What you need to know about the 30% Local Ownership Rule for Foreign Companies

Posted on: July 15, 2016


What you need to know about the 30% Local Ownership Rule for Foreign Companies
Co-authored by Carol Njiru

By way of Legal Notice No. 109 of 2016, all the remaining parts of the Companies Act, 2015 (the 2015 Act) came into operation on 15th June, 2016. With them, so too did Part 37 of the 2015 Act which contains provisions relating to foreign companies which carry on business in Kenya.

Section 974 of the 2015 Act provides that a foreign company shall not carry on business in Kenya unless it is either registered, or it has applied to be so registered and the application has not been dealt with, within the prescribed period. In the case of the latter, the company will be taken to have been registered as a foreign company and it will be entitled to be issued with a certificate of registration. The term “carrying on business in Kenya” includes but is not limited to, offering debentures in Kenya, or being a guarantor for debentures offered in Kenya.

It is an offence for a foreign company to carry on business in Kenya without being so registered and the penalty incurred is a fine of not more than  KES  5 million (USD 50,000). Further, where a foreign company has being convicted of this offence and it continues to carry on business in Kenya all the same, the company and each of its officers who are in default will be liable to a fine of not more than KES 500,000 (USD 5000) for each further offence committed on each day which the contravention continues.

Section 975(2) contains the criteria for approval for registration of a company as a foreign company. Among these, the company must demonstrate in its application that at least 30% of the company’s shareholding is held by Kenyan citizens by birth, this is what has been dubbed the “30% local ownership rule”. The term “citizen by birth” is defined under Article 14(1) of the Constitution, 2010 to mean a person who, on the day of their birth, whether or not they were born in Kenya, either their mother or their father was a citizen. Therefore, following the commencement of the 2015 Act, any foreign company that wishes to be registered as such in Kenya, must have at least 30% of its shareholding held by people who have a parent or parents, who are Kenyan citizens.

However, in accordance with Section 65 of Part 7 of the Sixth Schedule of the 2015 Act, where the company was the holder of a certificate of registration as a foreign company, immediately before the repeal of Section 367 of the repealed Act (Cap. 486), it will continue to be registered as a foreign company under Part 37 of the 2015 Act. This provision is in line with Section 994(5) of the 2015 Act, which provides that as soon as practicable, after the commencement of Part 37, the Companies Registrar shall transfer to the Foreign Companies Register, the records relating to foreign companies that were registered under the repealed Act (Cap. 486) immediately before commencement.

There has been significant debate on how this provision will affect business in Kenya, with an outcry that the provision must be urgently amended to encourage foreign direct investment in Kenya, something Kenya has been applauded for, when compared to some of its neighbours. There have also been some discussions on whether indeed the Companies Registry is currently strictly ensuring compliance with this provision. Whatever the case, the provision is in the 2015 Act and is operational by Legal Notice No. 109 of 2016, like all the remaining parts of the 2015 Act. It is also worth noting, that whereas Section 995 of the 2015 Act grants the Cabinet Secretary the power to make Foreign Companies Regulations, at this time, no such regulations have been made. We continue to watch whether this section and other controversial provisions in the Companies Act, which have attracted significant debate will be amended.

 

Practice Areas

  • Corporate and Commercial
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