Joint Ventures in Kenya: A Comprehensive Guide

Establishing a Joint Venture

A joint venture (JV) in Kenya is a commercial arrangement between two or more economically independent entities. The legal form of a JV is determined by factors such as the nature and size of the enterprise, the identity and location of the participants, and the commercial and financial objectives of the participants.

General Legal Considerations

Kenya does not have specific laws governing joint ventures. The legal framework is derived from general laws such as the Companies Act, 2015, Partnership Act, 2012, and Competition Act, 2010.

No Specific Laws

Kenya does not have laws specifically dedicated to joint ventures. The relationships between the parties are governed by an amalgam of general common law rules and substantive provisions from company and partnership law, tax law, competition law, and intellectual property law.

Cross-Border Joint Ventures

For cross-border JVs, key considerations include:

Legal structure: Whether to form a company in Kenya or the foreign jurisdiction.
Tax implications: Compliance with tax laws in both jurisdictions.
Dispute resolution: Mechanisms for resolving conflicts, such as arbitration or mediation.

Possible Vehicles

The basic choice in structuring a JV in Kenya is whether to establish a separate legal entity. The four basic legal forms are:

Limited Liability Company: Offers limited liability and flexibility in management and financing.
Limited Liability Partnership (LLP): Combines elements of partnerships and corporations, providing limited liability protection for partners.
Partnership: A general partnership where all partners share equal responsibility for the management of the business and are jointly liable for its debts.
Contractual Cooperation Agreement: A simple contractual basis for collaboration, often used for short-term or single-purpose ventures.

The Basic Choice

The choice of legal structure depends on factors such as limited liability, publicity, financial flexibility, and control.

Degrees of Integration

JVs can vary in degrees of integration, ranging from fully integrated corporate structures to purely contractual arrangements.

Corporate Form

The corporate form is the most common structure for JVs in Kenya due to its flexibility, limited liability, and established legal framework. Key considerations include:

Limited liability: Shareholders’ liability is limited to their share capital.
Publicity: Companies are required to file accounts and other information regularly.
Financial flexibility: Companies can issue different types of shares and loan capital.
Relationship between participants and control: Governed by the articles of association and a shareholders’ agreement.

Choosing a Legal Structure

Key factors to consider when choosing a legal structure include:

Why? Why set up a joint venture? What are its underlying objectives?
What? What type of structure is most effective for achieving this objective?
Where? Where is the physical location of the joint venture operation?
When? How long is the joint venture intended to operate? Is it for a finite or indefinite period?
Who? Does the legal nature of any of the participants present any problems or particular considerations?

Joint Venture Company

A limited liability company is often the most appropriate structure for JVs in Kenya. Key considerations include:

Limited liability: Shareholders’ liability is limited to their share capital.
Publicity: Companies are required to file accounts and other information regularly.
Financial flexibility: Companies can issue different types of shares and loan capital.
Relationship between participants and control: Governed by the articles of association and a shareholders’ agreement.

Directors’ Duties

Directors of a JV company are generally nominated by the participants. Directors must act in the best interests of the company and comply with the provisions of the Companies Act, 2015.

Changes in Shareholders and Incentive Schemes

The shareholders’ agreement and the articles of association will contain detailed provisions covering situations in which shares in the JV company may or must be transferred. The corporate structure allows for the withdrawal of participants and the arrival of new ones without necessarily affecting the business.

Warranties

The JV may be initiated through participants transferring businesses and assets to a newly-formed company in exchange for shareholdings or through one or more of the participants subscribing for shares in an existing company or transferring assets to an existing company in exchange for shares. Parties will wish to obtain suitable warranties and indemnities to protect against unknown liabilities.

Listed Company Parties

When a listed company enters into a JV, it is required to classify the transaction under the relevant securities laws and regulations.

Accounting Aspects and Financial Arrangements

A company contemplating participation in a JV will wish to consider carefully the impact of its interest in the JV on its existing group structure and financial arrangements. For this purpose, it may be relevant to consider whether or not the JV would be a subsidiary or subsidiary undertaking of the company concerned under the Companies Act, 2015.

Tax Aspects

The tax implications of forming and operating a JV in Kenya include:

Transfer of assets to the JVC: Contributions of assets or businesses to a JV company may result in taxable gains.
Operation of the JVC: Profits are distributed as dividends, and the company may obtain tax deductions for interest payments.
Termination: The termination of a JV structured as a JVC may involve the transfer of assets or the disposal of shares, which may have tax implications.

Limited Liability Partnership

An LLP is a body corporate with legal personality separate from its members. It is taxed as a partnership, and members have limited liability. LLPs are commonly used for professional partnerships and other ventures where limited liability is desired.

Capacity and Liability

An LLP has unlimited capacity and is liable for its debts and obligations. Members are not personally liable for the LLP’s debts unless they have given personal guarantees.

Publicity

Like a company, an LLP is subject to certain formalities in relation to carrying on business and is required to file accounts and other information regularly.

Membership

An LLP must have at least two members. New members will be admitted by agreement of the existing members.

Management

Although the LLP Regulations set out default provisions, the members are free to agree their own arrangements for the management and control of the LLP.

Tax Aspects

An LLP is generally taxed as a partnership. Each member is taxed on their share of the LLP’s profits or losses.

Use as a Joint Venture Vehicle

The LLP structure may be attractive for some JVs due to its organizational flexibility and tax status combined with limited liability for its members.

Legal Partnership

A legal partnership is governed by the Partnership Act, 2012. Partners are jointly liable for the debts and obligations of the partnership. This structure is less common for business ventures due to unlimited liability.

Application of the Partnership Act 1890

The Partnership Act, 2012 applies to partnerships in Kenya. It defines a partnership as the relationship between persons carrying on a business in common with a view to profit.

Existence of Partnership

Whether particular JV arrangements constitute a legal partnership is a mixed question of fact and law. If a partnership exists, the Partnership Act, 2012 will apply.

Mutual Agency of Partners and Risk-Sharing

In a legal partnership, each partner is deemed to be the agent of the other partners for the purposes of the business. Partners are jointly liable without limit for the debts and obligations of the partnership.

Possibility of Limited Partnership

A limited partnership may be formed under the Limited Partnership Act. At least one of the members must be a general partner with unlimited liability, although the general partner can be a limited liability company.

Partnership Property and Profits

All assets originally contributed and those subsequently acquired in the course of the business are partnership property and must be held and dealt with in accordance with the partnership agreement.

Tax Aspects

The transfer of assets to a corporate partnership may constitute a disposal by the contributing partner of a share in the asset. The contributing partner will be liable to tax chargeable on any gain arising.

Partners’ Duties and Dissolution of Partnership

The Partnership Act, 2012 imposes particular duties on partners in connection with the conduct of business and also lays down rules which apply, subject to any contrary provisions in the partnership agreement, in relation to the termination and dissolution of the partnership and the settlement of its liabilities.

Disadvantages of Partnership Structures

The unlimited liability feature is of considerable concern to both individual participants and companies. The practical disadvantage of a partnership structure is the absence of a legal vehicle with its own externally recognizable management structure and an indefinite life in which can be vested the assets and liabilities of the business and which can raise finance.

Use of Structure

The partnership structure is infrequently adopted as the basic legal structure for business ventures by companies. However, a partnership structure should be considered where, for tax and commercial reasons, it is desirable for the participants to have common direct interests in the underlying assets of the venture and contracts with third parties.

Co-operation Agreement

A cooperation agreement is a simple contractual basis for collaboration. It is useful for short-term or single-purpose ventures and avoids the formality and permanence of a corporate structure.

Simple Contractual Basis

In pure legal terms, the simplest form of association for a JV is an arrangement under which the participants agree to associate as independent contractors, rather than as shareholders in a company or partners in a legal partnership.

Liabilities and Losses

Not being a partner in the legal sense, a participant in a purely contractual arrangement will not have a statutory responsibility for the liabilities and obligations of the JV and for acts and omissions of its co-venturers. However, any participant will be exposed to claims and liabilities, which could be unlimited, as a consequence of both its own activities and those of other participants for whom it has expressly assumed responsibility or is vicariously liable under the JV arrangements.

Intention Not to Create a Partnership

Joint ventures pursued through a non-corporate form of association vary from collaboration arrangements involving relatively limited sharing of resources and interests to ventures with a significant degree of integration. By their very nature, JVs frequently involve some degree of sharing of returns from the activities of the co-venturers and of the related costs and there is often a concern that, contrary to the intention of the parties, the arrangements may be held to be a legal partnership. It is common practice to incorporate in such a consortium, collaboration or co-operation agreement an express declaration of an intention not to create a partnership. However, such a statement, while helpful, is not conclusive and will not prevent the liability problem if, on a proper analysis, a legal partnership exists. For similar reasons, it is usual to provide that each party acts for its own account as principal and, except where specifically provided in the agreement, has no authority to bind the others.

Joint Venture Property

Subject to the provisions of the JV agreement which, depending on the nature of the operation, may give the participants various interests in different assets relevant to the venture, the assets of each participant will remain its own property.

Tax Aspects

If the businesses that make up the contractual JV are separately owned and controlled and each JV party bears its own costs, it will usually follow that the net profits of the contractual JV are not shared but rather accrue separately to the participants. However, there is no objection to the participants sharing the gross returns of the JV.

Suitability for Joint Ventures

The simple form of contractual association is suitable where the parties wish to avoid the relative formality and permanence of a corporate structure and the degree of integration and inter-dependence (and associated liability problems) represented by legal partnership, while wanting for particular reasons (such as tax, accounting and finance or regulatory requirements) to have direct interests in the relevant assets and revenues. A co-operation or collaboration agreement is often the basis for JVs in relation to:

Property development.
Tenders and construction contracts.
Oil and gas exploration and development projects.
Other projects where, for example, the participants make their contributions at different stages.

Strategic Alliances

Joint ventures are often entered into as part of, or to give effect to, a strategic alliance, which may involve cross-holdings of equity interests in the participants (or their holding companies). This type of arrangement involves a number of corporate legal issues, in particular in relation to any “standstill” arrangements entered into by the companies concerned and the impact of the Financial Conduct Authority and other regulatory requirements.

Property-Related Ventures

Numerous structures can be used for two or more parties to participate in property development or property investment projects. These include any one or a combination of the following:

Contractual arrangements.
Partnerships.
Limited partnerships.
Limited liability partnerships.
Limited companies.

Technical Know-How Ventures

Joint ventures are often formed for the purpose of developing and exploiting technical property, patents and other forms of intellectual property. In these cases, the owners of the intellectual property will grant other participants, or a jointly owned company, the right to exploit the intellectual property in exchange for royalties and/or lump sum payments, but without further integration of their respective interests.

Cross-Border Ventures

The basic forms of structure described above have their counterparts in other jurisdictions and, in the case of complex JVs, the possibility of using different legal vehicles in different jurisdictions, in association, possibly, with a partnership arrangement may be considered.

Other Issues

Whatever vehicle is chosen, there will be other issues to address if a JV is to be established:

Competition law: In Kenya, the merger control laws are contained in the Competition Act, 2010 and related guidelines.
Employment considerations: The JV will require employees. It is usual for the parties establishing the JV to each transfer several employees with the relevant expertise into the JV.
Pensions: The parties will need to consider the pension arrangements of the employees of the JV.
Share schemes: These are increasingly used as part of employees’ and directors’ remuneration packages.
Intellectual property: A JV will often need to use its parents’ existing technology. It is usual for the relevant participant to license the technology and other intellectual property rights rather than to assign the technology outright because of the risk that the JV might fail.
Documentation: Key documents for establishing a JV in Kenya include:
Shareholders’ agreement: Outlines the rights and obligations of the parties.
Articles of association: Govern the internal management of the company.
Management agreement: Defines the role and responsibilities of the managing party.
Asset purchase agreements: Detail the transfer of assets to the JV.
Intellectual property agreements: Govern the use and ownership of intellectual property.
Distribution and marketing agreements: Outline the terms for distribution and marketing activities.
Service and secondment agreements: Detail the terms for the secondment of employees.
Guarantees: Provides for guarantees from the JV parties.
Property arrangements: Details the property arrangements for the JV.

Choosing the Joint Venture Vehicle: Issues to Address

Profits and losses: To what extent (if at all) are these to be pooled? How are profits to be extracted?
Entitlement to assets and revenues: To what extent (if at all) do the participants want to have direct interests (whether discrete or undivided) in the assets and revenues attributable to the JV?
Risk-sharing and liabilities: Are all the risks of the enterprise being borne by the JV or are some being assumed directly by the participants? How much legal responsibility is each participant willing to accept for losses of the business and for liabilities to third parties incurred by the JV, particularly in the light of their relative financial positions?
Management structure, employees and employment incentives: Will the JV have its own employees? How much autonomy will it have? What sort of board and management structure will be required? Is any form of employee participation or incentive plan proposed?
Control and minority protection: How is the JV effectively to be controlled? Will the structure accommodate suitable protection for minority participants?
Accounting: How will the activities of the participants in the JV be treated for accounting purposes?
Tax: What is the tax effect on the JV parties of the contribution of assets or businesses to the JV? How will the JV be taxed and how will the interests of each participant be taxed? Does the structure provide the best tax treatment for the JV and the individual participants?
Financing: How do the participants foresee the JV being financed? If funds are to be raised externally, what are the requirements of the lenders in relation to recourse to the participants and security?
Disclosure: To what extent do the participants wish to keep confidential accounting and other information about the JV?
Changes in participation: Is it necessary to contemplate changes in ownership of the JV and to what extent is it desirable that participation should be transferable? Is it envisaged that the shares will be traded on a stock exchange?
Commercial and marketing: What are the imperatives from the operating and marketing points of view?
Regulatory and licence considerations: Is the JV bound by the requirements of any regulation or third party arrangement (such as a concession or licence) which effectively requires that the JV should be conducted in one form or another?
Competition and merger controls: How does the JV impact on competition in the relevant markets, and what restrictions are to be accepted by the participants?
Termination and dispute resolution: Is the venture for a finite term? In what circumstances should it be capable of termination? How are disputes to be resolved?

Subsidiaries and Subsidiary Undertakings

Subsidiaries: Whether or not one company is a subsidiary of another depends effectively on whether the other company holds a majority of the voting rights, is a member and has the right to appoint or remove a majority of the directors, or is a member and controls alone, pursuant to an agreement with other members, a majority of the voting rights.
Subsidiary undertakings: For accounting purposes, a company is required to prepare consolidated accounts for itself and every undertaking (including an unincorporated association) which is its “subsidiary undertaking”. The definition of subsidiary undertaking is broader than the previous definition of subsidiary and, in the context of a JV, may depend on the degree of influence or control enjoyed by one or more of the participants.

Register of People with Significant Control (PSC Register)

Every company must produce, keep and maintain a dedicated register of people with significant control over that company (a PSC register). The breadth of the legislation is designed to ensure that every method of holding significant control over a company is potentially registrable.

National Security and Investment Control Regime

Kenya does not have a specific National Security and Investment Control Regime like the UK. However, the government may review and intervene in transactions for national security reasons.

This comprehensive guide provides a framework for establishing and operating joint ventures in Kenya, ensuring compliance with local laws and best practices.

Conclusion

My team and I are well-versed in navigating the complexities of joint ventures in Kenya, ensuring compliance with all relevant laws and regulations while safeguarding your interests. Whether you’re considering a new joint venture or seeking to optimize an existing one, we’re here to provide tailored legal solutions for your business needs. Contact me today to discuss how we can assist you in achieving your joint venture goals.