KENYA Law and Practice Contributed by: Sammy Ndolo, Njeri Wagacha, Brian Muchiri and Deborah Sese, Cliffe Dekker Hofmeyr
The consideration structures that are predominantly seen in the market are outlined in the following.
be an element of the purchase price mechanism, it will be unique and negotiated by the parties. 6.3 Dispute Resolution for Consideration Structures In Kenya, it is typical to have an independent expert as an alternative dispute resolution mechanism in case there is a dispute with respect to the consideration structures in a private equity transaction. The use of an independent expert is usually separate from other dispute mechanisms, such as arbitration, and is lim - ited to specific aspects of the consideration such as how it should be determined or the review of the finan - cial statements. If the dispute concerns other issues, such as the peri - od within which the consideration was determined, then it will be referred to another dispute resolution mechanism, such as arbitration, for resolution. Ideally, with a more complex consideration mecha - nism (eg, the closing account mechanism), the dispute will more likely be referred to an expert in conjunction with other dispute resolution mechanisms. 6.4 Conditionality in Acquisition Documentation In Kenya, it is common for private equity transactions to contain conditions that must be met before comple - tion. These typically include the resolution of issues or red flags picked up during legal due diligence and will therefore vary from one transaction to another. Stand - ard conditions in every deal include the waiver of pre- emption rights by existing shareholders, and obtaining appropriate board and/or shareholder approvals and merger approvals. In addition, certain conditions are typical depending on certain elements of the transaction, such as: • either of the entities is operating within a regulated industry that requires consent to be obtained, or a notification to be lodged, before completion, as outlined in 3.1 Primary Regulators and Regulatory Issues ; • the target company has encumbered assets that may require the parties to notify or obtain consent from the financiers; and
Consideration Structures Locked-box mechanisms
This consideration mechanism is generally used by private equity funds in less complex transactions in order to streamline and expedite the payment collec - tion process, as there is less risk exposure. Earn-out mechanisms This mechanism is used when the private equity fund would like to ensure that the vendor, usually a founder or senior management with interest in the business, is motivated to contribute to the successful performance of the business during the transition. Closing account mechanisms This mechanism is used by private equity funds if there is a set of complex future factors that may affect the value of the target company, and the private equity fund is unwilling to take on the uncertain risk. Fixed-price consideration This mechanism is generally used in simple transac - tions with little to no risk so as to expedite completion of the transaction. Deferred consideration This mechanism is used mainly to bridge the valuation gap between the buyer and the seller when there are uncertainties about the target company’s future per - formance, or when the parties have different expecta - tions about its future earnings. Typically, the involvement of private equity funds results in the use of more sophisticated and complex consideration mechanisms. In Kenya, where the par - ties are not as commercially aware or do not engage counsel, fixed-price consideration structures or the use of deferred consideration through an escrow set- up is the norm. 6.2 Locked-Box Consideration Structures In Kenya, it is not typical for interest to be charged on the equity price or reverse-charged on any leakage that occurs during the locked-box period. If this is to
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