The New Act contains more extensive disclosure and compliance requirements for companies that are incorporated outside Kenya that wish to register to do business in Kenya (such as franchises that are interested in doing business in Kenya). This is found in Part XXXVII of the New Companies Act.
One significant change that was introduced is that a foreign company, which from the definition of the New Companies Act is a branch entity, is now required to have at least 30 per cent of the company’s shareholding held by a Kenyan citizen by birth.
The Act categorically states that the registrar will not register a foreign company unless the company has at least one local representative. The law makes it a punishable offense for a foreign company to operate without the input from local directors. Under Section 975 (3) of the Act, the officers, if found guilty of this offense, they will each be liable to a fine not exceeding 5 Million shillings.
The effect of this provision is that every branch that wishes to operate in Kenya will be required to effect a share transfer or share allotment of at least 30 per cent of its shares to a Kenyan individual in its jurisdiction.
The Act goes on to further to state, that should the local representative choose to exit, then the foreigners will have 21 days to get a replacement failure to which the company shall have breached the law, attracting a fine of Sh500,000 from each of the directors. This is if they continue operation in the country without the local representation.
It is our opinion that the impact of this provision may not have been fully appreciated for the following reasons;
- There may be foreign shareholding restrictions in the other jurisdictions;
- It may be very expensive for Kenyan individuals to purchase or invest at least 30 per cent in a foreign company.
- The process of carrying out a due diligence in a company in another jurisdiction to effect the share sale or allotment would not only be time-consuming, but also expensive.
While the intention of the imposition of local shareholders may be noble, the restrictions placed therein may make it difficult for foreign companies to invest in Kenya, particularly where 30% of the capital base is unsustainable and/or unaffordable for a local representative. The diligence, time, cost and human resource required in seeking out a local representative and ensuring that the representative is one who will work well with the foreign shareholders and understands the foreign company’s vision will not be an easy task. This will create a bottleneck for foreign investors who will have to be the ones to look for local investors who are willing to purchase 30% of the business.
On the flip side of the coin, the introduction of local representatives for foreign companies will ensure that Kenyan entrepreneurs to benefit from companies that are investing in Kenya. Foreign companies will not operate without input from local investors and this will drive our economy. Local partners will be of great benefit, particularly for [“maneuvering”] around the inherent pitfalls specific to the Kenyan market. A “local face” can be helpful, if not necessary, in overcoming the perception placed on a foreign-owned business, particularly when the local partner is projected as the lead developer.
It is key to note that this section will not be applicable to existing foreign companies that are already registered in Kenya under Cap 486.