[co-authors: Mahesh Acharya, Faith Chebet]*
World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Kenya. View the full guide.
In your jurisdiction, which sectors do venture capital funds typically invest in?
Venture capital funds in Kenya typically invest in a wide range of sectors such as technology, FinTech, agribusiness, healthcare and affordable healthcare, transport and logistics, renewable energy, and e-commerce.
Do venture capital funds require any approvals before investing in your jurisdiction?
This will depend on the nature of the investment. Certain regulated sectors such as banking, insurance and telecommunications have prior approval requirements from regulators before an investment is made. Competition/antitrust approvals may also apply. Also, entities which hold agricultural land will require prior approval before foreign investments may be effected. Kenyan law restricts non-citizens from owning agricultural land unless presidential exemption for this is obtained.
Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
This will depend on the nature of the investment. Certain regulated sectors such as banking, insurance and telecommunications have minimum Kenyan shareholding requirements or even maximum individual shareholding restrictions. Control transactions are, generally as a rule of thumb, subject to Competition Authority of Kenya (or even COMESA Competition Commission) notification.
Would an investor be required to undertake an antitrust analysis prior to investment?
Where the investment qualifies as a merger, an antitrust analysis would have to be conducted as part of the process of seeking merger authorization from the Competition Authority of Kenya (or even COMESA Competition Commission – to which Kenya is subject).
All transactions qualifying as mergers in Kenya that result in a change of control and in which the combined value of the assets and/or turnover of the merging entities exceeds KES 500,000,000 (approximately USD 5,000,000) require notification to the Competition Authority of Kenya for authorization prior to implementation of the merger.
When would such a requirement be triggered?
Provided the investment transaction triggers a change of control in the investee entity and the combined value of assets and turnover exceeds KES 500,000,000 the transaction will be deemed as a merger and be subject to merger control and antitrust analysis.
What are the preferred structures for investment in venture capital deals?
Investments in venture capital deals are typically channeled through special purpose vehicles such as limited liability partnerships governed by partnership deeds or joint ventures in the form of companies limited by shares governed by shareholder agreements between the venture capital funds, the investee entities and their shareholders. Funds may be invested as equity, debt or convertible loans.
What are the primary drivers for each of these structures?
The primary drivers include:
The length of time that the venture capital fund intends to invest for.
For investors seeking to exit after a specified length of time a joint venture model may be more appealing due to pre-agreed exit mechanisms.
The risk appetite of the investor.
Companies limited by shares and limited liability partnerships provide limited liability for venture capital funds that are shareholders or limited partners in their investee entities.
Debt vs Equity
An investor may opt for a debt of convertible debt structure if they wish to retain the option of recouping the investment amount with interest without having to necessarily invest capital in the investee entity.
Is there any restriction on rights available to venture capital investors in public companies?
No. However, specific shareholder arrangements in listed companies are uncommon. Also, listed public companies have a limit on foreign participation in such companies.
What protections are generally available to venture capital investors in your jurisdiction?
Investors may negotiate a wide array of contractual protections such as anti-dilution provisions, liquidation preferences, preference shares, board seats, voting rights with veto powers, pre-agreed minimum rates of return and cumulative dividends, option rights, redemption rights, rights to participate in future funding rounds, rights of first refusal/pre-emption rights, tag-along rights, information rights such as access to periodic financial information and conversion rights.
There are no restrictions as to the type of protections that a venture capital fund may obtain in an investment deal. This is dependent on the negotiated terms of the investment.
Is warranty and indemnity insurance common in your jurisdiction?
Not very common but possible.
Are there any legal or practical challenges associated with obtaining such insurance?
What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
Some common exit mechanisms include sale of shares including by way of tag-alongs, put and call options, mergers & acquisitions and redeemable shares, deadlock mechanisms, IPOs, trade sales and liquidation of the investee entity.
Among the challenges that Venture Capital Funds may face when trying to exit are:
Any exit that qualifies as a merger and meets the value threshold of KES 500,000,00 will require authorization by the Competition Authority of Kenya.
There is no guaranteed return on investment except as may have been negotiated in contract at the investment stage.
Incoming investors will typically require a full set of indemnities, warranties and representations from the exiting investor even where such an investor was not involved in the daily operations of the business.
Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
IPO exits in Kenya are not very common but are possible where listing conditions are satisfied.