This article was written by Sammy Ndolo (Senior Associate, HHM ORARO, Kenya) and Jackson Awele (Senior Associate, HHM ORARO, Kenya).
M&A activity in Africa has generated a lot of interest lately, but there has been little, if any, data showing trends of such activity. In this article, we look specifically at M&A activity in Kenya to identify existing trends.
The Legal Framework
The Kenyan Competition Act (12 of 2010) ("Act") entered into force on 1st August 2011. It repealed the Restrictive Trade Practices, Monopolies and Price Control Act (Chapter 504) which previously governed competition matters in Kenya. The regulatory authority responsible for enforcing the Act is the Competition Authority ("Authority"). Although the Act came into force in the year 2011, the Authority was not properly constituted until 16th January 2012 when the current chair was appointed by notice in the gazette.
Looking at the numbers
The Authority received 42 M&A applications in the year 2012, 37 in 2013 and 47 in 2014. The slight drop in M&A activity in the year 2013 is likely due to the Presidential and Parliamentary elections held in March of that year.
There are no filing thresholds under the Act. This means that even though neither the acquirer nor the target generates any revenue in Kenya, a filing is still necessary if the transaction involves the acquisition of control of a Kenyan company.
However, the Authority in the year 2013 published guidelines that describe the kind of mergers that are excluded from the provisions of the Act. It also introduced a simplified form for exclusion applications and this means that only a limited amount of information and documents will need to be provided to the Authority where the merging parties meet the exclusion criteria. Consequently, there is no full-fledged investigation by the Authority of the parties, the transaction or the markets in such cases and the Authority is able to respond much faster.
Exclusion from the Act
Some of the mergers that can be excluded comprise any merger where the combined turnover (in Kenya) based on the audited accounts of the merging parties is between KES 100 million and KES 1 billion; or where the business of the merging parties is carbon based mineral exploration and prospecting. In the year 2014, at least 70% of the M&A applications sought exclusion from the provisions of the Act. Over the three year period the Authority approved all applications for approval or exclusion.
The introduction of filing fees by the Authority in August 2014 does not seem to have had an immediate effect on the number of applications made. A filing fee of KES 500,000 is payable where the turnover of the merging parties is between KES 500 million and KES 1 billion. The highest filing fee payable is KES 2 million where the turnover is KES 50 billion and above.
Most active sectors
There was M&A activity over a broad variety of sectors over the three years. The most active sectors over the period were: (i) telecommunications; (ii) restaurants and hotels (tourism) sector and (iii) mining and oil and gas sectors which recorded nine applications each.
These trends are not surprising. The telecommunications sector in Kenya, as in most of Africa, has experienced tremendous growth over the recent years with exponential increase in the use of internet and mobile phones.
In addition, the Kenyan tourism sector over the last three years has been negatively impacted by terrorism threats and attacks in some parts of Kenya and also the Ebola crisis in part of West Africa.
The discovery of minerals sands (ilmenite and rutile) in the coastal town of Kwale and commercially viable oil wells in the northern part of Kenya within that period also generated a lot of interest in mining, exploration and prospecting companies.
Other sectors that have recorded at least five applications in the three year period are: (i) insurance; (ii) pharmaceuticals; (iii) food (sugar, beverage, confectionary etc.); and (iv) motor vehicles.
The Common Market for Eastern and Southern Africa (COMESA) Competition Commission (CCC) recently introduced notification thresholds and these are contained in the COMESA Merger Assessment Guidelines of 2014 ("Merger Guidelines"). According to the Merger Guidelines, a merger will only be notifiable to the CCC if:
- At least one merging party operates in two or more Member States (an undertaking "operates" in a Member State if it has annual turnover or value of assets in that Member State exceeding US $5 million)
- A target undertaking operates in a Member State
- It is not the case that more than 2/3 of the annual turnover or value of assets in the Common Market of each of the merging parties is achieved or held within one and the same Member State.
Consequently, with this new criteria those mergers that have only a marginal effect on the COMESA Common Market will not incur additional costs in notification obligations. However, even where a notification to the CCC is not required, the merging parties must still notify the Kenya Competition Authority to the extent that such a notification is required under the Kenya Competition Act.
Taxing times ahead
It remains to be seen what impact the re-introduction of capital gains tax ("CGT") will have on M&A activity in Kenya. CGT was re-introduced by the Kenya Finance Act (2014) with effect from 1st January 2015 after a three decade suspension to inter-alia encourage investment and boost confidence in the real estate and securities market.
The suspension no doubt served its purpose with the target markets experiencing exponential growth over the suspension years. Burdened, however, by an ever widening budget deficit, the government has for some time created a number of measures to improve tax collection on existing tax baskets and equally introduced additional measures to net income hitherto free from tax hence the re-introduction of inter-alia CGT to net gains realized in the booming property and securities markets.
CGT will be charged at the rate five per cent on the net gain that accrues to a person on the transfer of property situated in Kenya. The net gain is the difference between the transfer value of the property, and the adjusted cost of the same. This is not a controversial "super tax" that international investors are wary of, such as in Mozambique where the sale of offshore holding companies with assets in the country will be caught. However, this CGT will apply to virtually all transfers of property including land, buildings and marketable securities in Kenya.
In addition to the main text of the legislation, the Kenya Revenue Authority also issued Capital Gains Tax Guidelines (the CGT Guidelines) for the administration of CGT sometime in January 2015. Under the guidelines, the tax is payable to the KRA on or before the 20th day of the month following that in which the transfer took place, and is to be accompanied by certain declaration forms.
The re-introduction of CGT is not surprising, given this tax applies in all the other East African Community member countries. However, the implementation of the CGT is anticipated to be difficult for the following reasons:
- Time of Transfer: Under the 8th Schedule (deals with computation of gains or losses derived from transfer of property) to the Income Tax Act (Chapter 470, Laws of Kenya) (the ITA), a gain or loss is deemed to have arisen at the time of transfer, whether or not the payment is made by installments. It is unclear when the time of transfer is for purposes of CGT where payment is made by installments.
- Capital gain or trading gain: The general rule is that if a person carries out an activity repetitively and continuously from which he receives income, such person is said to be conducting business or trading, and the income received shall thus be his business income and subject to corporation tax. Where, however, there are one-off sales of assets that are not typically the business of the person, these shall be deemed to be capital disposals, and thus subject to CGT. Under the CGT Guidelines and the ITA, it is not clear as to when gains being made by an investor dealing in listed securities are deemed capital gains or trading gains.
- Collection responsibility: For listed securities, the Kenya Revenue Authority has given notice that stockbrokers are to complete CGT declaration forms on behalf of the investors for whom they act. The stockbrokers are contesting this and a case challenging that notice has been filed at the High Court. The court’s decision is eagerly awaited as it raises critical issues of practicability in implementing CGT.
- Allowable deductions: CGT will be applied on gains made on property whether acquired on or before 1st January 2015 and it is anticipated that parties will have difficulty in computing their costs for purposes of CGT. At present, there is no specific statutory period within which parties to a transaction must retain documents. It remains to be seen if parties who acquired property before 1st January 2015 will be disentitled from the benefit of the costs incurred in fact, but where for one reason or another the proof of allowable expenditure has been destroyed.
On the whole, CGT will have an impact on capital investments including M&A in Kenya especially by private equity investors looking to make short term investments for high returns.
In addition to the notification requirements to COMESA and the Kenya Competition Authority, the CGT introduces a new reporting obligation. Any person holding ten per cent or more of the issued share capital in a company must notify the Commissioner General of the Kenya Revenue Authority of any changes in that company’s shareholding.
The number of M&A applications in Kenya over the three year period appears low when compared with South Africa’s fifteen year old competition tribunal, for example, which recorded about one and half more mergers over the same three years period (even with filing thresholds that apply). As the Authority grows its capacity to monitor and enforce the Act, and with increasing compliance by merging parties it be interesting to see what M&A activity looks like in the coming years in Kenya and the rest of rising Africa.
Investors should always seek local advice as to the application of the mergers control rules to their transmission and whether any exclusions will apply.
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