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.
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.
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.
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.
8th January, 2020
Oraro & Company Advocates is pleased to announce the appointment of Naeem Hirani as a Partner in the firm effective from 7th January 2020. Naeem’s appointment further strengthens the firm’s Corporate & Commercial practice as he brings extensive experience in Mergers & Acquisitions, Private Equity, Venture Capital and Corporate Law. Naeem has advised international and domestic clients in complex cross-border transactions across sub-Saharan Africa. His commitment to excellence furthers the firm’s tradition of providing exemplary service to its clients whilst upholding the highest levels of integrity and professionalism.
Naeem joins us after founding a boutique law practice called “Hirani Law” and prior to that he served as a Senior Associate at Anjarwalla & Khanna where he worked for eight years. In 2017, Naeem spent nine months working with Cleary Gottlieb Steen & Hamilton in New York under the Africa Legal Fellowship, an initiative by the Cyrus R. Vance Centre for International Justice which aims to promote diversity and strengthen the legal profession in Africa.
Welcoming Naeem to the firm, Chacha Odera, Managing Partner, stated “the partnership is delighted to have Naeem whose breadth of knowledge and impressive track record are a great addition to our Corporate & Commercial team and an asset to our clientele.”
Naeem obtained his Bachelor of Laws (LLB) from the University of Leeds, a Post Graduate Diploma in Tax from the East Africa School of Taxation and is currently pursuing a Master of Business Administration from Queen Mary, University of London.
Naeem is also a Board member of the Fleischer Foundation, a non-profit organisation whose mission is to promote the personal development and empowerment of underprivileged children in developing countries through mentorship and education.
About Oraro & Company Advocates
Established 43 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’s corporate & commercial practice area continues to shine and prides itself in creative solutions to the most complex transactions entrusted to them. The team has been extensively involved in the recent consolidations and acquisitions within the banking sector in Kenya, including acting for the National Bank of Kenya Limited in relation to the take-over of 100% of the company’s shares by KCB Group PLC, advising Transnational Bank and its shareholders in the sale and purchase of 93% shares to a Nigerian multinational commercial bank, and also assisting Prime Bank Limited in obtaining regulatory approvals in connection to the acquisition of a significant minority stake in the Bank by AfricInvest and Catalyst Principal Partners.
The practice area and its lawyers are recognised by leading international legal directories such as Chambers Global and IFLR1000.
Co-authored by Radhika Arora.
With the Kenyan banking sector being brought into the spotlight for a projected increase in Mergers and Acquisitions (M&A), it is important for businesspersons to have a basic understanding of this type of transaction. Buyer protection in any M&A is at the forefront and is also the reason that any Share Purchase Agreement (SPA) in a majority of cross-border transactions is composed primarily of the seller’s representations and warranties. The need for this protection is particularly enhanced when there is more than one potential buyer involved in the transaction from the outset, as multiple potential buyers give the seller a chance to sway the representations and warranties in the SPA to its favour, leaving the buyers vulnerable in the event that the target company does not perform as projected.
The scope and detail of these representations and warranties are often heavily negotiated and tailored to reflect not only the essence of the target company and its business, financial status and operations, but also the relative negotiating strength of the buyer and the seller. Representations and warranties also help in providing information to the buyer, thereby allowing for a fair allocation of risk between the contracting parties with respect to the matters covered by the representations and warranties.
Representations and warranties, for purposes of simplicity, may be defined as “promises” - they are the contractual tool that buyers and sellers use in an M&A transaction to allocate the risk of any imperfections in the deal. On the other hand, indemnities serve as “protection” to the buyer for issues related to the target company that are discovered during the due diligence. What are some of the important representations, warranties and indemnities that a buyer should look out for within an SPA?
Balance Sheet Warranties
The balance sheet warranty in an SPA is arguably the most important warranty for a buyer, as it paints a complete picture (to the extent possible) of the financial standing of the target company. It normally entails a warranty over all, or at least the important, balance sheet data. However, it is common practice to extend the warranty to the income and loss statements of the target company, as well as to the notes in the financial statements.
A diligent buyer to a transaction should ensure that he is not only receiving a subjective (soft) warranty but also an objective (hard) warranty. The difference is that the seller´s objective warranty confirms that not only has he complied with applicable law, but also that the balance sheet is objectively true, and thus gives a complete and fair view of the assets, financials and earning position of the target company. Furthermore, objective warranties are governed by the law of strict liability, which means that a buyer can bring an action against the seller regardless of whether or not the defect in the target company that accrued and was linked to the balance sheet was the direct fault of the seller. A subjective warranty on the other hand, confirms that the provisions of the balance sheet warranty are in compliance with applicable accounting principles.
It should also always be borne in mind that balance sheet warranties do not extend to the period between signing and closing of the transaction, which means there is often a period (usually a couple of months) where if the situation of the target company changes, the buyer will have little or no protection. In such a situation a diligent buyer should request a “closing balance sheet” which covers this period. Monitoring the performance of the target company during this period, and comparing the returns on the closing balance sheet to the last audited balance sheet, will allow the buyer to ascertain with confidence that the target company is performing as was projected. In the event that the target company does not perform to the standards expected, the closing balance sheet places the buyer in a favourable position to be able to negotiate the purchase price downwards.
Materiality and Knowledge Qualifiers
In negotiating the SPA, the seller and the seller’s lawyers will have an incentive to keep the representations and warranties as narrowly drawn as possible. The buyer, on the other hand, would want full coverage for any possible eventuality and so would ideally want the representations and warranties to be as broad as possible. One way through which a seller tries to limit liability is to qualify the representations and warranties to its “knowledge” or “materiality”.
Materiality qualifiers entail the use of phrases such as, “could reasonably be expected to have a material adverse effect.” Phrases such as these immediately protect the seller for any eventuality that could not reasonably have been foreseen by a third party, or eventualities which to the buyer would be a major development but to the seller are not “material” enough as to warrant a reduction in the purchase price or indemnification from the seller.
Knowledge qualifiers are phrases such as, “to the best of the seller’s knowledge.” Once again, as in the case of materiality qualifiers, these protect the seller from any legal issues that may arise which could not reasonably have been foreseen.
It is therefore important for a buyer to be prudent when reviewing the SPA and to ensure that all connotations of materiality or knowledge are taken out from the seller’s representations and warranties, so as to achieve complete coverage and protection even after the transaction is complete.
Tax is notoriously known to be one of the most contentious areas of any M&A transaction, as tax liabilities are hard to predict with absolute certainty and often entail the buyer taking a substantial risk. The ideal scenario with respect to tax indemnities would be for the buyer to get full protection in the event of any pre-closing tax liability, arising subsequent to completion. In Kenya however, this is still an emerging area of the law that is yet to be formally legislated upon. Buyers and sellers will usually negotiate the period of time to which the liability for tax extends.
Tax indemnities have the reputation of being the part of any SPA where the buyer’s and seller’s lawyers will have to employ their most savvy contracting techniques, especially where it is a cross-border deal. Ordinarily, the process of sending repeated amended drafts of the SPA to and fro will be quite intense as both sets of lawyers attempt to secure the best deal for their respective client. The buyer’s lawyer in this situation will usually have close contact with the target company’s auditors so as to ensure that every problem flagged during the due diligence is covered by a specific indemnity to protect the buyer.
These are provisions within the SPA that limit the amount of exposure the target company, or the buyer, might face in the event that a claim is made against the target company.
Firstly, the buyer must look out for the “survival period” clause in the SPA that dictates the length of time within which a claim may be brought against the seller for any eventuality arising out of the status of the target company as at the time of sale. As a buyer, one should always try and maximize the amount of time to bring a claim, bearing in mind that core provisions (such as ownership of shares in the target company) warrant longer survival periods.
Another important liability limitation to look out for as a buyer would be the “caps”, which are the maximum liability clauses. Indeed it is argued that these are often the single most important clauses in the entire SPA. The main aim as a buyer would be to try and secure as high a cap as possible to ensure maximum protection.
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.
Chambers Global, 2021.
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.
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