Regulation Of Mergers In Kenya

Introduction

The Competition Act defines a merger as an acquisition of shares, business or other assets, whether inside or outside Kenya, resulting in the change of control of a business, part of a business or an asset of a business in Kenya in any manner and includes a takeover. Mergers occur in various ways including:

a) Acquisition of full control over whole or part of the business of an acquired firm;

b) Acquisition of indirect control where the acquiring firm, though not acquiring a controlling stake, materially influences the affairs of the acquired firm;

c) A joint venture is deemed to be a merger if it performs all the functions of an autonomous economic entity for at least ten years, unless it is established for a finite period;

d) Acquisition of material interest;

e) Acquisition of assets of a target company;

f) Acquisition of at least fifty percent shares of an acquired firm;

g) Acquisition of majority voting rights;

h) Acquisition of majority board appointment rights.

As illustrated in the definition, the issue of ‘control’ is at the heart of the definition of mergers. A person is said to be in control if it:

a) beneficially owns more than half of the issued share capital or business assets;

b) is entitled to a majority of votes that may be cast in a general meeting;

c) is able to appoint or veto appointment of a majority of directors;

d) is a holding company and the undertaking is a subsidiary;

e) has ability to control majority of votes of trustees or to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of a trust;

f) in case of a nominee undertaking, owns the majority of the members’ interest or controls directly or has the right to control the majority of members’ votes;

g) has ability to materially influence the policy of the undertaking in a manner comparable to a person who in ordinary commercial practice can exercise an element of control; or

h) has control over the assets of the business.

Control Of Mergers By Competition Authority

The Competition Act prohibits any person from implementing a proposed merger unless the same is approved by the Competition Authority of Kenya (“Authority”) and implemented in accordance with any conditions attached to the approval. Any merger that is implemented without approval of the Authority has no legal effect and any obligations imposed on any of the parties by any agreement shall not be enforceable in legal proceedings.

So, when do we say a merger is implemented?

A merger is said to be implemented if:

a) More than 20% of the consideration is paid by the acquirer;

b) there has been an actual integration of any aspect of the merging parties, for example integration of infrastructure, information systems, employees, corporate identity or marketing efforts;

c) the acquiring firm influences or controls any competitive aspect of the target party’s business, such as setting prices, limiting discounts or restricting sales to certain customers or of certain products; or

d) there has been an exchange of strategic information between the merging parties for purposes other than valuation or on a need-to-know basis during due diligence or in ways compromising the strategic independence of each of the parties to the merger.

Notification to the Authority

Section 43 of the Competition Act provides that, where a merger is proposed, the undertakings involved are required to notify the Authority in writing. This provision required any change of control, regardless of how small the undertakings were, to be notified to CAK. Because of the numerous merger notifications, many of which had no effect on competition, the Authority issued guidelines to restrict to notification to only those mergers which exceeded a specified threshold.

Under the guidelines, the Authority looks at the combined turnover or asset value of the parties (whichever is higher) in determining whether a merger is notifiable and if a merger filing fee is payable.

Below is a summary of the thresholds:

Threshold (Combined value of assets/turnover (whichever is higher) | Fees per proposed merger (Kshs)

0— 500,000,000 } | Zero (Excluded from notification)

500,000,001 to One billion (1 ,000 ,000 ,000) | Zero (requires notification to Authority)

One billion and one (1,000,000,001)— Ten billion (10,000,000,000) | One million (1,000,000)

Ten billion and one (10,000,000,001) — Fifty billion (50,000,000,000) | Two million (2,000,000)

Above Fifty billion (>50,000,000,000) | Four million (4,000,000)

The Authority may at any time revoke approval for implementation of any merger if its decision was based on materially incorrect or misleading information, or any condition attached to the approval that is material to the implementation has not been complied with. The Authority shall only revoke an approval after notifying the undertakings involved and hearing their submissions and representations.

Firms engaged in prospecting in the carbon-based mineral sector irrespective of their asset value are excluded from notification requiring the approval of the Authority.

Regional Notification

The Common Market for Eastern and Southern Africa (COMESA) has a set of rules and thresholds for the notification of mergers and acquisitions (M&As) within its member states. A merger must be notified to COMESA's Competition Commission if:

a) both the acquiring firm and target firm operate in at least two member states, or the acquiring firm operates in at least two member states while the target firm operates in only one member state, or the target firm operates in at least two member states while the acquiring firm operates only in one member state; and

b) the combined annual turnover or combined value of assets in the COMESA region (whichever is higher) of each of at least two parties to the merger equals or exceeds USD 50 million, and

the annual turnover or value of assets in the COMESA region (whichever is the higher) of each of at least two parties to the merger equals or exceeds USD 10 million, unless each of the parties to the merger achieves at least two-thirds of its aggregate turnover or assets in the COMESA region within only one member state.

Offences and Punishments

a) Any person who implements a merger without approval of the Authority commits and offence and on conviction the person shall be liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding KShs. 10 Million or to both. The Authority may also impose a financial penalty of an amount not exceeding 10% of the preceding year’s gross annual turnover in Kenya of the undertaking or undertakings in question.

b) The Authority may also impose a financial penalty of up to 10% of the preceding year's annual gross turnover on any person that gives the Authority incorrect or misleading information, or implements a merger without adhering to material conditions attached to the approval for implementation.

c) Any party to a proposed merger that gives the Authority incorrect or misleading information, or fails to adhere to conditions attached to the approval for implementation of a proposed merger commits and offence and on conviction is liable to a fine not exceeding ten million shillings or to imprisonment for a term not exceeding five years, or to both.

Sector Specific Compliance

In addition to the general requirements for notifying mergers, certain sectors impose additional regulatory obligations that must be fulfilled before a merger can proceed. Below is an overview of some key sectors and their specific requirements.

1. Capital Markets

Under the Capital Markets (Take-Overs and Mergers) Regulations, any individual or entity seeking to acquire shares or voting rights in a listed company must adhere to the prescribed take-over procedures. This applies when the acquisition, combined with shares or voting rights already held by the acquirer, their associates, or related parties, would result in effective control of the listed company. Non-compliance with these regulations is prohibited.

2. Banking and Financial Institutions

Mergers involving banks or financial institutions require prior approval from the Central Bank of Kenya. Additionally, any transfer of more than five percent of a bank or financial institution’s shareholding must also be approved by the Central Bank of Kenya before it can be executed.

3. Insurance Sector

The Insurance Act mandates that licensed insurers obtain approval from the Insurance Regulatory Authority (IRA) before proceeding with any amalgamation of two or more insurers or the transfer of an insurance business of any class to another licensed insurer.

These sector-specific requirements ensure that mergers and acquisitions are conducted in a manner that safeguards the interests of stakeholders and maintains the stability and integrity of the respective industries.

Conclusion

It is an offence for undertakings (e.g. companies) that meets the threshold required to notification of mergers to implement a proposed merger without notifying the Authority for approval.

Therefore, it is important for every undertaking/company to, as soon as they have made a decision to acquire a controlling stake in another, to first determine whether it shall be required to notify the Authority.

Failure to notify the Authority of a notifiable merger can result in penalties as well as in the merger being declared void. For instance, the Authority imposed a fine of Kshs. 17,492,795.23 for the irregular implementation of a merger between Sika International AG and LSF11 Skyscraper Holding Company. The two entities had proceeded to implement a merger without procuring the approval of the Authority of Kenya contrary to the Competition Act. More on this case can be found in our article accessible here.

How Can We Help You

At CM Advocates, we have an experienced team of corporate lawyers who can assist you in complying with the Competition Act and ensure that your merger is implemented seamlessly. This guidance will run all the way from the commencement stage- from drafting of the term sheet, to conducting the due diligence exercises, to drafting the transaction documents and seeking approval/notification of the merger depending on the turnover.

If you would like to consult on this article or any other related matter, you may contact the contributors on the emails below or the commercial team through commercial@cmadvocates.com. Do also visit our website https://cmadvocates.com/en for more information about us and our services.

Contributors 

Victorine Rotich, Senior Associate – vrotich@cmadvocates.com 

Caiphas Chepkwony, Associate – cchepkwony@cmadvocates.com