Buying Out Your Kenyan Joint Venture Partner: A Legal Guide

Joint ventures between foreign investors and Kenyan partners often start with goodwill and end with one side wanting out. Sometimes the partner has stopped contributing; sometimes the investor wants full control before expanding or bringing in new capital; sometimes the relationship has simply broken down. Buying out a joint venture partner in a Kenyan private company is usually straightforward if the documents anticipated it and slow and expensive if they did not. This article explains the legal routes, the valuation questions and the formalities.

Start with the documents you already have

Under section 326 of the Companies Act, 2015, shares are transferable in accordance with the company’s articles. The articles and any shareholder agreement therefore decide most of the answer. Look for:

• Call options allowing one shareholder to require the other to sell on defined triggers, such as a deadlock, a material breach, the end of an employment or management role, or after a fixed period.
• Put options allowing a shareholder to require the other to buy.
• Pre-emption on transfer, requiring a shareholder who wants to sell to offer the shares to the other shareholders first.
• Drag-along rights, allowing a majority selling to a third party to force the minority to sell on the same terms, and tag-along rights, allowing the minority to join a sale on those terms.
• Deadlock clauses (see our article on reserved matters and deadlock clauses), from escalation and mediation to “shotgun” or “Russian roulette” mechanisms in which one party names a price and the other must either buy or sell at it.
• Valuation provisions stating how the price is set, who the valuer is and whether a minority discount applies.

If the shareholder agreement and the articles conflict, you have a problem to solve before you have a deal to negotiate. Our article on which document governs explains how Kenyan courts approach the two.

When the documents are silent

Many joint ventures between foreign investors and local partners are documented only by the model articles and a short, informal agreement. In that case, a buy-out depends on agreement. There is no general right to compel a fellow shareholder to sell.

The statutory squeeze-out in section 611 of the Companies Act will not usually help. It applies only after a takeover offer, and only where the offeror has acquired, through acceptances, not less than ninety percent in value of the shares to which the offer relates. In a two-party joint venture, the minority partner holds all the shares the offer relates to, so the threshold cannot be reached without their consent.

Where the relationship has broken down, either side may consider a petition under section 780, which allows a member to apply to court on the ground that the company’s affairs are being conducted in a manner that is oppressive or unfairly prejudicial to members’ interests. Among other orders, the court may provide for the purchase of a member’s shares by other members or by the company (section 782(2)(e)). This is a remedy, not a negotiating tool. It is slow, it puts the conduct of both sides under scrutiny, and the price is set by the court. Our article on shareholder disputes and minority oppression claims covers these petitions in more detail.

Agreeing the price with your joint venture partner

Price is where most buy-outs stall. Common approaches for a restaurant or other owner-managed business include a multiple of normalised earnings, net asset value, or a discounted cash flow model. Agree early on:

• the valuation date and the accounts it will be based on;
• how shareholder loans and unpaid contributions are treated, and whether they are repaid separately from the share price;
• whether a minority discount applies to the outgoing partner’s stake;
• who appoints an independent valuer, and whether their figure is binding;
• whether the price is paid at completion, in instalments, or partly through an earn-out.

A partner whose stake was originally given for “sweat equity” may see the value very differently from an investor who funded the fit-out. Document both sides’ contributions before talking numbers.

Completing the transfer

Once terms are agreed, the parties sign a share purchase agreement covering price, warranties, any release of the departing partner from guarantees, resignation from the board, non-compete and confidentiality obligations, and the handover of licences, accounts and bank mandates where the partner was a signatory.

The share transfer is lodged with the company. Under section 498, the company must register the transfer, or give the transferee a notice of refusal with reasons, as soon as practicable and in any case within two months. Stamp duty is payable on the transfer under the Stamp Duty Act, and the seller may be liable for capital gains tax. Confirm current rates and filing steps with your tax adviser before completion.

After completion, update the company’s registers and file the changes with the Registrar. If the transfer changes who the company’s beneficial owners are, section 93A requires the amended register of beneficial owners to be lodged within fourteen days. Check whether any licence, lease or bank facility requires notice or consent on a change of shareholding or directors.

Plan the exit at the start

The cheapest buy-out is the one the parties agreed before they invested. When setting up a joint venture with a Kenyan partner, build in clear call and put options, a workable deadlock mechanism, a valuation method and matching provisions in the articles. Our articles on joint venture agreements in Kenya and shareholder agreements for foreign majority owners cover the structures and terms to consider.

Frequently asked questions

This article is general information on Kenyan law as at its publication date, not legal advice. Reading it does not create an advocate and client relationship.