DFI and Private Equity Raises in Kenya: A Legal Checklist

Development finance institutions (DFIs) and private equity funds are among the most important sources of growth capital for Kenyan businesses. They are also among the most demanding investors. A raise that looks commercially agreed can stall for weeks over a missing shareholder resolution, a pre-emption right nobody waived, or a merger filing nobody planned for. This checklist sets out the Kenyan legal points advisers and companies should clear before and during a DFI or private equity raise.

1. Can the company issue the shares?

Authority to allot. Under the Companies Act, 2015, directors need authority to allot shares. In a private company with only one class of shares, section 328 lets the directors allot shares of that class unless the articles prohibit it. Where there is more than one class, or the investor will take a new class such as preference shares, authority is needed under section 329 from the company’s articles or a shareholder resolution. Check the articles first.

Pre-emption rights. Section 338 prevents a company from allotting equity securities unless it first offers existing ordinary shareholders a pro rata share on the same or better terms. The right can be excluded by the articles in the circumstances in section 345, or disapplied, including by special resolution under section 348. Investors will ask how pre-emption was dealt with, so the paper trail matters.

Filing. Under section 333, a limited company must lodge a return of the allotment with the Registrar, with a statement of capital, within one month of the allotment. The register of members and the register of beneficial owners required by section 93A must also be updated.

2. Is the instrument right?

DFIs and funds use ordinary shares, preference shares, convertible instruments, shareholder loans and mezzanine debt, often in combination. Each has different consequences for control, tax, ranking on insolvency and how the investor exits. Our article on share capital versus shareholder loans sets out the trade-offs. Whether, and how, an offer of securities engages Capital Markets Authority rules depends on the type of company and the instrument, and should be checked at this stage rather than at closing.

3. Does the deal need regulatory approval?

Competition. Under section 41 of the Competition Act, 2010, a merger occurs when one or more undertakings acquire or establish direct or indirect control over the whole or part of another undertaking’s business, including through the purchase of shares. Under section 42(2), a merger to which Part IV applies may not be implemented unless approved by the Competition Authority of Kenya. The Authority sets thresholds below which mergers are excluded. A minority investment can still raise the question if the rights the investor receives give it control, so investor protections should be tested against the Act’s concept of control, not just the shareholding percentage. Larger regional deals may also need to be considered under the COMESA regime.

Sector regulators. If the company holds a licence from a regulator such as the Central Bank of Kenya, the Capital Markets Authority, the Insurance Regulatory Authority or a sector regulator, the investment may trigger change of control or significant shareholding approvals. Our article on acquiring a licensed financial services business covers the main regimes.

4. What will the investor’s due diligence look for?

In practice, DFIs and institutional funds apply standards well beyond Kenyan statutory minimums. Expect questions on:

• corporate records: certificate of incorporation, current articles, registers, filed returns and resolutions;
• material contracts, especially change of control clauses that the investment might trigger;
• licences and permits, and whether they are current and transferable;
• employment and pension compliance;
• tax compliance across income tax, VAT and withholding tax;
• land and leases;
• anti-corruption, anti-money laundering and sanctions controls; and
• environmental and social management, often measured against the DFI’s own performance standards.

Gaps found in due diligence usually become conditions precedent, specific warranties or indemnities. Fixing them before the process starts is cheaper.

5. What will the shareholders’ agreement contain?

DFI and private equity term sheets typically ask for board seats, information rights, reserved matters, anti-dilution protection, transfer restrictions, drag and tag rights, and an exit route within a set period. The articles must be amended to match. Founders should understand which reserved matters could slow down ordinary decisions. Our article on common gaps in shareholder agreements highlights the provisions that cause most disputes later.

6. Tax and money flows

Dividends, interest and fees paid to offshore investors can attract Kenyan withholding tax, depending on the payment and on any applicable tax treaty. Our article on paying a foreign shareholder from Kenya covers the issues. Model the after-tax return early, because it affects the instrument choice.

7. The adviser’s own position

An adviser running the raise should check its own regulatory position too. Advising on securities for a fee is an investment adviser activity under the Capital Markets Act, and actively persuading investors to subscribe can move the work towards dealing. Our articles on the investment adviser licence and on advising or dealing in securities explain the boundaries.

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.