This is a continuation of What you need to know about Mergers & Acquisitions
A merger is defined as a voluntary amalgamation of two firms on roughly equal terms into one new legal entity. The decision is usually mutual between the two companies and geared towards enjoying greater economies of scale and becoming more competitive.
Acquisition is where a company acquires another company and obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure.
The main difference between a merger and an acquisition is that in the latter, a bigger company will buy a smaller company and absorb it or run it as a subsidiary
Legal Framework Governing Mergers and Acquisition in Kenya
- The Capital Markets Act ,Cap 485A
The Act provides for approval of, and licensing of players in the securities industry. These include investment advisors and venture capital companies .Therefore any player who takes part in structuring a merger or an acquisition must hold a license and be approved as per the Act.
Under the Capital Markets Act, there is established the Capital Markets Authority (CMA) whose functions include ;the development of all aspects of the capital markets with particular emphasis on the removal of impediments to, and the creation of incentives for longer term investments in, productive enterprises.
Part of the purpose of mergers and acquisition is to create ‘productive enterprises,’ therefore their regulation by the CMA amounts to it carrying out one of its functions.
With regard to listed companies, the CMA is empowered to approve persons wishing to carry out the business of a securities exchange. Currently, the Nairobi Securities Exchange (NSE) is the only approved securities exchange in Kenya. Where a company which is the subject of a merger or acquisition is listed on the securities exchange, certain notices are required to be served on the NSE; however CMA’s functions do not extend to giving approvals.
- Capital Markets (Takeovers & Mergers) Regulations,2002
By virtue of section 12(1) of the Capital Markets Act, the Cabinet Secretary is empowered to formulate rules and regulations to govern various aspects of the securities market.
The Regulations define what mergers and take-overs are and their various dimensions, and provide for the procedures to be followed in such transactions.
- The Competition Act,No.12 of 2010
The Competition Act contains provisions safeguarding competition in the national economy which includes regulating mergers. It provides for the procedure to be followed when conducting a merger for both listed and unlisted companies.
Section 7 of the Competition Act establishes the Competition Authority, and part of its mandate is to investigate impediments to competition, including entry into and exit from markets, in the economy as a whole or in particular sectors and publicizes the results of such investigations. This extends to corporate activity in the market that affects competition.
- The Companies Act, No. 17 of 2015
The Companies Act regulates the formation, conduct and winding up of companies registered in Kenya but does not specifically regulate mergers and takeovers. Its relevance is in the context of prohibiting companies from giving financial assistance to any person to acquire its shares. This includes giving loans, issuing guarantees, providing security or in any way financially assisting a person in acquiring its shares.
The only exceptions to this prohibition are where the company lends money as part of its ordinary business (for example a bank); or where there is an employee share ownership scheme.
- COMESA Competition Rules
COMESA Competition Regulations came to effect via Gazette Notice issued in January 2013 and first adopted in December 2004 by the Council of Ministers that is empowered under the provisions of the COMESA Treaty to make regulations for the COMESA region.
According to the Regulations, a merger must be notified to the COMESA Competition Commission (CCC) where both the acquiring firm and target firm or either the acquiring firm or target firm operate in two or more member states.
The Regulations do not set any meaningful thresholds for determining whether or not a merger is notifiable.
The absence of a proper threshold regime for COMESA mergers and the lack of legal precedent within COMESA on competition matters place merging parties in a difficult position. To ease this situation, COMESA has published draft guidelines, including: Draft Merger Assessment Guidelines, Draft Public Interest Guideline and Draft Market Definition Guideline.
However, these Guidelines are still in draft and have not yet been adopted and therefore remain untested. Until absolute clarity is provided on the applicability of the Regulations and the draft Guidelines, parties engaging in mergers and acquisitions activity within the COMESA region would be well advised to seek legal counsel prior to consummating any such transaction.
- Insurance Act ,Cap 487
Under the Insurance Act, where two or more insurers registered under the Insurance Act, intend to amalgamate; or where an insurer intends to transfer insurance business of any class to another insurer; then the approval of the Insurance Regulatory Authority must be obtained prior to the amalgamation or transfer, as the case may be.
In addition, the Insurance Act requires that the prior written approval of the Commissioner of Insurance must be obtained prior to any transfer or disposal of more than 10 per cent of the paid-up share capital or voting rights of an insurer. Failure to obtain such approval results in such transfer, disposal or acquisition being null and void ab initio.
The Insurance Act also contains restrictions on the ownership of shares in an insurer.
- Banking Act ,Cap 488
The Banking Act provides for the licensing of banks and other financial institutions such as mortgage finance providers. Any amalgamation or arrangement that involves a licensed institution as one of the principal parties to the transaction and any arrangement for the transfer of all or any part of the assets and liabilities of a licensed institution to another person, is of no legal force if it is consummated without the prior written approval of the Cabinet Secretary of Finance.
In addition, the Banking Act prohibits the transfer of more than 5 per cent of its share capital to an individual or an entity except with the prior written approval of the Central Bank of Kenya.
The Banking Act also prohibits single ownership of more than 25 per cent of the shares in a bank by any person other than another bank (including a foreign bank), government, state corporation, or non-operating holding company.