Cushioning yourself in company mergers

By Sudi Wandabusi

Recent years has seen a sudden surge in mergers and acquisitions in Kenya. We have seen mergers between local companies as well as with international ones. The financial sector seems to be leading the way.

One of the most common arguments for mergers and acquisitions is the belief that synergies exist, allowing the two companies to work more efficiently together than either would separately.

Such synergies may result from the firms’ combined ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise, and raise larger amounts of capital. Others also merge because they are motivated by a desire for greater market power, or the need to diversify in their goods or services.

While this is good for entrepreneurs, employees of both companies usually face difficult times during the process with the risk of being laid off, losing employee benefits etc. It is important as an employee to understand your legal rights in case of a merger of your company and another.

Similarly, the shareholders are also likely to be affected by the merging of business, especially the minority shareholders. Therefore, understand the procedures, consequences and your legal rights as a shareholder in case of a merger or take-over.

In Kenya, businesses combination is governed by a number of laws. The Restrictive Trade Practices, Monopolies and Price Control Act encourage competition by guarding against monopolistic and restrictive trade tendencies among businesses.

The Companies Act, Cap 486 Laws of Kenya lays down the laws governing the incorporation, management and winding-up of companies. The Capital Market Authority Act) and the Capital Markets (Take-Overs and Mergers) Regulations 2002 set out the general rules governing takeovers and mergers in Kenya.

Relevant laws

Depending on whether the merger is for financial institutions or insurance companies, either the Central Bank of Kenya Act or the Insurance Act shall be relevant. As for employees and their rights in case of a merger, the relevant laws to refer to include the Employment Act; the Labour Relations Act, the Labour Institutions Act; and the Occupational Safety and Health.

For instance, the Capital Markets (Take-Overs and Mergers) Regulations 2002 provide that where a takeover results in the acquiring company getting 90 per cent of the voting shares of the company being acquired, then it can exercise the option of offering the dissenting shareholders a consideration that is equal to the prevailing market price of the voting shares or the equal price offered to the other holders, whichever is higher.

The Companies Act lays down the procedure for this process in which the minority shareholder is ‘squeezed out’, giving a two months period within which the notice to acquire the shares from dissenting shareholders should be issued and requiring that the shares be bought within a month from the day of the notice.

Ear to the ground

For workers, the employment contract agreements should be the starting point in establishing your rights as regards the combination of businesses. The first thing you should do before a merger happens, and even if you’re just starting to hear rumours is to take a look at any contracts or agreements you may have with your employer.

If you survive the merger and get a job with the new company, in most cases any contracts and agreements you had with the old company still apply after the merger. But then you need to get an assurance of this from the management as well as legal advice from your lawyer on what action to take if the employer goes back on his word, which is not uncommon.

Even when staying on, you may want to find out issues like retention contract, which should entitle you to extra compensation, or a bonus, and other benefits - in exchange for your agreement to stay in the company’s employment during any merger to help make sure the merger goes smoothly.

Should you be laid off, then it is important to acquaint yourself with your severance entitlements as provided in the Employment Act and in your contract.

It is important that the moment you realize that a merger is imminent, then that is the time to seek an appointment with your lawyer to go over these issues.