[co-authors: Mahesh Acharya, Faith Chebet]* *
World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers 30+ jurisdictions on investment approval processes, typical investment sectors, and investment structures for venture capital deals (and more!).
The guide is by no means exhaustive and laws in this area are evolving rapidly. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary from case to case and country-specific regulations may change.
This chapter covers Kenya. View full instructions.
In which sectors do venture capital funds typically invest in your jurisdiction?
Kenya venture capital funds typically invest in a variety of sectors including technology, fintech, agribusiness, healthcare and affordable health care, transportation and logistics, renewable energy, and e-commerce.
Do Venture Capital Funds Need Approvals Before Investing In Your Jurisdiction?
It depends on the type of investment. Certain regulated sectors such as banking, insurance and telecommunications require regulatory approval prior to investing. Competition / cartel approvals may also apply. Companies that own agricultural land must be approved in advance before foreign investment can be made. Kenyan law prohibits non-nationals from owning agricultural land unless exempted by the president.
Are there any legal restrictions on an offshore venture capital fund that has control over or affects the business, operations or governance of an investee company?
It depends on the type of investment. Certain regulated sectors like banking, insurance and telecommunications have minimum Kenyan participation requirements or even maximum individual participation restrictions. Control transactions are generally subject to notification to the Kenya Competition Authority (or even the COMESA Competition Commission) as a rule of thumb.
Does an investor need to conduct an antitrust analysis before investing?
If the investment qualifies as a merger, an antitrust analysis would need to be conducted in order to apply for approval of the merger from the Kenyan competition authority (or even the COMESA competition commission – which Kenya is subject to).
All transactions that are considered to be mergers in Kenya and result in a change of control and where the total value of the assets and / or sales of the merging companies exceeds KES 500,000,000 (approximately USD 5,000,000) must be approved in advance by the Kenyan competition authority to be reported for the implementation of the merger.
When would such a request be triggered?
If the investment transaction triggers a change of control in the investee and the combined value of assets and sales exceeds 500,000,000 KES, the transaction is considered a merger and is subject to merger control and antitrust analysis.
What are the preferred structures for investing in venture capital businesses?
Investments in venture capital businesses are typically channeled through special purpose entities such as limited partnerships governed by partnership deeds or joint ventures in the form of limited liability companies governed by shareholder agreements between the venture capital funds, the investees and their shareholders. Funds can be invested as equity, debt or convertible bonds.
What are the main drivers for each of these structures?
The main drivers are:
For investors who want to exit after a certain period of time, a joint venture model may be more attractive due to previously agreed exit mechanisms.
Limited liability companies and limited partnerships provide limited liability for venture capital funds that are shareholders or limited partners in their investees.
An investor can opt for a convertible bond if they wish to retain the option of getting the investment back with interest without necessarily having to invest capital in the investee.
Is there a restriction on the rights of venture capital investors in public companies?
No. However, certain shareholder agreements in publicly traded companies are unusual. Listed companies also have a restriction on foreign participation in such companies.
What protection do venture capital investors offer in your jurisdiction in general?
Investors can negotiate a wide range of contractual safeguards such as anti-dilution provisions, liquidation preferences, preferred shares, directorships, voting rights with veto rights, pre-agreed minimum returns and cumulative dividends, option rights, redemption rights and rights to participate in future financing rounds, first refusal / pre-emption rights such as rights of participation, rights of information Access to regular financial information and conversion rights.
There are no restrictions on the type of protection a venture capital fund can receive in an investment business. It depends on the negotiated terms of the investment.
Is warranty and liability insurance common in your jurisdiction?
Not very often, but possible.
Are there any legal or practical challenges associated with taking out such insurance?
What common exit mechanisms are used in venture capital transactions and what risks or challenges, if any, are associated with such exits?
Some common exit mechanisms include selling stocks, including tag-along transactions, put and call options, mergers and acquisitions, and redeemable stocks, deadlocks, IPOs, trade sales, and the liquidation of the investee.
The challenges that venture capital funds must face when exiting include:
Any exit that qualifies as a merger and reaches the value threshold of KES 500,000.00 must be approved by the Kenyan competition authority.
There is no guaranteed return on investment unless this was contractually negotiated during the investment phase.
Incoming investors typically seek a full set of compensations, warranties and representations from the outgoing investor, even when such investor has not been involved in day-to-day business.
Do investors usually opt for a public exit over an IPO? Are there any specific public market challenges that need to be addressed?
IPO exits in Kenya are not very frequent, but possible if the listing conditions are met.