Transparency, equity, and investor protection in the ever-changing realm of business mergers and acquisitions heavily depend on regulatory compliance. In Take-Over transactions, the Capital Markets (Take-overs and Mergers) Regulations 2002, (the Regulations) provide particular responsibilities for the target firm (the Offeree) and the purchasing corporation (the Offeror). These responsibilities are intended to protect shareholder interests, reduce market manipulation, and preserve and strengthen public trust in the capital markets.
In this article, subsequent to our previous article on the Regulatory Framework in relation to Competing Take-Over, we delve deeper to highlight the obligations appurtenant to both the Offeror and Offeree in Competing Take-Overs in Kenya.
OBLIGATIONS OF THE OFFEROR
What are the obligations of the Offeror in a Take-Over? The obligations of the Offeror are stipulated in the Regulations and highlighted below as follows:
- Disclosure of Identity (Regulation 21)
Before initiating any discussions or negotiations regarding a Take-Over, the Offeror must fully disclose its identity and that of any related entities or persons acting in concert. As per Regulation 21 of the Regulations, this disclosure ensures transparency and allows all stakeholders to make informed decisions.
In 2019, Equity Bank sought to acquire Banque Commerciale du Congo (BCDC). As part of compliance, Equity was required, by the Regulatory Authority in Congo, Kenya and COMESA, to disclose its identity and the involvement of any related parties before engaging in negotiations.
- Provide Evidence of Financial Capability / Ability to Pay
Additionally, we note that Regulation 22 stipulates that the Offeror must demonstrate its financial capacity to implement the Take-Over Offer. This means ensuring that the Offer will not fail due to insufficient funding and that all shareholders who accept the Offer will be paid in full. Companies are prohibited from making Take-Over Offers if they do not provide reasonable grounds for believing that they are able to perform their obligations if the Offer is accepted.
- Extension of Favorable deals to all Shareholders
Paragraph 4 (b) of the First Schedule of the Regulations provides that the Offeror must disclose and provide a statement on whether there is any agreement or arrangement made between the Offeror and any of the directors of the Offeree in connection with or conditional upon the outcome of the scheme, and if so the particulars of such agreement or arrangement. This is in addition to the requirements of Paragraph 4 (b) of the First Schedule of the Regulation which stipulates that the Offeror must disclose if there is an agreement or arrangement under which shares acquired by the offeror through the scheme may be transferred to another party, the following must be disclosed:
- The names of the parties involved and the details (number and type) of the shares to be transferred; and
- The number, type, and amount of shares in the Offeree entity held by each such person — or a statement confirming if they hold none.
It is worthy to note that the above disclosures of any agreements or arrangements between the Offeror and directors of the Offeree ensures that the transaction process is not being unduly influenced or compromised by private incentives or side deals.
Furthermore, no shareholder should receive preferential treatment from the Offeror in the form of exclusive offers that aren’t accessible to all Offeree shareholders. The Offeror shall not enter into arrangements with the Offeree to purchase voting shares that are not made available to all shareholders of the Offeree.
Regulation 23 as read with 24 requires the Offeror to make an offer to buy any convertible securities that the Offeree may have issued. Furthermore, the Take-Over Offer document should also be served to the holders of convertible securities at the same time when other shareholders of the Offeree are served.
4. Share Transaction Restrictions (Regulation 25)
The Offeror and its affiliated entities and parties are prohibited from selling Take-Over-related shares during the Offer Period as per Regulation 25. Accordingly, all persons such as the Offeror, the Chief Executive Officer or the director and any senior officers of the Offeror are required to disclose the total number and price of all voting shares which are dealt in their accounts. Further, any transactions involving voting shares of the Offeror and Offeree must be disclosed to the appropriate securities exchange and the regulatory body within twenty-four hours.
OBLIGATIONS OF THE OFFEREE
What are the obligations of the Offeree in a Take-Over? The obligations of the Offeree are stipulated in the Regulations and highlighted below as follows:
- Provision of Information
Regulation 26 provides that the Offeree should provide the Offeror with the following information in order to facilitate due diligence before a decision is made:
- A list of shareholders and their contact details;
- Financial statements, including audited reports; and
- Information on any competing offers, if applicable.
- To not Frustrate the Offer
Additionally, as per Regulation 27, once a notice of intention of Take-Over is issued, the Offeree should not take actions aimed at frustrating the deal. Prohibited actions of the Offeree include:
- Issuing new shares even if authorized, to dilute ownership;
- Issuing grants in respect of any un-issued shares;
- Selling its key assets and those of its subsidiaries;
- Entering into contracts outside the normal course of business.
- Disclosure of Transactions
The Offeree, along with its executives and major shareholders, must disclose any transactions involving voting shares and the price of the shares in accordance with Regulation 28. This disclosure ought to be made within 24 hours of notification of the transaction to the Capital Markets Authority.
The Offeree is further required to promptly notify its shareholders, the relevant securities exchange as well as the Capital Markets Authority of receipt of a notice of take-over as provided under Regulation 6. Upon receipt of the Take-Over Offer document, the Offeree should within 14 days issue a circular to its shareholders indicating whether or not the board of directors recommends the acceptance of the Take-Over Offer.
- Transfer of Shares
As per Regulation 29, once the Take-Over is completed, the Offeree is mandated to facilitate the smooth transfer of shares to the Offeror as per the rules of the Nairobi Securities Exchange (NSE) and the Central Depository and Settlement Corporation (CDSC).
It is imperative to note that both Offeror and Offeree must always ensure adherence to the applicable timelines in accordance with the Regulations.
Conclusion
Conclusively, understanding the obligations set out in the Capital Markets (Take-Overs and Mergers) Regulations is crucial for any entity involved in mergers and acquisitions. Any business considering a Take-Over or merger must adhere to these guidelines to protect shareholder interests and maintain market integrity. The Offeror must disclose its identity, demonstrate financial capability, treat shareholders equitably, comply with transaction restrictions and comply with the timelines and processes outlined in the Regulations. Meanwhile, the Offeree must provide due diligence information, avoid frustrating the Offer, disclose transactions, facilitate share transfers and comply with the timelines and processes as outlined in the Regulations. Compliance with these obligations fosters market integrity, protects shareholder interests, and ensures a smooth Take-Over process.
Author: Godwin Wangong’u
Co-Authored by: Patience Laki, Jessica Opiyo and Peris Njonjo
This publication is meant for general information only and does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates. For particular expert advice on any matter dealt with above, please contact us.
