The Statute Law (Miscellaneous Amendments) Act No. 12 of 2019 now allows shareholders with a 50 percent stake to make compulsory acquisitions of shares held by the remaining investors.
The takeover threshold previously stood at 90 percent, a level that made it difficult for top shareholders of Unga Group and logistics firm Express Kenya to forcibly buy out minority investors.
As a result, they were unable to delist the firms.
At least 20 or a third of the companies listed on the Nairobi Securities Exchange (NSE) risk forceful takeover by their majority shareholders - which in turn could lead to their delisting from the bourse - following changes to the law that now make it easier for top owners to compulsorily acquire minority investors.
The Statute Law (Miscellaneous Amendments) Act No. 12 of 2019 now allows shareholders with a 50 percent stake to make compulsory acquisitions of shares held by the remaining investors. The takeover threshold previously stood at 90 percent, a level that made it difficult for top shareholders of Unga Group and logistics firm Express Kenya to forcibly buy out minority investors. As a result, they were unable to delist the firms.
Besides Unga and Express Kenya, other companies whose majority shareholders can take advantage of the lower threshold are Stanbic Holdings, BAT Kenya and Barclays Bank of Kenya where the multinational 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 caught many stakeholders by surprise with NSE fretful that this could egg on multinational firms to delist at a time when the Nairobi bourse has been plagued by lack of fresh listings.
“We were not involved in the amendments,” an NSE director who requested anonymity told the Business Daily. “The 90 percent threshold was meant to ensure that nearly all shareholders are in agreement in takeover deals.”
He argued that the lower threshold has made it easier for a few shareholders to team up to reach the 50 percent ownership and force out the rest.
The law change was sponsored by Aden Duale, the Majority Leader at the National Assembly, suggesting that it had the backing of the government.
The Capital Markets Authority (CMA) had not responded to our queries by the time of going to press.
While the change to the law applies to both private and listed firms, its impact will be felt most among publicly traded companies where hundreds of thousands of local and foreign individual investors have stakes.
“We understand that these changes have been received with enthusiasm by majority shareholders in NSE companies,” a billionaire investor who owns shares in scores of listed firms told the Business Daily. “What we want to know is what inspired the change. It is also disturbing that the Capital Markets Authority has not pronounced itself on such a material issue.”
Law firm Bowmans (Coulson Harney) described the legal amendments as bizarre, noting that they have 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.”
The law firm added that the amendment will hurt Kenya’s reputation with regards to investor protection rules.
The amendments come at a time when the NSE is in a bear market, meaning that shareholders with the requisite 50 percent stakes can easily sway minority investors with premium offers.
Delaware-based conglomerate Seaboard Corporation last year said it would still pursue the complete takeover of Unga Group despite its failure to convince enough shareholders to take its offer of Sh40 per share. Seaboard, working together with the family of the late Central Bank of Kenya governor Philip Ndegwa, received 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 now make it easier for Seaboard to achieve its ambition of making Unga private with the help of the Ndegwas who hold a 50.93 percent equity in the miller.
“It remains the intention of Seaboard to proceed with its proposal to seek a delisting of the company from the Nairobi Securities Exchange at an extraordinary general meeting to be convened in due course,” the multinational said in a statement in July last year after its offer flopped.
The new legal regime 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 Sh5.5 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.
Besides Unga and Express Kenya, the legal amendment has made it easier for scores of other companies to be taken private.
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