First published in the Business Daily on October 8, 2019.
Kenya has seen notable mergers and acquisitions (M&A) activity this year. The banking sector has seen the merger of NIC Bank with CBA and the takeover by KCB Group of National Bank of Kenya. Other notable transactions include the takeover by Rubis Energie of KenolKobil and the Telkom and Airtel merger.
A recent amendment to the Companies Act through the Statute Law (Miscellaneous Amendments) Act, 2019 has significantly lowered the acceptance threshold required in a take-over of a listed company to compulsorily annex the shares of the remaining shareholders, a process referred to as squeezing-out.
Before the amendment, an investor seeking to acquire a listed company had to obtain acceptance of a take-over offer by at least 90 percent of the shareholders of the listed company to acquire the right to compulsorily annex the remaining 10 percent minority shareholding.
This threshold has been reduced from the 90 percent to 50 percent. The effect of this amendment can be viewed from two perspectives. From a macroeconomics perspective, the amendment can be seen as an incentive to investors. A high squeeze-out threshold is viewed as a challenge by investors seeking to acquire control of listed companies.
For such investors, a high threshold makes squeeze-out difficult, which has major challenges on control, since the investor would not acquire autonomy in decision making. According to the World Bank Group’s Doing Business Report 2019, Kenya was ranked at position 61 in the ease of doing business category, out of 190 participating economies.
Previously, Kenya had been ranked at position 92 and 80 in 2017 and 2018, respectively, indicating an increasing effort by the Government to improve the business environment. This amendment is a step towards the right direction in improving the business environment in Kenya.
On the other hand, the amendment is at the expense of shareholders of listed companies. Unlike in private companies where shareholders are at liberty to decide drag along thresholds through Shareholders’ Agreements, shareholders of a listed company will be subject to this statutory threshold.
An investor seeking to take-over a listed company will only need to obtain acceptance of the offer by 50 percent of the shareholders to be entitled to squeeze-out the remaining shareholders.
Resistance Expected
Shareholders seeking to retain their investments in listed companies will have less control on the decision to keep their investment as a result of the amendment. This may be fatal where such shareholders invest in these companies to rely on dividends.
The reaction of the market to the amendment remains to be seen, but it is likely to attract resistance from shareholders seeking to protect their investments in listed companies.
In conclusion, the lowering of the squeeze-out threshold will be a key consideration in Kenya’s next ranking in the ease of doing business scale.
It may also spur M&A activity as investors seeking to acquire Kenyan listed companies have one less hurdle.
However, minority shareholders seeking to retain their investments in listed companies stand to lose the most.