Introduction

Following the enactment of the Companies (Amendment) Act, Act No. 28 of 2017 and subsequently the Statute Law (Miscellaneous Amendments) Act, No. 12 of 2019 which made amendments to the Companies Act 2015 (the Act) by introducing section 93A of the Companies Act 2015, companies incorporated in Kenya are required to keep and maintain a register of beneficial owners. The Attorney General through Legal Notice No. 12 of 18th February 2020 published the Companies (Beneficial Ownership Information) Regulations, 2020 to operationalize Section 93A of the Companies Act 2015.

A company is required to lodge a copy of its register of beneficial owners with the Registrar of Companies within thirty (30) days after completing its preparation and (save for public companies), to lodge a copy of any amendment to the register with the Registrar within fourteen (14) days after making any amendment. To enable companies comply, the Registrar of Companies has published a public notice granting companies a grace period of up to 31 July 2021 to prepare and lodge the register of beneficial ownership (the deadline was previously 31 January 2021).

Definition of a beneficial owner

Pursuant to the Act, a beneficial owner of a company is the natural person who ultimately owns or controls the company or arrangements or the natural person on whose behalf a transaction is conducted and includes those persons who exercise ultimate effective control over the company or arrangement.

An arrangement is defined as an artificial entity, without legal personality, associating one or more natural or legal persons together in an ownership or control relationship, but without implying that the parties to this arrangement have any other form of collective legal arrangement.

Pursuant to the Companies (Beneficial Ownership Information) Regulations, 2020 (the Regulations), a beneficial owner of a company is a natural person who meets any of the following conditions with respect to the company:

  • holds at least ten percent (10%) of the issued shares in the company either directly or indirectly;
  • exercises at least ten percent (10%) of the voting rights in the company either directly or indirectly;
  • holds a right, directly or indirectly, to appoint or remove a director of the company; or
  • exercises significant influence or control, directly or indirectly over the company. Significant influence or control means participation in the finances and financial policies of a company without necessarily having full control over them.

Information to be provided

The Regulations outline the relevant information to be entered in the register of beneficial owners and the relevant statutory forms for the filing of the particulars (including any changes) of beneficial owners with the Companies Registry. The Regulations provide that the register of beneficial owners shall include the following information with regard to each beneficial owner, (a) full name of the beneficial owner, (b) passport number, (c) personal identification number, (d) nature of ownership and control, (e) the date on which the person became a beneficial owner, and (f) the date on which the person ceases to be a beneficial owner (if any).

Use of beneficial information

A company is only allowed to use or disclose beneficial ownership information if (a) communicating with the beneficial owner concerned, (b) for compliance with the Regulations (this would include making the relevant filing at the Companies Registry), (c) for compliance with a court order and (d) where the beneficial owner has consented to such use or disclosure in writing.

On the part of the Companies Registry, beneficial ownership information is not to be made available to the public and the Companies Registry may only use information relating to a beneficial owner for communicating with the beneficial owner or for provision to a competent authority upon a written request by the competent authority to the Registrar of Companies. Competent authorities include criminal investigation agencies, law enforcement agencies and authorities that supervise and monitor the financial sector including the Kenya Revenue Authority.

FAQs

How does this requirement for companies to maintain registers of beneficial ownership and lodge this with the Companies Registry affect a fund manager of a private equity (PE) or venture capital (VC) fund registered in Kenya?

Fund managers registered as companies in Kenya (and not other forms of registrations such as branches of foreign companies or limited liability partnerships) are required to maintain the register of beneficial owners and lodge a copy of the register with the Companies Registry within thirty (30) days after its preparation. The fund managers have until 31 July 2021 to prepare and lodge the register of beneficial ownership.

Who would constitute the beneficial owners of the fund manager of a private equity (PE) or venture capital (VC) fund registered in Kenya?

The beneficial owners of the fund manager would be each natural person who (a) holds at least ten percent (10%) of the issued shares in the fund manager either directly or indirectly, or (b) exercises at least ten percent (10%) of the voting rights in the fund manager either directly or indirectly, (c) holds a right, directly or indirectly, to appoint or remove a director of the fund manager, or (d) exercises significant influence or control, directly or indirectly over the fund manager. As noted above, a person exercises significant influence or control if the person participates in the finances and financial policies of a company without necessarily having full control over them.

What is the effect of the requirement on a portfolio company in which a PE or VC fund is an investor?

With respect to portfolio companies registered in Kenya in which a PE or VC firm is an investor, the obligation to maintain the register of beneficial owners and to lodge this with the Companies Registry is on the relevant portfolio company. The portfolio company will need to determine who its beneficial owners are, obtain the relevant information relating to the beneficial owners from them and file the register of beneficial owners with the Companies Registry by 31 July 2021.

Who from the PE or VC fund would be the beneficial owners of a portfolio company in which a PE or VC fund is an investor?

A beneficial owner is defined as a natural person who (a) holds at least ten percent (10%) of the issued shares in the company either directly or indirectly, or (b) exercises at least ten percent (10%) of the voting rights in the company either directly or indirectly, (c) holds a right, directly or indirectly, to appoint or remove a director of the company, or (d) exercises significant influence or control, directly or indirectly over the company.

Typically, PE and VC firms are set up with the fund manager controlling the PE or VC fund under the supervision of advisory and investment committees and with investors (typically being limited partners) not involved in the management of the PE or VC fund. PE and VC firms would either invest directly in portfolio companies or through special purpose vehicles (SPVs) set up for this purpose.

Accordingly, if a PE or VC firm holds directly or indirectly 10% or more shareholding in a portfolio company registered in Kenya and/or exercises directly or indirectly at least 10% of the voting rights in such company, or holds a right, directly or indirectly, to appoint or remove a director of the company, or exercises significant influence or control, directly or indirectly over the company, then the natural persons who would constitute beneficial owners of the fund manager of the PE or VC firm (were such fund manager incorporated in Kenya) would constitute the beneficial owners of the portfolio company with respect to the PE or VC firm, in addition to other beneficial owners of the PE or VC firm. This is regardless of whether the PE or VC firm is registered in Kenya.

In addition to the above, depending on the shareholding of the PE or VC firm in the portfolio company and the ownership interest of the relevant investors in the PE or VC firm (whether through shareholding in the case of a limited liability company or partnership interest in the case of a limited partnership or limited liability partnership), and notwithstanding that the investors may be passive investors, investors who are natural persons and the natural persons who control or have significant shareholding in investors that are corporate bodies may also constitute beneficial owners of a portfolio company where such investors who are natural persons and the natural persons who control or have significant shareholding in corporate investors indirectly hold ten percent (10%) or more of the issued shares in the portfolio company.

By way of example, let us assume PE Fund X incorporated as a limited liability partnership holds 50% of the issued shares in Company A, PE Fund X has several passive investors including (a) a high net worth individual (Person Y) who holds 30% partnership interest in Fund X, (b) a sovereign fund B which holds 50% partnership interest in Fund X and (c) development finance institution C which holds 15% partnership interest in Fund X. Fund X is managed by a Fund Manager FM, and Fund X has various rights with respect to Company A including the right to appoint and remove two (2) directors in Company A.

The ultimate beneficial owners of Company A would be determined as follows:

  1. Person Y will be an ultimate beneficial owner of Company A as he will indirectly hold 15% of the shareholding in Company A (being the 30% partnership interest he holds in PE Fund X multiplied by the 50% shareholding PE Fund X holds in Company A);
  2. sovereign fund B indirectly holds 25% shareholding in Company A (being the 50% partnership interest it holds in PE Fund X multiplied by the 50% shareholding PE Fund X holds in Company A). Sovereign fund B will thus be required to look through its ultimate ownership interest and determine whether there is any of its ultimate owners who is a natural person that indirectly owns 10% or more of the shareholding of Company A. In case there is no such natural person, then there will be no beneficial owners from sovereign fund B to be reported by Company A;
  3. development finance institution C indirectly holds 7.5% shareholding in Company A (being the 15% partnership interest it holds in PE Fund X multiplied by the 50% shareholding PE Fund X holds in Company A). No ultimate beneficial owner of development finance institution can thus indirectly own 10% or more of the shareholding of Company A and accordingly, there will be no beneficial owners from development finance institution C to be reported by Company A; and
  4. the natural persons who would constitute the beneficial owners of FM, which controls PE Fund X which holds 50% shareholding in Company A and which also has powers to appoint and remove directors in Company A would also constitute ultimate beneficial owners of Company A. This is notwithstanding the fact that none of such natural persons may individually hold 10% or more shareholding in Company A, directly or indirectly if a "look-through" was applied as to the ultimate shareholding of Company A.

How does the Beneficial Ownership of Companies affect fund managers who are not locally registered in Kenya but have invested in portfolio companies in Kenya?

The beneficial ownership requirements are not limited to beneficial owners who are citizens or residents of Kenya.

Provided the relevant company preparing the register of beneficial owners is incorporated in Kenya, it is required to maintain a register of its beneficial owners and this may be Kenyan persons as well as foreign persons. As such, if the fund manager of a PE or VC Fund that holds an interest in a Kenyan portfolio company is registered in the Netherlands, the portfolio company will still be required to provide the details of the ultimate beneficial owner (natural person) with respect to the PE or VC fund provided they meet the test of beneficial owners.

Would institutional investors (such as development funds, sovereign wealth funds, other institutional investors such as pension funds) that are investors in PE and VC firms constitute beneficial owners of portfolio companies in which the PE or VC firms are investors?

No, the institutional investors themselves would not constitute beneficial owners as beneficial owners should be natural persons.

A beneficial owner of a company is a natural person who meets the beneficial ownership requirements namely, that such person (a) holds at least ten percent (10%) of the issued shares in the company either directly or indirectly, or (b) exercises at least ten percent (10%) of the voting rights in the company either directly or indirectly, (c) holds a right, directly or indirectly, to appoint or remove a director of the company, or (d) exercises significant influence or control, directly or indirectly over the company.

It is possible that some of the institutional investors may themselves meet the beneficial ownership requirements but a determination has to be made as to the ultimate natural persons who are owners of or investors in such institutional investors to determine whether they also meet the beneficial ownership requirements.

What are the options of a portfolio company in which a PE or VC fund is an investor if the PE or VC fund refuses to provide relevant beneficial ownership information?

The relevant portfolio company may after issuing due notice to the beneficial owner place a restriction on the interest of the beneficial owner whose effect is to restrict any transfer of the interest (such as transfers of shares), restrict any exercise of rights in respect of the relevant interest (such as voting rights, rights to appointment of directors etc), restrict issues of shares with respect to the interest (such as a rights issue) and restrict payment of moneys with respect to the interest (such as a payment of dividends). The restriction would be lifted once the beneficial ownership information is provided.

Will the disclosed beneficial ownership information of a company be accessible to the general public?

No. The beneficial ownership information disclosed by companies to the Registrar of Companies will not be available to the public. The Companies Registry may only use information relating to a beneficial owner for communicating with the beneficial owner or for provision to a competent authority upon a written request by the competent authority to the Registrar of Companies. It is an offence to disclose the beneficial ownership information of a company for any other purpose, other than the permitted disclosures. There is of course the risk that such information may leak at the Companies Registry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.