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Kenya’s Legislature Deals a Blow to Minority Shareholders

25 September 2019
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The Statute Law (Miscellaneous Amendments) Act (Act No. 12 of 2019) (Amendment Act), which is now law, makes a number of somewhat bizarre amendments to the Companies Act (Act No. 17 of 2015) (the Companies Act), which we set out below:

  1. Take-overs – Minorities rights diluted

The most important change relates to the compulsory acquisition/sell-out rights for company shareholders involved in a take-over. This applies equally to private company take-overs where there are minority shareholders but is especially relevant in public take-overs of listed companies on the Nairobi Securities Exchange. Prior to amendment, the position was as follows:

  1. the bidder’s right to buy-out the minority at the offer price (compulsory acquisition right): this right is triggered on satisfaction of a dual test. A bidder needs to have acquired or unconditionally contracted to acquire both 90% of the shares to which the offer relates and 90% of the voting rights in the company to which the offer relates; and
  2. minority shareholders’ right to be bought out (sell-out right): this right is also triggered on satisfaction of a dual test. Any minority holder had the right to require the bidder to buy its shares at the offer price if the bidder had obtained 90% of both the issued shares and the voting rights in the company.

However, the Amendment Act now lowers the 90% threshold to just 50% thereby pulling Kenya away from global practice in relation to minority shareholder protections. The lower threshold allows any bidder to force out any non-assenting shareholders easily if 50% of the shares to which the offer relates accept the offer.

There are few, if any, jurisdictions globally with such a low threshold for compulsory acquisition. We anticipate challenges to the legitimacy of this amendment and, potentially, in respect of any take-over effected in the future that takes advantage of the lower thresholds. It will also impact Kenya’s standing as a jurisdiction where minority shareholders are both valued and protected, especially in the context of the capital markets and publicly listed companies.

  1. Unanimous consent to the addition of new members

An additional criterion under section 91(a) of the Companies Act has been added to the list of what is required for a private company to be classified as such. The current requirements state that a company is a private company if its articles of association: (i) restrict a members right to transfer shares; (ii) limit the number of members to fifty; and (iii) prohibit invitations to the public to subscribe for shares or debentures of the company. The articles of association must now also include a requirement that the consent of all the members is required to add a new member.

A wide reading of the amendment suggests that approval will be required from every stakeholder for a transfer of existing shares or an issue of new shares where the recipient of such shares will be a new member. The amendment: (i) poses particular issues where companies are trying to raise capital through equity (and minority shareholders object to the dilution of their shareholding); (ii) restricts the liquidity of the market for shares in a private company further; and (iii) creates unnecessary additional hurdles to share transfers and share subscriptions, at a time when Kenya should be promoting ease of doing business.

We fail to see, given that there already exists statutory pre-emption rights, why there is the need to make this unwieldy and unnecessary change. Again, this sets Kenya apart from global norms in company law. Nonetheless, private companies will need to ensure that their articles of association are updated to account for the amendment.

The amendment does not apply to public companies.

  1. Beneficial ownership disclosures

In an attempt to promote transparency in the ownership of companies in Kenya, the Companies (Amendment) Act, 2017 (Companies Amendment Act) introduced the requirement by Kenyan companies to disclose beneficial ownership. The Amendment Act includes in the Companies Act a specific section setting out these requirements.

Kenyan companies are now required to keep a register of beneficial owners disclosing, amongst other things, the nature of control the beneficial owner has in the company. The register is to be lodged with the Companies Registrar (Registrar) within 30 days of its preparation and where there are any amendments made, such amendments should be lodged with the Registrar within 14 days of such amendment.

A publicly listed company is not required to file such amendments. The amendments raise some issues, namely: (i) who has access to the new information now disclosed to the Companies Registry; and (ii) whether such information be adequately protected, especially given we do not yet have a data protection regime.

  1. Other minor changes

There are minor changes under the Amendment Act worth mentioning:

  1. the requirement for single member companies to not hold annual general meetings is now codified;
  2. the Registrar now has the discretion to extend the time within which a company may hold its annual general meeting;
  3. the qualifying conditions for a small company (these are companies that are, amongst other things, not required to have their accounts audited under the Companies Act) have been amended to lower the number of employees from 50 to 25;
  4. the authority of the directors to allot securities is to be derived solely from a resolution of the company and not the articles of association of a company; and
  5. the register of members of a company is not required to state when a person ceased to be a shareholder.