Mergers and Acquisitions in Kenya

Mergers and acquisition (M&A) is a critical vehicle in facilitating corporate growth and productivity. The reasons a firm may go the merger and acquisitions are many and diverse.

They range from tax planning efforts to expansion in a bit to enjoy economies of scale. The need to achieve legal compliance especially in capital intensive sectors like telecommunications industry and the financial sector the other major reasons.
There is also the factor of business considerations like is the case in a business environment where the one competitor has large capital outlay as compared to the other scores of small competitors. The small firms may merge in a bit to wrestle market share from the large company.

Whatever reason, the common denominator of all M&As is the focus on bottom line of the companies involved. M&A may be aimed at improving bottom line through increased efficiency or sustaining the same by staying afloat.

Defining M&A

Let’s attempt a simple definition of the terms. “Merger” is when two companies come together and the one company loses its identity afterwards.

“Acquisition” is when, in a manner of speaking one company (usually the big one) swallow another company (usually the small one). This result is such that the “swallowed” company’s operations are taken over by the other and the smaller company ceases to be.

For an acquisition to take place there must be in existence two companies upon which instance one integrates the operations of the other whose existence comes to an end as a result. Here we cite the Kenyan example of the recent taking over of operations of Mobil Oil Ltd by Oil Libya Limited.

Related to merger and acquisition is consolidation. “Consolidation” on its part occurs when two or more firms contribute (or pool together) their assets. The result is that they end up one Big company with a completely new identity’ under the law. Local example here is the still underway arrangement between the CFC Bank and Stanbic Bank which will yield CFC-Stanbic Bank.

Technical Meanings

Technically, these terms bear the same meaning but in more convoluted terminology. Thus a “merger” to lawyers is a transaction in which two or more corporations combine under the company law with the result that all but the one of the participating corporations loses its identity.”(Fox & Fox, 2004 Corporate Acquisitions & Mergers)

An acquisition is any transaction in which one corporation obtains another by purchase, exchange merger and consolidation.

“Consolidation” is sometimes used in place of both “acquisition” and “merger” but it is distinguishable in meaning from the two. A “consolidation takes place when two or more organizations combine to yield one legal entity.
Quite apart from the case in merger, in consolidation neither of the consolidated corporation survives. All the corporations cease to exist their operations being taken over by totally new venture.

Meanings under the Kenyan law

M&A in Kenya generally fall within the regulatory framework of competition laws. The main legal framework on competition in Kenya is Restrictive Trade Practices, Monopolies and Price Control Act, cap. 504 laws of Kenya.

This is an act of parliament whose aim, if its preamble is anything to go by, is to encourage competition in the economy. This it does, or proposes to do, by prohibiting restrictive trade practices, controlling monopolies, concentrations of economic power and prices and for connected purposes. It offers a negative outlook at M&A arrangements in that it seeks to control the tendency to abuse the same as a tool to restrict trade, whatever that means. No definitions of the terms defined above are offered.

With regard to companies listed in stock exchange in Kenya, the relevant legal framework on M&A is the Capital Markets Act, Cap. 485A Laws of Kenya. Although it wins a plus in looking at the positive side of M&A, it is limited in that it does not regulate merger and acquisition directly. Instead, it gives power under section 12 thereof, to the Capital markets Authority to make rules, regulations and guidelines on regulation of mergers and acquisitions among listed companies. Hence the enactment of Capital Markets (Take-Overs and Mergers) Regulations, 2002 which came to operation in the July of 2002. The rules define merger as “an arrangement whereby the assets of two or more companies become vested in or under the control of one company.” It does not offer legal definitions of the other terms.

Next we seek to fathom why a firm would opt to go the M&A way and what legal considerations the firm must grapple with as a preliminary to an M&A move.