KENYA SCHOOL OF LAW

ATP 108; COMMERCIAL TRANSACTIONS

CLASS C: FIRM 6 ASSIGNMENT

FIRM 6 MEMBERS

VUSAKA ASIKO 20231412

GITHIOMI ESTHER KARIMI 20230216

OTIENO DON 20230311

MOMANYI MICHELLE 20231266

MBIU PHYLIS 20231157

AKINYI DAISY 20230560

LUMONA CHERUTO 20231175

 IRUNGU JEFF 20230596

KIPKORIR KENNEDY 20230087

MARANYA ROSELYN 20231297

20230317

NAIKUMI HARRISON

SHARON CHERUTO 20231175

QUESTION 6

Discuss the consideration taken into account by Mergers and Acquisition practitioners
when making decision around asset or share purchase and discuss the vital elements of
the asset or share purchase agreement.
TABLE OF CONTENTS

LIST OF ABBREVIATIONS......................................................................................................................4

LIST OF STATUTES..................................................................................................................................4

INTRODUCTION.......................................................................................................................................5

LEGAL PROVISION ON MERGERS AND ACQUISITIONS..................................................................5

REGULATORY FRAMEWORK GOVERNING MERGERS AND ACQUISIONS IN KENYA.............6

The Capital Markets Act..........................................................................................................................6

Capital Market (Takeovers and Mergers) Regulations 2002....................................................................6

The Competition Act...............................................................................................................................7

The Companies Act.................................................................................................................................7

COMESA Competition Rules..................................................................................................................7

PROCESS OF A MERGER AND ACQUISITION....................................................................................7

Considerations by the Competition Authority of Kenya..........................................................................8

Determination by the Competition Authority of Kenya...........................................................................9

SHARE PURCHASE..................................................................................................................................9

ASSET PURCHASE.................................................................................................................................10
FACTORS TAKEN INTO CONSIDERATION BY M&A PRACTIONERS IN AN ASSET OR SHARE
PURCHASE..............................................................................................................................................10

Legal considerations..............................................................................................................................11

Financial considerations........................................................................................................................12

Strategic considerations.........................................................................................................................13

VITAL ELEMENTS OF AN ASSET OR SHARE PURCHASE AGREEMENT.....................................15

CONCLUSION.........................................................................................................................................18

BIBLIOGRAPHY.....................................................................................................................................19

LIST OF ABBREVIATIONS

M&A Mergers and Acquisitions

CGT Capital Gain Tax

COMESA Common Market for Eastern and Southern Africa 

LIST OF STATUTES

1. The Capital Markets Act, Cap 485A

2. Capital Market (Takeovers and Mergers) Regulations 2002

3. The Competition Act, No. 12 of 2010

4. The Companies Act, No. 17 of 2015

5. COMESA Competition Rules

INTRODUCTION

In Kenya Mergers and Acquisition transactions (herein referred to as M&A) may be structured
as private or public transaction1. Public M&A transactions are structured as;
1.Share subscription agreements
2. Negotiated takeover bids as provided by the capital markets legislation
3.Shareholder sanctioned share swap.
Private M&A transactions are structured as;
1.Share purchase
2.Asset purchase agreement.
This assignment focuses on the vital elements of share purchase and asset purchase while
detailing the considerations taken by Mergers and Acquisition practitioners. Further discussions
included are the provisions and regulations by the law, and a detailed outline of the process
with regards to Mergers and Acquisitions.
1
G. Macharia,” Kenya: Mergers and Acquisitions Comparative Guide (2023)
https://www.mondaq.com/corporatecommercial-law/1062848/mergers--acquisitions-comparative-guide Accessed
on2nd March 2, 2023.
LEGAL PROVISION ON MERGERS AND ACQUISITIONS

Section 2 of the Competition Act defines a merger to means an acquisition of shares, business or
other assets, whether inside or outside Kenya, resulting in the change of control of a business,
part of a business or an asset of a business in Kenya in any manner and includes a takeover2

Part 4 of the Competition Act provides for the Mergers recognized by the law. Section 41
contemplates Mergers achieved under the following circumstances;

(a) The purchase or lease of shares, acquisition of an interest, or purchase of assets of the other
undertaking in question

(b) The acquisition of a controlling interest in a section of the business of an undertaking

capable of itself being operated independently whether or not the business in question is carried
on by a company

(c) The acquisition of an undertaking under receivership by another undertaking either situated
inside or outside Kenya

(d) Acquiring by whatever means the controlling interest in a foreign undertaking that has got a
controlling interest in a subsidiary in Kenya

(e) In the case of a conglomerate undertaking, acquiring the controlling interest of another
undertaking or a section of the undertaking being acquired capable of being operated
independently

(f) Vertical integration

(g) Exchange of shares between or among undertakings which result in substantial change in
ownership structure through whatever strategy or means adopted by the concerned undertakings

(h) Amalgamation, takeover or any other combination with the other undertaking.

2
S.2 of the Competion Act,2010
REGULATORY FRAMEWORK GOVERNING MERGERS AND ACQUISIONS IN
KENYA

The Capital Markets Act

The Act is mandated to provide approval and licenses to all players in the security industry. They
include venture capital companies hence the requirement that all persons who take place in
structuring a merger or an acquisition must hold a license and be approved as required by the
Act. The act establishes the Capital Market Authority whose functions for purposes of mergers
and acquisition include to create productive enterprises.

Capital Market (Takeovers and Mergers) Regulations 2002

The Act empowers the Cabinet Secretary to formulate rules and regulation to govern various
aspects of the securities market. The Regulations define mergers and take overs and provide
procedures to be followed in such transactions.

The Competition Act

The Competition Act aims to safeguard competition in the national economy which includes
regulating mergers. It stipulates the procedure to be followed for mergers for both listed and
unlisted companies. It also establishes the Competition Authority which investigates
impediments to the competition while entry and exists to the market

The Companies Act

The Companies Act in this context prohibits companies from providing companies with financial
assistance to any person to acquire its shares. This includes giving loans, providing guarantees or
providing securities. The only exception is where the company lends money as part of its
ordinary business.
COMESA Competition Rules

The Regulations provisions under COMESA Treaty are applicable in the COMESA region. They
stipulate that a merger must be notified to the COMESA Competition Commission where the
acquiring or target firm operate in two or more member states.

PROCESS OF A MERGER AND ACQUISITION

The process of a merger is regulated by the Competition Authority of Kenya under the
Competition Act No. 12 of 2010. The procedure for a merger is provided for in section 43 to 47
of the Competition Act, 2010. The process kicks off with the parties involved in the merger
notifying the Competition Authority of the proposed merger in writing or the prescribed manner
after which, the authority acknowledges receipt of a merger application within 30 days, upon
receipt of the same in the Authority’s Offices3.

The Competition Authority shall consider and make a determination on a merger proposal,
within 60 days after receipt of complete information4. If the Authority requests (where necessary)
further information within 30 days after receipt of a merger notification, it shall make a
determination within 60 days after receipt of such information 5. If the Authority requires to
convene a hearing conference, it shall make a determination within 30 days after the date of the
conclusion of the conference6.

Considerations by the Competition Authority of Kenya

Upon receipt of an application and Subsequent acknowledgement, the Authority carries out
preliminary review by:

a) Checking for completeness of information - If it is determined that the application is

incomplete, the authority would then request for the additional information from the
transacting parties. The Authority may seek for further clarification of any information

3
S. 43 of the Competition Act, 2010
4
S. 44 (1)(a) of the Competition Act, 2010
5
S. 44 (1)(b) of the Competition Act, 2010
6
S. 44 (1)(c) of the Competition Act, 2010
 submitted through meetings, phone calls, official letters, emails, conference hearing, etc.
if it deems it necessary.
b) Determining whether the transaction is a relevant merger situation in terms of section 2
and 41 of the same Act.
c) Determining if the transaction meets the threshold for mandatory notification as provided
for in the Merger Threshold Guidelines.
d) Assessing the nature of confidentiality sought if any, as provided for in section 20 of the
Act and subsequently grant such confidentiality through a letter.

Any criterion that the Authority deems pertinent to the circumstances surrounding the proposed
merger may be used as the basis for its decision about a proposed merger. The Authority may
refer the specifics of a proposed merger to an investigator (who may be an Authority employee
or any other suitable person), for investigation and a report in relation to the criteria mentioned in
section 46(2), and it is the Authority's responsibility to notify the parties involved of this
referral7. Anyone may voluntarily provide any document, affidavit, statement, or other pertinent
material on a prospective merger to an investigator or the Authority, even if they are not a party
to the merger8.

Determination by the Competition Authority of Kenya

Upon completion of the process, the transacting parties are informed of the determination as set
out in the Act. In making the determination, the Authority may either give approval for the
implementation of the merger, decline to give approval for the implementation of the merger or
give approval for the implementation of the merger with conditions9.

The Authority may, at any time, revoke a decision approving the implementation of a proposed
merger if the decision was made based on materially false or misleading information for which a
party to the merger is responsible 10 or if any condition attached to the approval of the merger that
is material to the implementation has not been complied with11. The Authority may do this after
considering any representations made to it. Every party engaged in the merger as well as

7
S. 46 (3) of the Competition Act, 2010
8
S. 46 (5) of the Competition Act, 2010
9
S. 46 (1) of the Competition Act, 2010
10
S. 47 (1) (a) of the Competition Act, 2010
11
S. 47(1) (b) of the Competition Act, 2010
anybody else who the Authority determines is likely to have an interest in the issue must be
notified in writing if the Authority intends to withdraw its decision and call upon such persons to
submit to the Authority, within 30a days of the receipt of the notice, any representations which
they may wish to make in regard to the proposed action12.

It is worth noting that the following timelines hold; Exclusion - 14 days, non-mergers - 10 days
and advisory opinions - 10 days.

SHARE PURCHASE

A share purchase in mergers and acquisition refers to the acquisition of a company’s shares by
another company or an individual. In a share purchase, the buyer purchases a certain percentage
of the outstanding shares of the target company from its existing shareholders, which gives the
buyer ownership and control over the target company. In this type of M&A transaction, the
buyer acquires all the assets and liabilities of the target company, including all the legal
obligations or outstanding debts. Share purchases can be a straightforward way for companies
to acquire another business without having to merge operations or assume any additional debt.

Share purchases can be either friendly or hostile, depending on whether the target company's
management and board of directors are willing to sell their shares to the buyer. The share
purchase agreement outlines the terms and conditions of the transaction, including the
purchase price, the number of shares being purchased, and any restrictions or warranties
associated with the shares.

ASSET PURCHASE

An asset purchase refers to the acquisition of a company's assets by another company or

individual, as opposed to purchasing the company's shares. In an asset purchase, the buyer
acquires specific assets of the target company, such as equipment, inventory, customer lists,
intellectual property, and real estate. The buyer has the flexibility to pick and choose the
specific assets they wish to acquire and assume the corresponding liabilities. The target

12
S. 47(2) of the Competition Act, 2010
 company can continue to operate as a separate legal entity or can be wound down after the
asset purchase.

Asset purchases can be beneficial for buyers because they can limit their exposure to
liabilities associated with the target company, such as debts or legal claims. However, asset
purchases can also be more complicated than share purchases because the buyer must
negotiate the purchase of individual assets and assume any corresponding liabilities.

The asset purchase agreement outlines the terms and conditions of the transaction, including
the purchase price, the specific assets being acquired, and any restrictions or warranties
associated with the assets. Asset purchases can be a strategic way for companies to acquire
specific assets or capabilities, without having to assume any unwanted liabilities or
obligations.

FACTORS TAKEN INTO CONSIDERATION BY M&A PRACTIONERS IN AN ASSET

OR SHARE PURCHASE

When considering whether to pursue an asset purchase or share purchase in a merger or

acquisition, practitioners will typically take into account a number of factors, including legal,
financial, and strategic considerations.

Legal considerations

a) Liability: In an asset purchase, the buyer typically acquires only the assets and
assumes only the liabilities specifically agreed upon in the purchase agreement,
whereas in a share purchase, the buyer assumes all liabilities of the target
company. For this reason, it is prudent that a background check is done to
ascertain whether or not identified assets in the target company are free from
any third-party liabilities in the form of the issue of legal ownership, leases or
any potential claims that are likely to be made on the same. Further, there is
need to get certainty on whether there are any pending or potential litigation in
 a court of law or tribunal as regards the subject at hand. This is essential in
informing the decision that a bidder company is likely to make.

b) Tax implications: it is important to check whether the target company has any
pending tax obligations that they are yet to honour. This informs the bidder on
whether they are agreeable to shoulder the tax liabilities of their target
company, especially in share purchase agreements. This would include
checking whether or not the target company have any tax liabilities, have been
filing tax returns to avoid potential conflict with the Kenya Revenue Authority
or have any litigation on matters tax obligations and liabilities in court.

c) Regulatory considerations: Depending on the industry and location, there may

be regulatory restrictions or approvals required for either an asset or share
purchase. The Competition Act 12 of 2010 which establishes the Competition
Authority of Kenya has clothed the latter with the mandate of either approving,
disapproving or approving with conditions13 a proposed merger. It would
therefore be imperative to seek sector-specific approval as a consideration
before a merger process. This further, is for the reason that any merger that is
not approved by the relevant authority for instance the Competition Authority
of Kenya, stands unapproved and therefore an illegality in law14.

d) Employment issues; it is an important consideration as will guide the bidder

company on relevant legal employment issues it needs to put into consideration
for instance issues surrounding integration of employees, employee safety,
regulations to govern employee conduct in the company and matters such
employee compensation and remuneration which is a vital part of employee
satisfaction.

13
Sec 46 of the Competition Act,10 of 2012.
14
Sec 43(2) of the Act.
 Financial considerations

a) Valuation: The valuation of the target company can differ between an asset or share
purchase. It is worth valuating the target company or the assets thereof to determine
whether or not it is worth the purchase price/Consideration. It would also inform the
decision on how the purchase price is to be allocated among the targeted assets in the
deal. Further, the use of professional valuers may come in handy to assist the bidder
company to make an informed decision. Valuation is further important in informing
the bidder company to consider the market value of the assets in question.

b) Financial information; This is a key consideration as it will help the bidder company
ascertain the financial standing of the target through the scrutiny of balance sheets,
income statements, any credits owing and what the breakdown of sales or purchases of
the target company are like. Financial Information will further help to discuss issues
pertaining to any future financial projections, auditing of the target company, the
capital structure of the company and any operating expenses likely to be borne by the
bidder company.

c) Financing: It is important for a bidder company to ascertain whether they will employ
the use third parties like banks or other financial institutions as bridge to
accomplishing the merger process. This is essential for planning purposes and to allow
for the bidder company to outsource funds in time before starting a mergers and
acquisition process. This is also an important step as it will determine whether or not
the bidder company is able to pay consideration in full, which is a requirement under
the Competition Act15,and further as a way of honoring their contractual obligations
during the process.

d)Tax implications: on the issue of tax, it is important to check ascertain whether the bidder
company is in a comfortable financial position to pay any past, present or potential future tax
15
Sec 42(4) of the Act.
 obligations. This is far more important in acquisition through shares as the bidder company
shoulders the liabilities of the target. It is important to consider the stamp duty and capital
gain tax transactions (CTG) implications. CTG applies to the transfer of shares at 5% of the
gain except from entities of oil exploration and mining space. Stamp duty rates applies at the
rate of 1% of the market value of the shares. Asset transfer on the other hand CTG will apply
on the specific asset on the specific instrument at the rate of 2-4 %.

Strategic considerations

a) Operational control, management and personnel: In a share purchase, the buyer

acquires control of the entire company and can continue to operate the business as a
going concern. In an asset purchase, the buyer only acquires specific assets and may
need to set up new operations to continue the business. This would further inform the
need to gauge whether there Is need to carry on with the operational or organizational
structure of the target, or the transfer and integration of management and personnel to
assist who may be assets to the bidder company. On the issue of management and
personnel, it is prudent to scrutinize the same to check whether there will be need to
create departmental organization such as finance, sales, consulting or customer care
which are an important part of a company. This also key in identifying any pending
positions that need to be filled.
b) History; A look into the target’s history is essential in determining whether their
culture resonates with the ultimate goal of the bidder, whether there are success stories
associated with the target and whether the said history is vital in preserving the
reputation and brand of the company. Further this will guide the target in determining
r or not there will be a need to come up with a new strategy to realize the company’s
ultimate goal.
c) Product in question; Every merger and acquisition process is aimed at promoting,
protecting or expanding a given product. Checking for issues such as product pricing,
 market share, market size for the said product will be vital in deciding whether or not
continue with the process.
d) Research and Development; it is an important strategic consideration especially if the
target company is looking into any identifying any past or potential future engineering
milestones in the company, and whether or not it is looking into retaining any existing
strategic relationships that will maintain and enhance technology in the company.

e) Brand and reputation (Trademarks, patents): In a share purchase, the buyer acquires
the target company's brand and reputation, whereas in an asset purchase, the buyer
may need to establish new branding and marketing. It is therefore prudent to consider
whether brand and reputation of the target company is properly built to the extent of
helping to expand the purpose and mission of the bidder company. It is a most
important consideration especially in share purchase because a branding and
reputation is an integral part of a company’s selling point. No one wants to be
associated with a bad and irreputable brand.

f) Marketing and sales structure; will play a role in deciding whether or not there will be
need to employ new strategies to promote the company’s product to improve sales,
and further whether current marketing strategies are efficient to reach a targeted
market.

g)Integration: this is a key consideration as will determine whether or not a bidder company is
agreeable to having their operations integrated with the target for either ease of
communication, production or management. Secondly, it will inform the decision as to
whether there is need to move employees from the bidder to target company as a way of also
ensuring that they do not violate any employment laws and policies, and to also identify
whether or not there are those operations that will be scraped off from the system or
employees declared redundant as a result.
Other considerations revolve around issues of enforceability, quality and quantity of the assets
in question to ascertain whether they conform with the bidder’s expectations.
Secondly, issue of competition is an important consideration in not only enabling the bidder
company to comply with existing laws on competition but to also knowing the position that
the resulting entity is likely to be placed in the market.
It is noteworthy that most of these considerations are cross-cutting and can therefore be used
when either acquiring a target company through asset or share purchase. In summary, these
considerations revolve around legal, financial, management, competition, research and
development, product and product market, history of the target company and any existing or
future strategies that the company wants to employ. These basically forms the structure of the
due diligence techniques that the bidder company needs to employ.

VITAL ELEMENTS OF AN ASSET OR SHARE PURCHASE AGREEMENT

An asset or share purchase agreement is a legal document that outlines the terms and
conditions of the sale of assets or shares of a company. This agreement is a vital element of
any acquisition process, and it is important to ensure that all the necessary elements are
included to protect the interests of both parties involved. The following are some of the vital
elements that should be included in an asset or share purchase agreement:

a) Party information; The inclusion of the party’s names, addresses and contact
information is a vital requirement as it will outline the parties involved in the M&A
process. This facilitates accountability and can be used as reference if need be. It can
further be used as evidence in a court of law to lay claim when need arises.
b) Signature section; signature of the parties involved is vital part of the agreement as it
enforces enforceability of the agreement.
c) Purchase price/consideration: This is the amount that the buyer agrees to pay for the
assets or shares being sold. The purchase price and payment terms, including any
contingencies or adjustments, will need to be agreed upon and as such will form part
 of the agreement. Further, an inclusion of purchase price or consideration in the
agreement is relevant as it outlines how much and how a payment will be made.

d) Payment terms: The payment terms specify how and when the buyer will pay the
purchase price/consideration. It may include a down payment, installments, or
payment upon completion of certain milestones. This enables both parties to set
timelines as to when full consideration should have been paid to formalize the M&A
process. Payment of full consideration/purchase price is in itself an indication that an
M&A process is complete as espoused in the Competition Act.

e) Assets or shares being sold: The specific assets or shares being acquired will need to
be identified, and any exclusions or carve-outs should be clearly stated.

f) Liabilities assumed: In an asset purchase, the liabilities to be assumed will need to be

clearly identified and agreed upon. In a share purchase, the buyer will assume all
liabilities of the target company. It is an important part of the agreement as it outlines
specific liabilities that a bidder company is going to shoulder at the end of the M&A
process and thereby absolving the target company of the same.

g) Representations and warranties: The seller will typically provide representations and
warranties regarding the target company's operations, financials, and legal compliance,
which the buyer will rely upon in making the decision to proceed with the transaction.
Further, warranties bind the parties to the agreement that if misrepresentations are
made, then a party has a legal recourse as they will form part of the grounds for legal
action.

h) Conditions to closing: The parties will need to agree upon the conditions that must be
satisfied before the transaction can be completed, such as regulatory approvals, third-
 party consents or the receipt of financing. Parties agree on what documents that are to
be availed to the closing meeting to aid in the purchase process. Such documents
would include employment contracts of employees, certificates of good standing,
agreement on repairs or modifications that need to be made to property before the sale
or approvals by other parties for instance if the tragedy company sits on leased
property.

i) Indemnification and escrow: The parties will typically agree to an indemnification

provision, where the seller will agree to reimburse the buyer for any losses arising
from breaches of representations and warranties. An escrow may also be established to
ensure that funds are available to satisfy any indemnification claims. This is vital as it
protects both parties and outlines the damages awarded to the prevailing party if any
legal dispute arises from the agreement.

j) Termination: The agreement should include provisions that allow either party to
terminate the agreement under certain circumstances for breach of contractual terms.

k) Confidentiality: The agreement may include provisions that protect the confidentiality
of any information exchanged during the sale process.

l) Restrictive covenants/side agreements that protect the bidder company by preventing

the target from competing within a certain period of time/non-compete agreements.

From the foregoing therefore, it is safe to say that all requirements of a normal contractual
agreement form part of the elements of an asset or share purchase agreement. Secondly, it is
clear that an asset or share purchase agreement is legal document that can be used as evidence
in court in the event of the breach of the terms of the agreement as it specifically sets out the
obligations of each party to an M&A process.

In summary therefore, it is important to note that an asset or share purchase agreement is a vital
document in an M and A process as it creates a record of the existence of an M&A process.
CONCLUSION

As the Republic of Kenya grows developing into a financial hub and economic center not only in
Eastern Africa but also across Africa, the number of mergers and acquisitions have significantly
increased. We herein acknowledge the relevance of a conducive regulatory and legal
environment for the process of mergers and acquisitions especially with a view of achieving
vision 2030.

This work submits that great responsibility lies on Mergers and Acquisition practitioners when
making decision around asset or share purchase. Due diligence is key as without it great risks
discussed above will be inevitable with dire effects which would evidently hurt the economy of
the country.

BIBLIOGRAPHY

1. G. Macharia,” Kenya: Mergers and Acquisitions Comparative Guide (2023)

https://www.mondaq.com/corporatecommercial-law/1062848/mergers--acquisitions-
comparative-guide Accessed on2nd March 2, 2023