAK) powers to impose stricter penalties and streamline investigations, especially targeting anti-competitive conduct in digital activities. These amendments aim to refine how competition law is applied, addressing issues like market dominance and improving consumer protection mechanisms.

Conclusion

Mergers are complex processes involving multiple stakeholders and detailed legal frameworks. While they indeed present significant opportunities for growth and diversification, they equally demand deliberate planning and strict compliance with regulatory frameworks.

At Ashitiva Advocates LLP, we bring a blend of deep legal expertise and strategic business insight to ensure your M&A processes are seamless and successful. With a proven track record in high-value transactions and handling of regulatory interactions, we are your trusted partner in the multifaceted legal landscape of mergers and acquisitions. Partner with us to experience the highest standard of legal excellence and client care.

For any additional information or support regarding this or related topics, please contact our Corporate Commercial practice via info@ashitivaadvocates.com.

This article is intended for informational purposes only and does not constitute legal advice or establish an advocate-client relationship.