Uncategorized - OT Advocates

13 Aug

12 Legal Documents that Founders and Start-Ups Need

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.

6. Intellectual Property Assignment Agreement (or Licencing Agreement)

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.

7. Non-Disclosure Agreement (aka Confidentiality Agreement)

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.

8. Time & Performance Share Option Agreement (and Share Vesting Agreement)

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.

Check out our experience in Private Equity, and Mergers and Acquisitions practice here.

By admin Articles, Blog, Commercial, Uncategorized blogs 0 Comments

How to Conduct a Lawful Redundancy Process – Useful Tips

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

By admin Articles, Labour, Uncategorized 2 Comments

Verification of Work Permits Exercise at Nyayo House (From 21 May 2018 to 21 July 2018)

On May 21 2018, the Cabinet Secretary in charge of the Ministry of Interior and Coordination of National Government, Dr. Fred Matiangi announced a looming crackdown on foreigners who are in Kenya illegally, including those who are in Kenya legally but are working illegally.

He gave them a sixty (60) days’ ultimatum to present themselves to the Department of Immigration and Registration of Persons and get the requisite legal documentation or risk arrest and being jailed.

Following his announcement, the Department of Immigration and Registration of Persons has issued a notice that a verification exercise of all work permit holders will be undertaken at the Department of Immigration with effect from 21st May 2018 to 21st July 2018.

During the sixty (60) days’ period, all work permit holders will be required to attend in person at the Department of Immigration, at Nyayo House, Nairobi for the verification exercise which will include taking of fingerprints and (passport) photos of the work permit holders.

The work permit holders will be have to carry the following documents with them for the exercise purposes:

their original work permits;
their original and valid passport with the official endorsement of the work permit on it;
a valid foreigners certificate card (also referred to as alien card) or foreigners waiting card;
the official payment receipt of the work permit; and
their KRA PIN certificate.

(more…)

By admin Uncategorized 20 Comments