Understanding Takeovers and Mergers in Kenya: A Legal and Regulatory Guide

Introduction

Kenya's M&A landscape has matured significantly over the past decade, with increasing transaction volumes across financial services, telecommunications, manufacturing, energy, and real estate. As the economy deepens and market participants become more sophisticated, the regulatory framework governing takeovers and mergers has become an increasingly important consideration for acquirers, target companies, and their advisors.

The legal framework for takeovers and mergers in Kenya draws from multiple sources, each addressing different aspects of the transaction process. The Companies Act, 2015 provides the corporate law framework for mergers, reconstructions, and schemes of arrangement. The Capital Markets Act and the Take-over Regulations govern the process for acquiring control of listed companies. The Competition Act, 2010 and the Competition Authority of Kenya (CAK) regulate mergers and acquisitions from a competition law perspective, applying to both listed and private companies above specified turnover thresholds.

Understanding how these regulatory regimes interact — and the sequence in which approvals must be obtained — is critical to the successful execution of any takeover or merger transaction in Kenya.

Legal Framework

The Companies Act, 2015: Mergers and Reconstructions

Part XXVI of the Companies Act, 2015 provides the framework for mergers and reconstructions. Section 920 defines a merger as a transaction in which two or more companies amalgamate their undertakings and one or more existing companies merge into another company, or two or more companies form a new company. The Act distinguishes between a merger (where one company absorbs another) and an amalgamation (where two or more companies combine to form a new entity).

Section 921 requires that a merger or reconstruction must be approved by a special resolution of each company involved, passed at a general meeting of which at least 21 days' notice has been given. The notice must be accompanied by a statement explaining the effect of the proposed merger on shareholders, creditors, and employees. Directors are required to provide a report on the terms of the merger and its likely impact on each class of stakeholder.

Sections 922 to 924 provide protections for dissenting shareholders and creditors. A shareholder who voted against the merger resolution may, within 28 days, require the company to purchase their shares at fair value. Creditors may apply to the court for an order restraining the merger if they can demonstrate that their interests would be materially prejudiced.

Schemes of Arrangement

Part XXVII of the Companies Act provides an alternative mechanism for effecting mergers, acquisitions, and corporate restructurings through schemes of arrangement. Under Section 930, a company may propose a compromise or arrangement with its creditors or shareholders (or any class of them), which, if approved by a majority in number representing 75% in value of those present and voting, and sanctioned by the court, becomes binding on all members of the relevant class.

Schemes of arrangement are a flexible tool that can be used for a wide range of transactions, including the acquisition of a target company by a bidder (where the target's shares are cancelled and replaced by consideration from the bidder), the restructuring of a company's share capital or debt, and demergers and spin-offs. The scheme process involves an application to the High Court to convene meetings of the relevant classes, the holding of the class meetings and voting on the scheme, a second court hearing to sanction the scheme, and registration of the court order with the Registrar of Companies, at which point the scheme becomes effective.

The Capital Markets (Take-overs and Mergers) Regulations, 2002

The Take-over Regulations apply to the acquisition of voting shares in a company whose shares are listed on the Nairobi Securities Exchange (NSE) or, in certain circumstances, a public company. The Regulations establish a comprehensive framework governing the conduct of takeover bids and the obligations of bidders, target companies, and their respective advisors.

Key provisions of the Take-over Regulations include the mandatory offer obligation. Regulation 4 provides that any person who acquires shares carrying 25% or more of the voting rights in a listed company must make a mandatory offer to all remaining shareholders to acquire their shares at a price not less than the highest price paid by the acquirer for shares in the target during the preceding 12 months. This threshold is designed to protect minority shareholders by ensuring that they have the opportunity to exit at a fair price when control of the company changes.

The Regulations also impose requirements on voluntary offers, setting out the procedures for making a formal takeover bid, the content of the offer document, the timetable for the offer, and the obligations of the target company's board in responding to the offer. The board of the target company must obtain independent advice on the merits of the offer and communicate that advice to shareholders.

The CMA's Mergers and Acquisitions Division is responsible for reviewing and approving takeover transactions. The CMA must be notified of any proposed takeover of a listed company, and the offer document must be submitted to the CMA for review before it is dispatched to shareholders.

The Competition Act, 2010

The Competition Act, 2010 establishes a merger control regime administered by the Competition Authority of Kenya (CAK). Under Section 41, parties to a proposed merger or acquisition must notify the CAK if the combined turnover or assets of the merging parties exceeds the thresholds specified in the Competition (General) Rules, 2019. As at the date of this article, notification is required where the combined turnover or assets of the merging parties exceed KES 1 billion, or where the turnover or assets of the target exceed KES 500 million.

The CAK assesses whether the proposed transaction is likely to substantially prevent or lessen competition in any market. The CAK may approve the merger unconditionally, approve it subject to conditions (such as divestiture requirements or behavioural undertakings), or prohibit the merger entirely. Completing a notifiable merger without CAK approval is an offence carrying significant penalties, and the transaction may be declared void.

It is important to note that the CAK merger control regime applies to all mergers and acquisitions — not just those involving listed companies. Private company M&A transactions that meet the turnover or asset thresholds are equally subject to CAK notification and approval requirements.

Types of Takeover Structures

Share Acquisition

The most common form of takeover involves the direct acquisition of shares in the target company from its existing shareholders. For listed companies, this may take the form of a market purchase (acquiring shares through the NSE), a negotiated block purchase from major shareholders, or a formal takeover offer to all shareholders. For private companies, share acquisitions are typically executed through a negotiated share purchase agreement between the buyer and the selling shareholders.

Asset Acquisition

An alternative to acquiring the company itself is to acquire its business and assets. Asset acquisitions allow the buyer to select specific assets and liabilities to acquire, leaving unwanted assets and contingent liabilities with the seller. This structure is commonly used where the buyer is interested in a specific business division or asset portfolio, or where the target company has historical liabilities that the buyer wishes to avoid. However, asset acquisitions may trigger transfer taxes (including stamp duty and VAT) and may require the consent of third parties to contracts and licences that are being transferred.

Scheme of Arrangement

As discussed above, a scheme of arrangement under Part XXVII of the Companies Act can be used to effect a takeover. The advantage of a scheme is that, once approved by the requisite majority and sanctioned by the court, it is binding on all shareholders — including those who voted against it or did not vote. This eliminates the risk of a minority holdout that can arise in a voluntary offer structure.

Practical Steps for Executing a Takeover or Merger

The successful execution of a takeover or merger in Kenya requires careful planning and coordination across multiple workstreams. The transaction process typically involves several key stages.

During the planning and structuring phase, the acquirer should engage legal and financial advisors to determine the optimal transaction structure (share purchase, asset purchase, or scheme), identify regulatory approvals required (CMA, CAK, sector-specific regulators), conduct preliminary valuation analysis, and prepare a transaction timeline.

The due diligence phase involves a comprehensive legal, financial, tax, and commercial review of the target company. For listed company takeovers, access to non-public information must be managed carefully to comply with insider trading restrictions under the Capital Markets Act.

The regulatory approval phase requires concurrent management of multiple approval processes. For listed company transactions, this includes CMA notification and review of the offer document. For all transactions exceeding the CAK thresholds, competition authority notification and clearance is required. Sector-specific approvals may also be necessary — for example, CBK approval for banking sector transactions, or IRA approval for insurance sector transactions.

The execution and completion phase involves the signing of definitive transaction documents, satisfaction of conditions precedent, obtaining shareholder approvals where required, completion of the share transfer or asset transfer, and filing of post-completion returns with the Registrar of Companies and other regulatory bodies.

Compliance Risks

Key compliance risks in takeover and merger transactions include failure to make a mandatory offer when the 25% threshold is crossed in a listed company (which may result in CMA enforcement action and potential unwinding of the transaction), failure to notify the CAK of a merger that meets the notification thresholds (which is a criminal offence and may result in the transaction being declared void), failure to comply with insider trading restrictions during the transaction process, failure to obtain sector-specific regulatory approvals before completing the transaction, and inadequate disclosure to shareholders regarding the terms and effects of the transaction.

Conclusion

Takeovers and mergers in Kenya involve a complex interplay of corporate law, securities regulation, and competition law. The multi-layered regulatory framework requires careful planning, early engagement with advisors, and proactive management of regulatory approval processes. For acquirers, understanding the mandatory offer thresholds, competition notification requirements, and sector-specific approvals at the outset of a transaction is essential to developing a viable timeline and avoiding costly compliance failures.

As Kenya's M&A market continues to mature, the regulatory framework is likely to evolve further. Companies and investors engaged in M&A activity should ensure they have access to experienced legal counsel who can navigate the regulatory landscape and deliver transactions efficiently and compliantly.