On 2 August 2021, Kenya and the US signed the “Agreement between the Governments of the United States of America and the Republic of Kenya on the Employment of Dependents of Official Employees” to allow for the issuance of work permits to the dependents of Kenyan and US diplomatic staff by Kenya and the US.
While Kenya’s immigration laws allow the presence, employment, and status of foreigners in Kenya, their provisions do not apply to diplomats, consuls, diplomatic and consular staff, mission staff, or their dependents. Provisions relating to the status of such persons are in the Kenyan Privileges and Immunities Act.
Additionally, both Kenyan immigration laws and diplomatic laws are silent on the eligibility of the dependents of this class of foreigners (that is, diplomats, consuls, diplomatic and consular staff, and mission staff) for employment in the receiving state.
“Dependents of the official employees of the government of the Republic of Kenya assigned to official duty in the territory of the United States of America and dependents of the official employees of the government of the United States of America assigned to official duty in the territory of the Republic of Kenya are authorised to be employed in the territory of the receiving state after obtaining the appropriate authorisation in accordance with the provisions of this agreement.”
Under the Agreement, individuals who are immediate family members of Kenyan and US diplomatic staff assigned to diplomatic missions in Kenya and the US can take up employment in the receiving country.
In Kenya, the authorization required is to be obtained from the Ministry of Foreign Affairs after a request is made through the US Embassy. Once the authorization has been obtained, the dependent can approach the Immigration Department for a work permit.
Are you a Start-up Founder or thinking of starting a business with friends or others? Here is a Checklist of legal documents that are critical to you and your business.
Question: What is the most common mistake that start-up founders make during early growth?
Answer: Not establishing a strong legal structure from the start.
While it’s tempting to step into the market and change the world, it is crucial that founders of a start-up pause and cover their legal bases to avoid needless and preventable legal battles. Or even losing their business altogether.
Below, we have highlighted twelve (12) legal documents that founders need to put in place to safeguard their businesses from sly co-founders or investors.
1. Term Sheets (aka “Heads of Terms” or “Heads of Agreement”)
A Term Sheet is a preliminary document that defines the type of investment that the investor wishes to engage in, the different classes of shares and their benefits, proposed capitalisation, and key legal and financial terms. It can be referred to as your starting gear.
Ideally, the execution of the term sheet by a potential investor is an indication that the investor is serious about investing in your company. It conveys the interest of the investor to invest in your company and your willingness to accept their investment.
However, a Term Sheet is not a legally binding document in itself as the investor can walk away from the intention to invest unless a Share Subscription Agreement (or an Investment Agreement) and subsequently, a Shareholders Agreement, are signed.
The Term Sheet is essentially a roadmap that guides an investor in determining whether or not to make an investment in the business.
2. Share Subscription Agreement
The simplest explanation for what a Share Subscription Agreement is this: it is a promise by a potential investor (referred to as “subscriber”), to invests in a company, in an agreed number of instalments, in return for the company giving a certain number of shares at a certain price to the subscriber, such that the investor becomes a shareholder.
The Share Subscription Agreement will set out the number of shares to be issued to the subscriber or shareholder, and the order and timing by which funds will be advanced by the subscriber or shareholder to the company.
3. Investment Agreement
Sometimes an investor may require that a legal document referred to as an Investment Agreement be signed in place of the Share Subscription Agreement.
So, what is an Investment Agreement, one would ask?
An Investment Agreement is a contract to formalize a transaction between an investor and a company whereby the investor invests in the company by giving funds to the company either in form of a loan (debt) or getting shares equivalent to his funds (equity) or both debt and equity. Where the investor gets shares in the company, he/she acquires an ownership interest in a company. This document sets out the terms and conditions of the investment transaction.
In simple terms, an Investment Agreement allows founders and their company to obtain capital from investors, and in exchange for the capital received, they give away a percentage of the ownership of the company to the investor.
4. Shareholders Agreement
A Shareholders Agreement is a critical document for any start-up to have. It is one of the key governance documents for the company. It is a private and confidential document that defines the relationship between the company, the founder-shareholders themselves and between the founders and the investors when investors come in to invest in the company.
It sets out the rights and duties of the shareholders in the company. It also sets out the framework for decision making in the company. Lastly, it provides a mechanism for the division of dividends, for exits by the shareholders among other critical issues. Simply put, it contains information on who owns what shares in the business and what is required of them.
If there is one document that is an absolute requirement for founders to have in place even before investors come in, it is the Shareholders Agreement. Also, since the Shareholders Agreements affects what rights investors will have when they become shareholders of the company, investors will be interested in what is contained in them.
5. Founders Agreement
If your start-up has more than one founder, it is highly beneficial that the founders have a written and signed Founders Agreement in place to govern their business relationship. Ideally, this Founders Agreement should be signed even before the start-up is registered.
The Founders Agreement stipulates the rights, responsibilities, liabilities, and obligations of each founder. It also generally covers matters that may not be addressed by the start-up’s Memorandum and Articles of Association such as, the strategy of the business; funding of the business; the ownership structure; roles of the founders; contribution of each founder (whether money, skills, intellectual property, physical effort etc.); the transfer of ownership; decision making and dispute resolution; confidentiality; representations and warranties.
Intellectual property is broadly defined as something which is created, invented or designed as a result of one’s creativity, thus bestowing upon him or her trademark, copyright or patent rights that preclude others from using it without permission.
It is critical that from the founding phase of the start-up to the successful set up of its operations, the intellectual property rights of the business are secured and safeguarded.
The Intellectual Property Assignment Agreement facilitates the transfer of intellectual property rights that are critical to the start-up and are possessed by the founders, from them to the business. It transfers the ownership of intellectual property rights of an individual to the company (before one becomes a director, employee, or consultant in the company). The individual will no longer have any right to the intellectual property assigned.
On the other hand, a Licencing Agreement will allow crucial intellectual property rights to be licenced by the founders to the start-up.
It is important to note that these two agreements, discussed here allow founders to maintain ownership of their intellectual property rights while permitting the company to benefit from the rights.
It is also important that the founders register all their intellectual property (name of the business, name of the product or service, the software, the design of the website, design of the product etc.), be it as trademarks, copyright, patents or industrial design, with the relevant statutory bodies, as soon as possible to protect them.
Founders get asked to share important non-public information all the time by potential investors, potential customers, among others. Such information they may be asked may include disclosing information proving why or how their product or service is unique, trading data, growth plans, key hires among other commercially sensitive information. Such information might be needed by the investors to help them determine whether to invest in the company or not.
A Non-Disclosure Agreement (also known in common parlance by its acronym “NDA”) is a legal “Great Wall” used to protect the trade secrets and confidential information of a business from third parties.
Basically, a Confidentiality Agreement prevents a person who has been granted access to privileged or confidential information of the business from divulging it to others for a limited or unlimited period.
Every business has some information and trade secrets that give it a competitive advantage in the market, which information must be kept confidential.
An NDA will protect such vital information from being shared, used or disseminated to the detriment of the owner of the information.
The Time and Performance Share Option Agreement is used in two ways. One way is to reward an exemplary employee by giving them the right to buy shares in the company at a specified price. A company can use it as a motivational tool to motivate its employees especially at an early stage when it does not have enough money to pay them well but really needs their skills to grow.
Offering such early-stage employees share option rights will motivate, and also serve as compensation for accepting a lower salary or the risk of working for a start-up business. The employees can later cash in the shares with a huge premium when the company is acquired or listed with a high valuation.
The other way a Time and Performance Share Option Agreement can be used is where the founders want to onboard a new co-founder who is bringing in non-monetary capital (or contribution). Such non-monetary capital can be, their time, or specialised IT skills (for a tech or tech-reliant start-up), or great management skills, or intellectual property or whatever skills or talent that the current founders do not have and are deemed critical to the company.
The performance criteria that trigger the grant of the options could nonetheless vary depending on the company.
9. Convertible Note Agreement
A Convertible Note Agreement is a legal document used where an investor has given a short-term loan to a start-up which loan may be converted into shares of the company on a specified date and upon certain agreed conditions being met.
It is also known as “Convertible Note” or “Convertible Loan Note”.
Investment in a company via a Convertible Loan Note takes the form of a loan (short-term debt) to the company (at the onset) and later on the loan is converted into equity.
Convertible Notes can be secured (with the start-up assets such as shares, or current and future invoices or revenues, or intellectual property being collateral), or be unsecured.
10. Employment Agreement
Many start-ups are basically “fly by the seat of the pants” operations where the founders double up as founders, managers, accountants, salespersons etc. Many of them start life with perhaps one or two or three employees with the founders putting all of their focus on getting the start-up off the ground, on getting sales, or drumming publicity on their products and services.
As such, most early-stage start-ups do not have written employment contracts for their people. While this is understandable from a commercial point of view, in the eyes of the law, this is illegal. The founders should ensure that their employees have written contracts (even Fixed-Term Employment Agreement for short term employment which can be renewed or extended would suffice) to reduce the risk of getting into trouble with the labour laws.
The Employment Agreement will govern the relationship between the company and its employees and provide the terms of engagement of the employees and their deliverables. It will set out among others, the employment term, duties of the employee, salary and benefits available to the employee, working hours, the circumstances that will result in termination and any dispute resolution mechanisms available to the employer and the employee, and the job description, sick leave, maternity, paternity and adoptive leave.
Three (3) critical reasons why a start-up should have in place Employment Agreements
Employment Agreements of a start-up must have:
(a) confidentiality clauses to stop the employee from taking the start-up’s confidential information and trade secrets to their next employee or their own business;
(b) restraint clauses to stop the employee from enticing other employees to join them in their new workplace – who might be a competitor of the start-up; or joining a competitor of the start-up, for one year; and
(c) intellectual-property clauses that will enable the employer to claim ownership of any intellectual property created by an employee while the employee is on the payroll of the company.
11. Commercial Agreements (with Agents, Contractors and Suppliers)
If the start-up intends to engage sales agents to generate leads and close sales on a commission basis, then it should have Agency Agreements drawn up and signed. In law and taxation, agents are different from employees in that they are independent persons who determine how, where and when they will work and are responsible for paying their own taxes and statutory contributions to NHIF and NSSF.
Where a start-up relies on a supplier or service provider to provide or supply products or services to it which are integral to its business, then it ought to protect itself. One way to do this is to draw up a Service Level Agreement (“SLA”) between the company and the supplier or service provider.
The SLA will specify the targets and performance standards agreed by the supplier or service provider and expected by the start-up. It will help to define and secure your business-supplier relationship, it will determine the major responsibilities of the parties. It will generally cover such issues as problem management, compensation, warranties and remedies, resolution of disputes and legal compliance.
The SLA, the Agency Agreement and the Consultancy Agreement will be extremely useful if legal proceedings ensue.
12. Agreements With Customers (Terms and Conditions, Terms of Use, Privacy Policy)
Every start-up needs a written contract between it and its customers. The written contract will take different forms depending on the industry that the start-up is operating. A tech-based or online start-up will have a “Terms and Conditions” or “Terms of Use” on its website or mobile app. Others will have a Letter of Engagement or plain old written contract among others. A Privacy Policy also falls under the category of contracts between businesses and customers.
What is of importance is that all start-ups, as well as established businesses, must have a document, written or digital, that will govern their relationship with their customers or end-users.
In the case of “Terms and Conditions” or “Terms of Use,” the customers or users will have to agree or accept or decline to accept the terms and conditions before accessing the website or the service. The “Terms and Conditions” will inform the customers or the users of their rights and duties and sets conditions to use the website or the service.
A Privacy Policy (usually placed on a company’s website) on the other hand will tell the customer or the user how the company will collect and use their personal information. It establishes the guidelines the company must follow when collecting and using information from users.
The founders are advised that the information provided by customers is also subject to Data Protection laws and start-ups have to be careful and adhere to the provisions under the Data Protection Act of Kenya when handling customers’ information.
What next?
Quite a number of these documents are complex, and a founder will benefit immensely from seeking specialised legal advice before committing themselves to sign the documents.
You can contact vonyango@otadvocates.co.ke or etarus@otadvocates.co.ke for legal advice on any of the above and any legal issues concerning your business, whether a start-up or an established company.
Employers Redundancy Obligations During the COVID-19 Pandemic: Managing the Process
The COVID-19 global pandemic has seen many businesses locally and globally being forced to make difficult decisions, especially in relation to whether retain all, some or none of the employees. Due to closures of businesses up and down the supply chain, the domino effect has resulted in many employers, both large and small, having to get creative to ensure they can survive and emerge from the pandemic.
Some options that employers have been implementing include:
exercising any contractual right to ‘lay-off’ staff on a temporary basis or reduce their hours;
where appropriate, terminating the contracts of agents and contractors first;
where there is no contractual right, asking employees to consent to reduce their hours and/or pay on a temporary basis, or considering ways to unilaterally make such changes;
providing employees with alternative duties; or
seeing whether any employees want to take unpaid leave or go on a sabbatical.
For employers who have been unable to initiate the above measures or for those who have, but it has not been helpful, the last resort has been to declare employees redundant.
This article provides a useful summary of the key considerations for employers who are contemplating a labour force reduction to manage costs amidst a contracting economy that’s been gutted by COVID-19.
From the onset, it is important to note that the methods and procedure of lawful termination of Employment are outlined in the Employment Act, No. 11 of 2007 (hereinafter referred to as “Employment Act”). This means that termination of employment is a statutory process. The methods and procedure of termination of employment prescribed by the Employment Act supersedes stipulations under any contract of employment except provided otherwise by the Employment Act. Further, it is important to note that at all material times, termination of employment can be initiated either by the employer or the employee.
Whilst there are several ways in which termination of employment can be effected, this article will focus only on termination by redundancy.
Redundancy Process in Kenya
It is lawful and allowed in Kenya for an employer to terminate an employee’s employment on account of redundancy.
Section 2 of the Employment Act provides a statutory definition of the term “redundancy” which means “the loss of employment, occupation, job or career by involuntary means through no fault of an employee, involving termination of employment at the initiative of the employer, where the services of an employee are superfluous and the practices commonly known as ‘abolition of office’, ‘job or occupation’ and ‘loss of employment’”.
Redundancy is provided for under Section 40 of the Employment Act. Where an employer seeks to declare employees redundant, he/she must adhere strictly to the conditions set out under Section 40(1) of the Employment Act. These are:
where the employee is a member of a trade union, the employer must notify:
the union; and
the labour officer in charge of the area where the employee is employed,
of the reasons for, and the extent of, the intended redundancy 30 days before the date of the intended date of termination on account of redundancy;
where an employee is not a member of a trade union, the employer notifies:
the employee personally in writing; and
the labour officer;
the employer has, in the selection of employees to be declared redundant had due regard to seniority in time (‘Last In, First Out’ – LIFO principle) and to the skill, ability and reliability of each employee of the particular class of employees affected by the redundancy;
where there is in existence a collective agreement between an employer and a trade union setting out terminal benefits payable upon redundancy, the employer has not placed the employee at a disadvantage for being or not being a member of the trade union;
the employer has where leave is due to an employee who is declared redundant, paid off the accrued leave in cash;
the employer has paid an employee declared redundant not less than one month’s notice or one month’s wages in lieu of notice; and
the employer has paid to an employee declared redundant severance pay at the rate of not less than fifteen (15) days’ pay for each completed year of service.
In the case of Hesbon Ngaruiya Waigi – v – Equitorial Commercial Bank Limited (2013) eKLR the court referring to conditions outlined under Section 40 held:
“These conditions outlined in the law are mandatory and not left to the choice of the employer. Redundancies affect workers livelihoods and where this must be done by an employer must put into consideration the provisions of the law.”
Where an employer fails, neglects, and/or ignores to strictly follow and/or adhere to the conditions laid down in Section 40 in declaring an employee redundant then such termination of employment will be considered to be unfair termination within the meaning of Section 45 of the Employment Act.
This is buttressed by the case of Francis Maina Kamau – v – Lee Construction (2014) eKLR where the court held that:
“Where an employer declares a redundancy the conditions set out in Section 40 of the Employment Act must be observed and where the employer fails to do so, the termination becomes unfair termination within the meaning of Section 45 of the Employment Act.”
Indeed, in the case of Kenya Airways Limited – v – Aviation & Allied Workers Union Kenya & 3 others [2014] eKLR, the Court of Appeal held that:
“…where there is a redundancy the employer must ensure two fundamental requires of substantive justification for the same and procedural fairness. Section 40(1) of the Act gives the requirements and conditions precedent to a redundancy. The employer must justify the redundancy. Notice of the intended redundancy should be issued to the employees likely to be affected and another notice issued to the labour officer. The notices under section 40(1) of the Act are mandatory. Both the notices themselves and their duration of 30 days under this provision are mandatory. Section 40(1) of our Employment Act does not expressly state the purpose of the notice. Although it also does not expressly provide for consultation between the employer and the employees or their trade unions before the final decision on redundancy is made, on my part I find the requirement of consultation provided for in our law and implicit in the Employment Act itself.”
Consultations should be undertaken and are meant to allow the employer and the employees to discuss and negotiate a way out of the intended redundancy, if possible, or the best way of implementing it if it is unavoidable as stated by the Court of Appeal in the case of Barclays Bank of Kenya Ltd & Another vs GM & 20 others, (Civil Appeal No. 296 of 2016). The consultations must be real and meaningful and not a charade.
In the unfortunate event that there is no solution in sight, meaning that redundancy is inevitable, measures should be taken to ensure that as little hardship as possible is caused to the affected employees.
Conclusion
Most employers are facing major challenges in balancing the high operating costs, caused by escalating employee cost, among other overheads, which have risen disproportionately when compared to declining revenues.
Despite these unprecedented times, the courts are unlikely to take the view that the COVID-19 pandemic is an excuse to forgo the legal processes when making employees redundant. Employers must strictly comply with the substantive provisions as outlined in the Employment Act before deciding a role will be made redundant.
Update
When an employee is declared redundant, he/she is entitled to the following:
All leave days not taken should be paid for in lieu of the same;
One (1) month’s notice or one (1) month’s salary in lieu of notice;
Severance pay at the rate of not less than 15 days pay for each completed year of service (for instance if you have worked for that employer for 5 years before being declared redundant, you are entitled to 15 days x 5 years =75 days pay);
where the employee is not a member of a trade union, they should be notified simultaneously with the Labour Officer of the area;
where the employee is a member of a trade union, the employer should notify the union simultaneously with the Labour Officer noting in the information the reasons for the redundancy; and
where the union had signed a collective bargaining agreement with the employer, all benefits provided under the agreement should be provided.
If the employer had not been remitting the employee’s pension deductions to the relevant pension fund or NSSF and/or not remitting NHIF contributions, the employee can insist on his/her pension deductions being remitted to the relevant pension fund or NSSF and/or NHIF for the material period. If the employer refuses to do this, the employee is at liberty to sue the employer at the employment and labour relations court for settlement of pension deductions and/or NHIF contributions, plus interest.
It is important that redundancy exercises are properly documented and carried out correctly to avoid lengthy and potentially expensive employment claims down the line. We often advise clients on these processes and can assist with drafting scripts for use at consultation meetings, letters to employees and associated termination documents.
Should you have any questions regarding the redundancy process or any other employment matters, contact Victor of the OT Advocates at vonyango@otadvocates.co.ke
Why protecting your intellectual property rights to your Mobile App is so critical:
Story
time:
In February this year (2020), Blix, an app developer behind the
BlueMail email management app announced that it will sue Apple for allegedly
copying one of its app features. Blix also called out Apple for engaging in unfair
business tactics by allegedly stealing its anonymous email sign-in feature with
“Sign in with Apple”, then thereafter “suppressed” Blix’s iPhone app in search
results and finally kicked Blix app out of the MacOS App Store.
In
January 2012, Mocality, a Kenyan business database service that has since
folded up, complained that Google was using Mocality’s data to sell Google
services. Mocality also accused Google for allegedly making false claims about
Mocality’s business practices. Also in 2015, Waze, a popular GPS navigation app owned by Google, was accused of stealing
proprietary mapping information from a rival called PhantomAlert prior to Waze’s
acquisition by Google.
How
serious is the issue of theft of intellectual property rights in the tech
industry:
The
above are a mere drop in the ocean of suits, accusations and claims of theft of
intellectual property brought by small and large app developers against Apple, Google and Microsoft which own the biggest app
stores in the tech industry, other competitors and corporates. In Kenya, the
risk of your app being copied by a lazy developer who is on tight deadline or a
rival who wants to replicate the success of your app or steal your traffic or
users, is very high.
It is
estimated that the global mobile application market is expected to reach USD 407.31 billion in 2026. With the rapid advancement in technology, new
mobile applications are constantly being developed to provide mobile phone
users with various novel services.
It is
therefore essential that mobile application developers take proactive measures
to protect their intellectual property rights in the app.
What
exactly are intellectual
property rights:
Intellectual
property rights are legal
rights aimed at protecting the creations of a person’s mind
by granting exclusive
rights
over the use of their creation for a particular period of time. They consist of Copyright, Trademark, Patent and Industrial Designs.
The
intellectual property rights highlighted above may be engaged to provide
protection to the various facets of a mobile application. Below is a brief
overview of how a patent, copyright and trademark may be used to protect the
different components of a mobile application.
Patent:
A patent is an exclusive right granted for an invention. The registration of
patents in Kenya is guided by the provisions of the Industrial Property Act,
No. 3 of 2001 Laws of Kenya; and Section 21 of the Act defines an invention “as a solution to a specific
problem in the field of technology and goes further to state that an invention
may be, or relate to, a product or process.”
A
developer may file an application to the Kenya Industrial Property Institute (“KIPI”)
to patent the process through which the mobile application stores data or
processes it to be used on a mobile phone; or patent a method embodied in an app.
Prior to
filing an application for a patent, the developer must ensure that the mobile
application meets the requirements for patentability as set out in Section 22
of the Act which are: the mobile application process must be new; it must
involve an inventive step which cannot be obviously deduced by a person with
ordinary skill the technical field; and the invention must be useful and not
merely theoretical.
Patent rights allow the patent holder to control who can use, make and sell the protected invention; and in return, the patent holder is required to disclose how the invention works in a way that a person skilled in that particular technical field can replicate the invention.
Copyright:
In order
to buffer his or her intellectual property rights, a developer may obtain copyright from the Kenya Copyright Board (“KECOBO”) to secure his or her rights to
the app itself,
including its original software code and content, that
is, the computer
programs that form the
basis for mobile application.
Copyright
may also be used to protect the screen displays generated by the mobile
application. It is important to note that this protection is limited to the
expression of the idea and not the idea itself.
However,
for the developer to be eligible for copyright protection, he or she must
demonstrate that
sufficient effort was expended
on
making the programme to
give it an original character; and that the programme has been written down or recorded.
Copyright
accrues automatically to the developer under the provisions of Section 22 of
the Act. However, it is essential that the same is registered so as to obtain
prima facie evidence of ownership in case someone else copies or replicates the
app or its appearance, or its source code exactly or almost exactly as it is.
Trademark:
Furthermore,
the developer may trademark the application’s: (i) name and (ii) graphical user
interfaces (“GUIs”) so as to distinguish them from competitors, and protect them from
being copied or passed off.
GUIs
are the point of contact between the device, whether static or mobile, and the
user, employing graphic elements such as icons, menus, text boxes, scroll bars
and animated features.
The mark
to be protected must be clearly defined and should be distinct from any other registered marks. It is
therefore essential that a developer conducts in depth research, both locally
and internationally, to ensure that the mark intended to be registered does not
infringe on another’s rights.
A
trademark is valid
for 10 years and may be renewed.
Trademarks
are registered by KIPI.
Industrial Design:
GUIs can also be protected by registering them as industrial designs by KIPI.
Disclaimer. The above information is intended for general information purposes only and is not intended to provide, and should not be relied on for legal advice. Please get in touch with OT Advocates or contact your attorney to obtain advice with respect to any particular issue or problem.
No one ever forgets how it felt when they bought their first car or when they finally bought their dream car. Unfortunately for a number of us, we were left with a bitter taste in our mouths, after realising that we had been conned by very cunning individuals.
Read on to know what do you need to prevent falling victim to vehicle fraudsters.
Seek a Trusted Mechanic’s Advice
Take a trusted mechanic with experience in that particular vehicle model to view, check and road-test the vehicle to confirm that it is mechanically sound, to help pinpoint any issues such as mechanical faults and to help you in the negotiation process. Tell the mechanic to take a mental note of the condition, the parts and accessories of the vehicle as they are on that day.
Crucial Searches to be Conducted
NTSA Search (TIMS Portal)
Conduct a search on the motor vehicle ownership and registration on NTSA TIMS’s portal here using the prospective vehicle’s Registration Number (what Kenyans call ‘number plate’). This will help determine:
who the registered owner of the vehicle is; the VIN number (or the chassis number); the engine number; vehicle type (that is, model, type (station wagon, saloon, lorry), colour, engine capacity etc.); and
whether there are other co-owners of the vehicle such as a bank, a micro-finance institution or other creditor such as a motor vehicle dealer.
Sometimes, there might be another co-owner or owner listed on the logbook such as:
a bank, a financial institution or a motor dealer, which would mean that there is a loan or a debt secured by the vehicle. Request the owner/seller of the vehicle to discharge the charge on the logbook by getting the bank, financial institution or motor dealer to write to NTSA stating that the loan or debt has been repaid (if it has) and to request the charge to be discharged/removed. The owner will then pay discharge fees, surrender their original logbook with the co-owners’ names; and NTSA will issue a new original logbook with the seller’s names only; or
a deceased person (legal term for ‘a person who has passed on’). In such a case, you should request the seller to present a copy of confirmed Letters of Administration or Grant of Probate issued by the courts to the NTSA office together with the original logbook, NTSA will then advise on the next steps and ultimately facilitate the transfer of the vehicle to the administrator/executor of the deceased’s estate who has been confirmed by the court and who in turn will transfer the vehicle to you or NTSA will transfer the vehicle directly to you and issue you with a new original logbook in your names.
IMPORTANT: Do not attempt to purchase a vehicle with a logbook showing another owner such as bank, financial institution, a motor dealer or a deceased person! It can be repossessed by the bank, financial institution or a motor dealer or the transfer challenged in court by dependant of the deceased person such as one of their children or spouse! You might end up like the gentleman below!
Collateral Registry Search (eCitizen Portal)
Conduct a search on the Collateral Registry (MPSR) under the Business Registration Service (a department of the Attorney General’s Office) on your account on the eCitizen Portal, by clicking on “Search Request” and select “Search Criteria” then “Grantor’s Identification” where you insert the owner’s/seller’s name and national ID/Passport number or “Motor Vehicle Chassis Number” where you insert the VIN Number of the vehicle. The Collateral Registry lists movable assets including motor vehicles which have been used as security to secure loans granted by individuals, banks, financial institutions such as microfinance institutions, saccos, credit institutions and motor dealers.
KEBS Search
Conduct a search on Kenya Bureau of Standards’ (“KEBS”) mileage verification portal here using the prospective vehicle’s Chassis Number (VIN Number) to determine whether there has been odometer tampering to reduce actual vehicle mileage. You can also send a text message to 20023 as follows:- CH#Chassis Number. Get the Chassis Number from the NTSA Search document you had already obtained.
KRA Customs Duty Search
Check online for a public notice published in the local dailies on Sunday, May 15, 2016 by Kenya Revenue Authority (“KRA”) and on KRA website for a public notice, which required owners of 124 vehicles (registration numbers listed) to present the vehicles and their importation documents to KRA for verification of payment of import duty; to confirm that the prospective vehicle’s registration number is not among the 124 registration numbers listed therein.
If possible, ask the seller whether they have all (or any) of these documents, QISJ (issued by KEBS), Import Declaration Form (“IDF”), F147 and Payment Slip, Export Certificate, Duty Entry Form and Payment Slip, CFS invoice, Receipt and Release order, and Bill of Lading; especially if they are the vehicle’s first owner or if the seller is a motor vehicle dealership.
Confirm whether the engine has ever been replaced by the seller, and if so, inquire whether there are importation documents such as IDF Forms for the engine, if it was imported; or sale receipts, if the engine was bought locally.
Before Meeting the Buyer
Obtain from a lawyer a Motor Vehicle Sale Agreement or search for a suitable one, online or from a legal portal such as LexisNexis, amend it and then print it.
Open an account with the NTSA TIMS portal and confirm that the owner too has an account on the NTSA TIMS portal. Get the owner’s bank details.
Carry the Motor Vehicle Sale Agreement,NTSA TIMS Vehicle Search and a Bankers Cheque drawn in favour of the owner with the agreed purchase amount.
IMPORTANT: Avoid transacting in cash when meeting the owner/seller. Always use Bankers’ Cheques! They are as good as cash but have the safety precaution of being traceable, easy and safe to carry and have to be banked. In the event that the seller insists on cash (we advise against this!), request them meet you at the banking hall of your bank and release the funds to them in the hall, not outside, and only AFTER concluding the transfer and being given the original logbook!
Before the meeting, ask the owner to come with the vehicle (if it is roadworthy) to the meeting place, if it is not, arrange for a flat-bed recovery truck to go to the premises where the vehicle is and load it up, that is, BEFORE parting with your Bankers’ Cheque. Remember the film “Now You See Me” or the “Pata Potea” street cons of downtown Nairobi? You can get conned in a blink of an eye. Being a little paranoid, always helps!
IMPORTANT: Avoid paying a seller and then collecting the vehicle later on, even if the seller is a friend. The vehicle might get involved in an accident, be stolen or damaged between the time of payment and collection. Pay only when you can see the vehicle and the keys!
Also before the meeting, ask the owner to carry their original as well as copies of their National ID or Passport and PIN Certificate. Request for the original logbook to be brought to the meeting. Do not forget to ask the owner to carry the QISJ, IDF, F147 and Payment Slip, Export Certificate, Duty Entry Form and Payment Slip, CFS invoice, Receipt and Release order, and Bill of Lading (if these apply, and are available); and where the engine has been replaced, to carry the IDF for imported engines, or sale receipts for locally purchased engines.
On the Transaction Day
IMPORTANT: Hold the meeting in a public place such as a law firm, shopping mall, restaurant, NTSA’s offices, a bank etc., where there are members of public and/or security officers about, as well as internet.
Have your trusted mechanic accompany you to the meeting as well as a trusted friend or relative for security purposes. The mechanic will do a final check on the vehicle to confirm that the vehicle is in the same condition it was when you and him/her checked and road-tested it (vehicle battery, radio, spare wheel, jack, wheel wrench and other parts and accessories are still there and that there is no new dents, cracks or scratches etc.).
Lastly, ensure you have money in your MPESA account for the payment of the motor vehicle transfer charges which vary based on the vehicle type such as saloon, lorry etc. and engine capacity (“cc.”). KES. 6,000.00 is the maximum amount one may be required to pay at present and minimum around KES. 1,000.00.
Ensure that you have access to internet for the purposes of accessing NTSA TIMS portal transferring the vehicle from the owner’s NTSA TIMS account to your NTSA TIMS account.
Confirm and double check that:
the engine number (called Vehicle Identification Number “VIN”) on the vehicle matches the one on the NTSA TIMS Search and the original logbook; if it does not, then the vehicle is either stolen, or duty was not paid and has been given the registration of another scrapped or written off vehicle;
the original logbook is authentic and not a forgery;
the names on the owner’s original logbook match the names on the NTSA TIMS portal;
the ID Number or Passport Number and PIN Number on the owner’s TIMS account match those on their original National ID or Passport and PIN Certificate; and
there is no other listed owner on the logbook or the TIMS portal such as a bank, financial institution or a motor dealer etc. and if there is, abort the transaction until the other owner consents to the sale and agrees to transfer the vehicle together with the owner to you.
The seller will then sign the Motor Vehicle Sale Agreement, handover the original logbook, motor vehicle keys and the buyer will hand over the Bankers Cheque. Also ask for an invoice and/or a receipt (if available).
Take your vehicle, legal documentation and go.
After the Purchase
If the engine had been changed, arrange with the seller to accompany you to the Nairobi Traffic Headquarters along Ngong Road, next to Kenyatta Hospital or the nearest traffic base or police station for the police to sign the replaced engine IDF document or purchase receipt.
Depending on the vehicl type, you can book online on the NTSA TIMS portal for the vehicle’s inspection by NTSA Motor Vehicle Inspection Unit at Industrial Area, Nairobi or the nearest regional Inspection Unit.
Follow up with NTSA two weeks after the transfer, to collect your new logbook in your name. Note to carry your original ID or Passport and the original logbook in the previous owner’s/seller’s name.
Lastly, never ever pay any “Commitment Fee” or any amount “to enable a seller to bring the car to you for viewing or for fuel” or any “Advance Payment”. KES 5,000 or KES. 50,000 is not a small amount! Neither is KES 600,000 or KES 1,000,000. Be smart and take your time and due diligence. Above all, follow our advice here to the letter. Be a little paranoid!☺
Individuals planning to buy a Business have two options:
Buy the Business’ assets only and not the Business itself; or
Purchase shares of the target company thereby purchasing the business itself with all its assets, and liabilities.
ASSETS VS SHARES
Pros of buying the assets of a Business:
The Buyer will get specific assets at the conclusion of the transaction (instead of getting a company that may have unknown or undisclosed liabilities).
The Buyer gets more flexibility and control over what they are buying; for instance, you can decide that only certain employees or Business assets will be transferred to you.
Cons of buying the assets:
Certain one-time transaction costs connected to the purchase might be more expensive.
Purchasing assets only, means you will be contracting with the company that owns the Business, whereas buying the shares means you will be contracting with the shareholders of the company, which requires a high level of trust on information given by the Seller.
There is also the risk that if the Business becomes insolvent, the Seller, as a private company, may have no other assets (which act had not been disclosed).
Two ways to deal with this risk:
insist on indemnification from the individuals owning the company; and
conduct a Due Diligence (legal, financial and tax) exercise on the company.
Asset Purchase Avoids Debts
If you buy another company’s assets, you must:
properly value the assets being purchased, especially assets like land and customer goodwill.
transfer the titles to assets such as bank accounts, real estate, intellectual property and vehicles, into your company’s name.
ensure that any charges and debentures registered against the company’s land and assets are discharged by the Seller and that you are given a clean title.
Note that as a buyer you generally don’t take up any of the debts of the company whose assets you are purchasing especially if you followed the provisions of Transfer of Business Act.
Share Purchase Includes Debts
If you own a company that purchases the shares (at least 51% of the shares) of a target company, the target company will become your company’s subsidiary.
You can then use your shareholder voting power to name directors and officers, giving you effective control of the company’s operations.
The acquired company will still hold all of its assets in its own name.
A target company may be more willing to authorize a share purchase than an asset purchase. * This is because the:
Company will be taxed on the gains realised from the sale of assets at the rate of 5% (Capital Gains Tax) (Note: gains realized on the sale of assets e.g. machinery which are qualified for the wear and tear deduction, will be exempt from capital gains tax); and
Buyer will pay Stamp Duty at 1% on the value of the assets.
The sales proceeds will not be taxed until the point they are distributed to the shareholders when they will be deemed income made or derived in Kenya and thus attract Income Tax.
On the other hand, the sale of shares of a private company attracts only stamp duty at 1% (a lower tax rate) paid by the Buyer not the Seller.
THE STEPS OF PURCHASING A BUSINESS
The stages one goes through in purchasing or selling of a
Business includes the following:
Pre-negotiation stage;
Negotiation stage;
Drafting (formal agreement) stage;
Pre-closing review stage; and
Closing stage.
Pre-Negotiation Matters
Some of the issues the Buyer must determine before they commence negotiations with the Seller include:
The Seller’s minimum price, and the Buyer’s maximum price;
How the value and/or the Purchase Price of the Business was arrived; and
The Business’ financials, i.e. the balance sheets, cash flow position, income and expense statements, and profit and loss statements.
Initial Negotiations
In the initial phase, the Buyer and the Seller need to discuss and decide on the following:
Documents such as income tax returns for the immediate past five years, tax compliance certificate, real property and equipment leases and title deeds, and employment contracts for key employees.
Whether shareholders’ and/or board of directors’ approval is required, such as in most asset sales and mergers, and the latest date on which approval must be had.
If any government approval is required, such as, Competition Authority of Kenya’s approval to the acquisition or merger – which party is responsible for obtaining the approval.
If any employees of the company will be retained by the Buyer. In such a case, the Buyer will have to draft fresh employment contracts. If not, the seller might have to pay them severance pay or gratuity.
If any contracts require third-party approval before the Buyer can take over them, like leases or loan agreements, the time within which approval must be obtained.
Whether the Business is adequately insured.
What are the terms of the contracts which Seller is a party to e.g. commercial leases, supplier contracts?
Head of Terms or Letter of Intent:
A Head of Terms (Term Sheet/Letter of Intent) is usually drafted by the Parties at this point. This short document states the main terms the Parties have agreed and shows that the parties are serious about the deal. It helps make sure that you don’t waste time and money performing due diligence and negotiating a formal agreement. It is mostly legally non-binding but evidences serious intent.
However, parts of the letter can be made legally binding and enforceable e.g. confidentiality and exclusivity, and it’s a good idea to do so.
Typically, the letter should contain:
The main terms of the sale agreed in principle.
The timelines and obligations of the Parties during negotiations.
A binding promise by the purchaser not to disclose trade secrets, and other sensitive company information, called a Confidentiality Agreement (Non-Disclosure Agreement).
A binding promise by the seller not to negotiate a sale with any other purchaser for a certain period of time.
Due Diligence
Due diligence is also done at this stage. Conducting Due Diligence helps a Buyer ensure that the company is everything it says it is.
Areas to consider include:
(a) Business Finances and Tax Position – engage an accountant and/or tax expert to review the Business:
Audited financial statements;
Tax returns going back five years;
Cash flows;
Income and expense statements;
Find out if there are any outstanding debts, liabilities, or tardy accounts receivables; and
Take a close look at VAT tax records too (Kenya Revenue Authority may hold the Buyer responsible if the Seller was negligent in remitting VAT).
(b) Legal Issues – engage a commercial lawyer to confirm:
The Business’s legal and obligations;
Compliance with legal issues;
Details about existing contracts, insurance policies;
Intellectual property rights;
Licenses, permits;
Registration;
Employee agreements; and
Commercial leases (check, for instance, that leases can be transferred to you).
Employees:
HR-related documentation;
employee records; and
any Non-Compete Agreements.
Suitability of the target’s Business Structure – Each Business structure has different legal and tax obligations. For instance, corporations are highly regulated and must maintain proper records.
Annual Returns have been filed at the Companies Registry etc.
Note:
(i) Confidentiality Agreement
The Seller may require the Buyer to sign a confidentiality agreement to ensure that the Buyer will not use the information about the Seller’s Business for any purpose other than making the decision to buy.
(ii) Consider Forming and Registering a New Business Vehicle
It may be advisable to create a new entity that will acquire the assets of your target Business. As a general precaution, forming a Company or a Limited Liability Partnership to buy a Business will minimize your personal risk for the Business’s past obligations unlike a Business Name.
Formal Agreement & Pre-Closing
A formal, final Sale and Purchase Agreement or an Asset Purchase Agreement will be end result of the negotiations. It should contain at least:
the conditions of the sale
the purchase price
intellectual property rights (trademarks, copyrights, patents, brand names etc.)
pre and post-completion obligations of both the Seller and Buyer
debts of the business to be discharged by the Seller
date of completion
restrictions on Seller
confidentiality and announcements
apportionments of outstanding payables eg land rates etc.
dispute resolution mechanisms e.g. negotiations before arbitration
liabilities of the Seller and the Buyer
indemnities
the employees
conditions: shareholder consent; governmental approval; other consents and clearances; no litigation challenging transaction
property: conditions of sale, transfer and assignments; the particulars of the properties; encumbrances; planning and use of properties; statutory obligations
the fixed assets and moveable assets; the leasing and hire agreements; the motor vehicles
the supplier contracts
information technology: particulars of the IT system and of the IT contracts
warranties on the: information supplied; capacity of the Seller; records; accounts; title to the assets; the business contracts, condition of assets; the stock, employees and agents; book debts; insurance; compliance with laws; licences and consents; defective products or services; disputes; insolvency
environment and health and safety warranties
taxation and tax compliance
In this stage, there are many details to attend to, such as:
Stock taking and inspection of the inventory, if it’s to be purchased.
Ensuring that all leases, contracts, and loans are subleased or assigned to the buyer. An Assignment of Lease and Assignment of Loan (short form) Agreements will be of help here.
Preparation of a Bill of Sale for assets, if they’re being sold, like fixtures, fittings and equipment.
Opening of an Escrow Account by the Seller’s and the Buyer’s Advocates, in which account the Purchase monies shall be held until all or specified conditions of the Sale Agreement have been met, such as the actual transfer of the assets to the Buyer.
Closing Stage
At closure, the Parties:
Must ensure that all documents are signed, and witnessed by their advocates.
Release the Purchase Price from the Escrow Account to pay any creditors; any unpaid VAT; and the balance to the Seller.
Procure the registration and transfer of titles of land assets and motor vehicles.
10 THINGS TO BE MINDFUL OF WHEN CLOSING A SME BUSINESS PURCHASE
Items to be addressed in the closing:
Closing or Settlement Sheet: This sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing.
Consultation Agreement: If the Buyer and the Seller agree that the Seller will remain on for a specified amount of time as a consultant then the mentioned Agreement will be required.
Leases: If the Buyer agrees to take over the Business’ Leases, ensure you procure the Landlord’s consent. The Buyer or the Landlord may opt to negotiate a new Lease instead of taking over the existing Lease, ensure you have your advocate review the terms of the new Lease.
Loan Agreement and/or a Charge or Debenture: It may be that the Buyer will have applied for financing of the purchase by a bank, therefore the three financing documents should have been reviewed by an advocate, signed, and possibly registered.
Non-Compete Agreement: For certain Businesses, it is advisable for the Seller to sign an agreement to not compete against the Business or set up a similar Business for a specified time.
Intellectual Property: If the Business owns any patents, trademarks and/or copyrights, the Seller should provide the Buyer with signed Transfer Forms.
Review Required Documents: These documents must include: a Company Resolution approving the sale, signed Share Transfer Forms (Share Transfer Forms are assessed for stamp duty purposes which is then paid before they can be registered), Tax Compliance Certificate, the mentioned Agreements, signed Discharge of Charges registered against the Business’ land assets, signed Memorandum of Satisfaction for any Debentures/ Charges registered against the Business’ assets.
The Final Purchase Price: This Price should include apportioned costs like rent, utilities, and inventory up to the time of closing.
Vehicles: If the purchase of the Business includes vehicles, the Seller must deliver to the Buyer signed Vehicle Transfer Forms.
THE LAW
The Transfer of Businesses Act, Cap 500
The Transfer of Business Act (“the Act”) requires the Seller and the Buyer to cause a Notice to be published in the Kenya Gazette (“Gazette”) of the sale and purchase of the Business. The Notice must be published either before or after the date of the transfer, in the Gazette and a national newspaper. The transfer will be deemed to be complete after two months from the publication of the notice.
The purpose of the Act is to prevent fraudulent transfer of Businesses to escape creditors and to give notice to the Business’ creditors of the sale for them to object or request settlement of their dues.
Consequences of Failure to Give Notice
Failure to cause the Notice to be published will lead to the Buyer becoming liable for all the liabilities incurred in the Business by the Seller.
The Notice will serve as evidence for the Buyer and the Seller that the law was followed in case any creditor of the Seller appears later and claims not to have known that the Business was sold.
Lastly, a creditor will not be allowed to sue the Buyer over any liability imposed by the Act after the expiration of six months after the date of the transfer.
Having a lawyer guide and advise you as the Buyer or Seller and to draft and review the mentioned legal agreements and documents is critical.
Disclaimer. The above information is intended for general information purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. Please get in touch with OT Advocates or contact your attorney, tax and accounting advisors to obtain advice with respect to any particular issue or problem.
