Companies

State revises firms’ hostile buyout law

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Nairobi Securities Exchange. Minority shareholders may be set for a reprieve after the State made a U-turn on the law that had made it easier for top owners to compulsorily acquire minority investors and delist firms. FILE PHOTO | NMG

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Summary

  • Minority shareholders may be set for a reprieve after the State made a U-turn on the law that had made it easier for top owners to compulsorily acquire minority investors and delist firms from the Nairobi Securities Exchange (NSE).
  • The proposed law, known as Business Laws (Amendment) Bill, 2019, seeks to restore the upper limit of an investors owning at least 90 percent of a firm’s shares to forcibly acquire minority investors.
  • Last year, the State, through the Statute Law (Miscellaneous Amendments) Act No. 12 of 2019, had cut the threshold to 50 percent stake, making it easier for top owners to compulsorily acquire minority investors.
  • The move sparked protests from stockbrokers and minority shareholders.

Minority shareholders may be set for a reprieve after the State made a U-turn on the law that had made it easier for top owners to compulsorily acquire minority investors and delist firms from the Nairobi Securities Exchange (NSE) #ticker:NSE.

The proposed law, known as Business Laws (Amendment) Bill, 2019, seeks to restore the upper limit of an investors owning at least 90 percent of a firm’s shares to forcibly acquire minority investors.

Last year, the State, through the Statute Law (Miscellaneous Amendments) Act No. 12 of 2019, had cut the threshold to 50 percent stake, making it easier for top owners to compulsorily acquire minority investors. The move sparked protests from stockbrokers and minority shareholders.

The Kenya Association of Stockbrokers and Investment Banks (Kasib) — a brokers’ lobby group — said the revised threshold was “too low” and would make it easier for majority shareholders to forcibly eject minorities. Now, the government — via a Bill tabled by Leader of Majority at the National Assembly Aden Duale — is seeking a reversal.

“Clause 35 of the Bill provides for the amendment of Section 611 of the Companies Act, 2015, to raise the applicable thresholds for “squeezing-in” and “selling-out” of shares in a company to control of at least 90 percent of the shares of the company,” says the Bill.

The 90 percent limit had proved useful for minority shareholders in firms such as Unga Group #ticker:UNGA and logistics firm Express Kenya when top shareholders wanted to squeeze them out and delist the firms from the NSE.

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“Company acquisition is a very grave matter that needs utmost caution and cannot therefore be left to a simple majority,” Willie Njoroge, the Kasib chief executive, said in an interview yesterday.

Top law firm Bowmans (Coulson Harney) had described the legal amendments as bizarre, noting that they had diluted the rights of small investors to unprecedented levels.

“There are few, if any, jurisdictions globally with such a low threshold for compulsory acquisition,” Bowmans said in a notice to clients. “We anticipate challenges to the legitimacy of this amendment and, potentially, in respect of any takeover effected in the future that takes advantage of the lower thresholds.”

According to the firm, the amendments would hurt Kenya’s reputation with regards to investor protection rules.

East African Community and Regional Development Secretary Adan Mohamed had also called for reverting to the 90 percent threshold, describing the change as predatory and unfair.

At least 20 or a third of the companies listed on the NSE risked forceful takeover by their majority shareholders — which in turn would have led to their delisting from the bourse — following the introduction of the 50 percent threshold.

Besides Unga and Express Kenya, other companies whose majority shareholders could have taken advantage of the lower threshold are Stanbic Holdings, BAT Kenya and Barclays Bank of Kenya where top shareholders own more than half of the firms.

Others are East African Breweries Limited, BOC Kenya, WPP Scangroup, Kakuzi, Sanlam Kenya and Total Kenya.

The drastic law change, which took effect last July, caught many stakeholders by surprise with the NSE fretful that it could egg on multinationals to delist at a time when the Nairobi bourse has been plagued by lack of fresh listings.

While the change to the law applies to both private and listed firms, its impact would be felt most among publicly-traded companies where hundreds of thousands of local and foreign individual investors have stakes.

Delaware-based conglomerate Seaboard Corporation had in 2018 said it would still pursue the complete takeover of Unga Group despite its failure to convince enough shareholders to take up its offer of Sh40 per share.

Seaboard, working together with the family of the late Central Bank of Kenya governor Philip Ndegwa, received the support of shareholders controlling a combined stake of 69.9 percent in the company. This fell short of its own target of 75 percent and the then higher threshold of 90 percent required to forcibly acquire dissenting minority investors.

The legal changes would have made it easier for Seaboard to achieve its ambition of taking Unga private with the help of the Ndegwas who hold a 50.93 percent equity in the miller.

The lower threshold could also motivate Express Kenya’s chief executive Hector Diniz to make a fresh bid to buy out minority investors and take the logistics firm private. Mr Diniz made an offer of Sh5.50 per share to buy out small shareholders last year when he held a 61.6 percent equity in the company.

He received acceptances that would have raised his ownership to 71.4 percent, falling short of his minimum 75 percent target. He cancelled the takeover bid but recently raised his stake to 71.8 percent after converting Sh80 million worth of loans he had provided to the company into shares.

Following the debt-to-equity deal, he announced that he would not make a fresh bid to buy out minority shareholders. That was before the threshold for squeezing out small investors was lowered to 50 percent.