A ‘Dicey’ Matter: The Fate of Employees in Mergers and Acquisitions

Posted on February 3rd, 2020

Share this article

There has been a rise in mergers and acquisitions transactions (M&A Transactions) in Kenya even as business entities grapple with tough economic times and the ability to stay afl oat in the evolving business market. Th e recent acquisition of National Bank of Kenya Limited by KCB Bank PLC, the merger of NIC Group PLC and Commercial Bank of Africa Limited, the acquisition of Quick Mart and Tumaini Self Service Supermarkets by Sokoni Retail Kenya to form a single retail operation and the proposed acquisition of one hundred percent (100%) of the issued share capital of De La Rue Kenya Limited (a subsidiary of De La Rue PLC) by American firm HID Corporation Limited are some of the notable M&A Transactions that have taken place in Kenya in 2019. All these recent M&A Transactions have brought to the fore, among other issues, the fate of employees in the merging entities. In most instances, a high number of employees are declared redundant and thereaft er, have to wait for fresh advertisements of positions by the merged or acquiring entity and apply to be recruited.

Employment and labour law considerations feature highly during M&A Transactions. More often than not, such transactions lead to loss of employment due to the restructuring of the target company, or the change in character and identity of the transferring entity. Unlike other contracts involving assets and liabilities of the transferor, contracts of employment are currently not assignable to the acquiring entity under Kenyan law.

Other than setting out the basic conditions of employment and addressing the legal requirements for engagement and termination of employees, both the Employment Act, 2007 and the Labor Relations Act, 2007 are silent on the effect of M&A Transactions on employees. In practice, the contracts of employment are terminated on account of redundancy subject to compliance with the conditions as set out under section 40 of the Employment Act.

In some instances, the Competition Authority of Kenya (the Authority) established under the Competition Act, 2010 undertakes a public interest assessment to ascertain the extent to which the M&A Transaction will cause a substantial loss of employment and impose conditions to mitigate such as has been in case of the acquisition of National Bank of Kenya Limited by KCB Bank PLC where the Authority approved the merger on condition that KCB Bank PLC retains ninety percent (90%) of the employees from National Bank of Kenya Limited for a period of at least eighteen (18) months. This was also seen in the merger between NIC Group PLC and Commercial Bank of Africa Limited where the Authority approved the merger on condition that both entities retain all the employees for a period of at least one (1) year.

Proposed Law

The Kenya Law Reform Commission, a statutory body established under the Kenya Law Reform Commission Act, 2013 with the mandate to review all the laws of Kenya to ensure that they are modernised, relevant and harmonised with the Constitution of Kenya, 2010, recently prepared a draft Employment (Amendment) Bill, 2019 (the Bill) which amongst other provisions, proposes to amend the principal Act (being the Employment Act, 2007) by introducing a new section 15A which provides for the transfer of employees during M&A Transactions.

The proposed section 15A provides that such transfer of employees shall not operate to terminate or alter the terms and conditions of service as stipulated in the original contracts of the employees. It also creates an obligation on the transferor to notify and consult with the affected employees or their representatives regarding the anticipated transfer, the implications of such transfer and the measures that the transferor envisages will be taken to mitigate such implications. Further, the Bill provides that any dismissal taking place prior or subsequent to the transfer shall amount to summary dismissal if such dismissal is premised on the transfer.

Essentially, the Bill seeks to eliminate the difficulties occasioned during M&A Transactions by ensuring that the employees are not left out in the cold when their employer is bought out. It also creates an obligation for the transferor to inform and consult with the employees who shall be affected in an M&A Transaction. This has been the practice in other jurisdictions such as the United Kingdom and even closer home, in neighbouring Uganda.

The Bill borrows heavily from the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE Regulations) as amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 applicable in England and Wales. TUPE Regulations are aimed at protecting the rights of employees in M&A Transactions in England and Wales by imposing obligations on employers to inform and, in other cases, consult with representatives of affected employees. Failure to comply with these obligations attracts penalties and sanctions to the employer.

Critique

While the proposed law could be seen as a relief for employees who are mostly losers in M&A Transactions, it brings with it several challenges and may potentially make M&A Transactions even more complex and strenuous, particularly on the part of the transferee.

Firstly, all the transferor’s rights, powers, duties and liabilities in connection with any employment contract shall be transferred to the transferee. Further, the transferee shall be liable for all the employees’ dues dating back to the commencement of the employment contract. This also means that the transferee shall shoulder all the liabilities that arose from the transferor’s engagements with its employees, including but not limited to cases initiated by and against the transferor.

Secondly, the proposed amendment as currently drafted may subject the parties in M&A Transactions to unnecessary costs and restrictions. It may not be practical to place the transferee under an obligation to automatically retain all the employees of the transferor without any loss of benefits or contractual dues. Such a provision shall defeat the purpose of M&A Transactions, as most of them are geared towards restructuring the business for purposes of reducing operational costs.

With respect to the dismissal of employees immediately prior or subsequent to an M&A Transaction, the proposed amendment as currently framed might open a pandora’s box as it may operate as a blanket protection to all employees including those whose contracts may be terminated for valid reasons during the transition period. The proposed amendment as drafted protects employees against redundancy processes while creating a higher standard of proof against the transacting parties with regards to any termination disputes arising in the course of an M&A Transaction.

Further, the proposed amendment fails to appreciate the contractual rights and obligations of parties with respect to employment and M&A Transactions. There should be provision to allow the transferee to freely negotiate alternative arrangements and contractual obligations with the transferor’s employees and maybe set the standards that should guide this process. By doing so, the parties would have a better chance to make agreements that are favourable to all.

Conclusion

While the issue of how to deal with employees and employment contracts remains a challenge in M&A Transactions in Kenya, the proposed amendments to the Employment Act will no doubt come as a sigh of relief for many employees who have long viewed themselves as collateral damage in M&A Transactions. However, the proposed amendment is likely to increase the cost of undertaking M&A Transactions in Kenya which may well end up being counterproductive as regards the rationale for which the M&A Transaction was carried out in the first place.

Oraro & Company Advocates Recognised For the Fourth Consecutive Year by IFLR 1000 in the 2019 Rankings

Posted on November 13th, 2018

November 13, 2018

For the fourth consecutive year, leading legal directory – IFLR 1000, recognised Oraro & Company Advocates as a top-tier firm in its recently released 2019 rankings. The firm was commended as “…very professional and diligent in providing its legal services and undertaking the work. They have competent lawyers who proactively respond to their clients. The law firm is also sensitive to clients’ needs and they go out of their way to understand the clients’ needs and provide the advice and service required.”

Solidifying its 2018 ranking as a tier 2 firm in both Project Development (Infrastructure) and Project Development (Mining), Oraro & Company Advocates was yet again recognised as a tier 2 firm in both practice areas. For the very first time the firm was ranked in Project Development (Power) as a tier 3 firm, evidence of notable transactions it has handled in the Energy sector in Kenya. The directory also acknowledged that the firm was active in Mergers & Acquisitions.

Three of the firm’s partners were also recognised for their expertise including George Oraro SC who was ranked as a highly regarded lawyer in Project Development and M&A and lauded as “…a very competent and knowledgeable advocate with a deep understanding and application of the law.” Also coming in as a highly regarded lawyer was Pamella Ager who was identified for her expertise in Banking and M&A.

Nelly Gitau joined the highly regarded lawyer rankings this year in Banking (Real Estate) from a rising star in IFLR 2017 and 2018 respectively. Well-respected for her expertise in Arbitration and Insolvency, Noella Lubano, a Partner in the firm was singled out as having “…extensive [insolvency] experience, is client focused and provides high quality legal services. She is accessible, responsive and sensitive to clients’ needs.”

In response to the rankings, the Managing Partner – Chacha Odera remarked that “These rankings signify our continuous efforts as a firm to go over and above what our clients expect and I am particularly pleased with Nelly Gitau’s recognition as a highly regarded lawyer in Banking (Real Estate) from a rising star.”

###

Profile

Established 42 years ago by George Oraro SC (one of Kenya’s top litigators), Oraro & Company Advocates is a top-tier, full-service Kenyan law firm providing specialist legal services both locally and regionally in Arbitration, Banking & Finance, Conveyancing & Real Estate, Corporate & Commercial, Dispute Resolution, Employment & Labour, Infrastructure, Projects & PPP, Restructuring & Insolvency and Tax. The firm has been consistently ranked by leading legal directories such as Chambers Global, IFLR 1000 and Legal 500 and its partnership includes well-recognised advocates who are regarded for their expertise in their respective areas as well as their significant contribution to Kenyan jurisprudence.

Kipkirui Kosgei

Head of Business Development

T: +254 709 250 000/709 250 735

E: gkosgei@oraro.co.ke

Corporate & Commercial

Posted on June 12th, 2018

Our Corporate & Commercial practice area brings on broad sector experience and commercial awareness to every transaction. We help drive business growth while combining a strategic outlook with deep legal knowledge and a keen understanding of the business factors involved in this area of law. 

Our Corporate & Commercial practice provides comprehensive legal advice by combining competition law, employment, financial, regulatory and taxation expertise. Our recent significant involvement includes advising complex mergers, acquisitions, joint ventures and commercial contracts for which we are well regarded.

Experience

We regularly advise on IPOs, rights issues, medium-term notes, private placement bonds and the set up of new products in the NSE and the Capital Markets. In particular, we have advised:

  • Advising the largest sugar miller in Kenya in the restructuring of its debt, owing from local and international lenders. Our role involved reviewing the contractual documentation, restructuring facilities documents and other security agreements and providing a legal opinion on the debt restructuring.
  • Advising a Dutch firm involved in the water sector and a Dutch financial risk management firm on the establishment of a capital market structured water pool facility, to finance water infrastructure projects in Kenya.
  • Advising a leading commercial bank on its proposed restructuring. Our role includes advising on the powers under the Kenya Deposit Insurance Act, 2012 to undertake the restructuring, the legal aspects of the restructuring, and advising on alternative restructuring options.
  • Advising the Attorney General of Kenya in the largest and most complex debt and equity restructuring which involved reviewing the restructuring documentation, converting Government loans into equity and securing Government sovereign guarantees for key lenders and issuing new shares to investors in consideration of in-kind capital contributions of non-cash assets to the company.
  • Acting a legal counsel in relation to the sale of shares to a Kenyan cement manufacturer hold shares in a Mauritius based company that holds shares in another company that owns and operates the cement factory.
  • Advised the NSE and the Capital Markets Authority (CMA) on the demutualisation of the NSE, as well as compliance with various statutory regimes governing their respective operations.
  • Advised on three successful and heavily subscribed rights issues for a leading commercial bank in Kenya.
  • Advised the Government of Kenya and KenGen during its offer and sales of 6.5 million ordinary shares at the Nairobi Securities Exchange (NSE).

Recent Insights

Extension of Timelines for Submission of Beneficial Ownership Information

Disclosure of Beneficial Ownership of Companies in Kenya

Smelling the Coffee: Salient Changes Brought About By the New Business Laws (Amendment) Act

Salient Changes Under the Business Laws (Amendment) Act, 2020

Obligations of a Company in Relation to Disclosure of Company Beneficial Ownership Information


Related Services

Banking & Finance, Capital Markets and Dispute Resolution


For more information about our Corporate & Commercial practice, please contact Jacob Ochieng (Partner).  Alternatively click here to download our Corporate Mergers & Acquisitions profile.

Key Contacts
George Oraro SC
Founding Partner

 

E: goraro@oraro.co.ke

Jacob Ochieng
Partner

 

E: jacob@oraro.co.ke

Cindy Oraro
Partner

 

E: cindy@oraro.co.ke

Jacob Ochieng

Posted on March 26th, 2018

Jacob is a Partner at Oraro & Company Advocates in the corporate & commercial practice group. With over 12 years’ experience, he has advised both local and international corporates on commercial contracts, corporate advisory, corporate restructuring mergers & acquisition, privatisations and infrastructure projects. 

Jacob was part of a team that advised in a complex debt to equity restructuring of Kenya Airways Plc that aimed to reposition the National carrier for long-term growth and business sustainability. He also acted for a leading commercial bank in the financing of the first road construction projects under the Road Annuity Program of the Ngong-Kiserian-Isinya and Kajiado-Imaroro Roads.

Chambers Global ranked Jacob, in its 2021 Guide, as one of the leading lawyers in Corporate/M&A in Kenya. Chambers noted that he is well regarded in the space by peers, who comment, [Jacob is] thorough in his thinking and extremely detailed in his output".

Jacob holds a Bachelor of Laws (LLB) from the University of Nairobi and a post-graduate diploma in Law from the Kenya School of Law.

“[Jacob is] thorough in his thinking and extremely detailed in his output”

Chambers Global, 2021.

Experience
  • Part of a team that advised Citigroup Global Markets Limited in its capacity as the underwriter and book runner for the offering of a total of 1,477,169,549 new shares by Kenya Airways Plc (KQ) in funding the pre-delivery payments to aircraft manufacturers in connection with the acquisition of 9 Boeing Dreamliner aircrafts and 10 Embraer aircrafts to finance KQ’s capital expenditure requirements.
  • Part of a team that advised the Government (through the office of the Attorney General) on the legal implications of the most complex debt and equity restructuring of Kenya Airways Plc.
  • Advising for a leading investment and real estate company in the acquisition of 40% stake a in a private Kenyan company that provides serviced office solutions for a potential investment of USD 2.5 million into the company.
  • Part of a team that advised Accion International, Velocity Capital and Progression Capital Africa Limited in a multi-jurisdictional due diligence and report in connection to the proposed acquisition of approximately 20% stake in the Cellulant Corporation.
  • Acting for a lender in relation to the financing of road construction of the Ngong-Kiserian-Isinya Road and Kajiado-Imaroro Road. These are the first road construction projects that are to be undertaken under the Road Annuity Regulations.
  • Part of a team that advised in the government-to-government collaboration between the Government of Kenya and a major national oil and gas corporation on a proposed USD 1.8 million project to develop up to 350 MW of geothermal power.

About Us

Oraro & Company Advocates is a full-service market-leading African law firm established in 1977 with a strong focus on dispute resolution and corporate & commercial law. With a dedicated team of 10 partners, 4 senior associates, 10 associates, 1 lawyer and 36 support staff, the Firm has been consistently ranked by leading legal directories such as Chambers Global, IFLR 1000 and Legal 500 as a top-tier firm in Kenya.

Oraro & Company Advocates is an affiliate member of AB & David Africa.

Contact Us

Oraro & Company Advocates
ACK Garden Annex, 6th Floor, 1st Ngong Avenue
P. O. Box 51236 - 00200, Nairobi, Kenya.
T: +254 709 250 000
E: legal@oraro.co.ke | W: www.oraro.co.ke

Oraro & Company Advocates © 2021