Step Lightly: Matters to Consider During M&A Deals in Kenya

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Among the myriad of legal issues that arise in a corporate merger or acquisition, labour and employment law considerations feature quite highly. The issues that arise are of great concern not only to employees but also to management of both the acquiring and acquired company. Typically job losses in mergers occur as a result of restructuring, duplication of roles or a desire to down-size.

The Employment Act (No.11 of 2007) and Labour Relations Act (No. 14 of 2007) make no specific reference to the effect of transfer undertakings on employees but the Employment Act does set out the basic conditions of employment and addresses the legal requirements for engagement, termination and specifically termination on account of redundancy which is a common feature in such undertakings.

It is trite law that contracts of employment are not assignable; therefore assignment of such contracts would ordinarily not be included in the assignment of assets and liabilities of a company being dissolved or absorbed into another company. An exception to this arises when the employer company is acquired by merely change of shareholder and not identity, therefore the terms of employment remain unchanged and the employment relationship continues.

Where a merger would result in a new company emerging and the old company being dissolved, the theory of corporate personality lays credence to the fact that the employee’s contractual relationship does not pass to the new entity as to create a contractual relationship between the employee and the new company. The contracts of employment are therefore terminated on account of redundancy with procedures and payments to be strictly followed in accordance with Section 40 of the Employment Act by the acquiring company. If the acquiring company adopts the approach of taking up the employment of transferred employees, they must be employed on terms that are on a whole not less favourable. The employees who are taken up on new terms waive their rights to terminal benefits, however if the employees reject this new offer they must be terminated on account of redundancy and compensated in accordance with the Employment Act.

Prior to the transfer undertaking, due diligence should be undertaken requiring a review of the other company’s employment agreements and collective bargaining agreement that relate to the conditions of service, as a buyer that steps in the seller’s shoes may be bound by them. In situations such as transfer of entity into a new entity, a buyer may assume bargaining obligations with a pre-existing union whose members are contracted by the new entity but it is not bound by the requirement of the collective bargaining agreement. Review of the company’s policies, procedures, pending employment claims, share incentive schemes, pension schemes, benefit plans, housing and building loans is also imperative. Appropriate warranties and indemnities are advised in the agreements.

Intellectual Property (IP)

In the event that the company being acquired holds any IP rights either as patents, trade marks, copyrights or industrial design (as is the case in many manufacturing companies), then a due diligence will need to be conducted by the acquiring entity to confirm that the target company is the registered proprietor of such IP rights.
If IP rights are to be transferred to the acquiring company, then the parties will need to consider having a deed of assignment executed to cater for the assignments of such IP rights to the acquiring entity. Such Deeds of Assignment are registerable at the Kenya Industrial Property Institute (KIPI). The details of proprietorship in the case of patents, trade marks and industrial design are then changed to reflect the acquiring entity and respective certificates are subsequently issued.
Immovable Property
For a transfer of immovable property to be effective in Kenya, it must be stamped and registered. Where an entity is acquiring the business and assets of the target company and the acquisition entails immovable property owned by the target company, then instruments of transfer will need to be drawn, executed by both parties and thereafter stamped and registered. It goes without saying that the acquiring entity will need to conduct a search at the Lands Registry to ensure that there are no encumbrances registered against such properties. Any encumbrances in the form of charges securing the payment obligations of the target company to financiers will need to be discharged before they are transferred to the acquiring entity.
In the case of leases held by the target company, the respective landlords will have to be engaged and notified of the target company’s proposed acquisition. Confirmation will have to be sought on whether such leases will be assigned to the acquiring entity or whether the existing leases will be terminated and fresh ones entered into between the landlord and the acquiring entity.
Where an acquisition entails a mere transfer of shares in the target company and a subsequent change of name, a certificate of change of name will have to be submitted to the relevant Land Registrar who will make an entry to indicate the change of name of the target company against the document of title.
Where a transfer of controlling interest triggers a transfer event in a lease or charge document, then the consent of the relevant landlord or financier or charge will need to be sought.

Major Contracts and Licences

A review of the target company’s major contracts and licences will need to be conducted before an acquisition.
In case the contracts or licences are to be assigned as part of the transfer of the business and assets of the target company, then deeds of assignment and novation would need to be prepared and executed by all the relevant parties.
Further, such contracts or licences may contain a clause that precludes the target company from transferring or assigning the contracts or licences. Such clauses may further state that a transfer of controlling interest in the target company would be deemed to be a transfer of the contract or licence and that the consent of the other contracting party to that contract would be required before such transfer of shares.
Finally, various state organs and departments would need to be involved in the case of mergers and acquisitions to properly safeguard the interests of the contracting parties and also in keeping with the provisions of various statues.