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Impact of Changes Relating to Disclosure of Beneficial Ownership Information in Kenyan Companies
Background
When the Companies Act No. 17 of 2015 (Companies Act) came into force in 2015, none of the provisions in the original text provided for disclosure of beneficial owners in Kenyan companies. In an attempt to promote transparency in ownership of Kenyan companies and to comply with international standards on transparency, Section 93 of the Companies Act was amended in 2017 to require a company to disclose information relating to beneficial owners of shares recorded in its register of members. This amendment contradicted the pre-existing requirements of the Companies Act which prohibited companies from recording any trust arrangements in the register of members.
The Statute Law (Miscellaneous Amendments) Act No. 12 of 2019 clarified that every company incorporated or registered in Kenya will now be required to keep two separate registers: (i) a register of members; and (ii) a register of beneficial owners. The two registers are required to be lodged with the Registrar of Companies upon any change in legal or beneficial ownership of a company’s shares. We understand that the Draft Companies (Beneficial Ownership Information) Regulations, 2019 (the Draft Regulations) are in the final stages of drafting and are expected to be published imminently. The Draft Regulations will prescribe additional information relating to the disclosure requirements and will publish a further Alert explaining the salient issues arising in the Draft Regulations.
In this Alert, we have set out some of the practical challenges which are likely to arise as a result of the new disclosure requirements, as well as certain obligations which shareholders, beneficial owners and companies must comply with going forward.
How is beneficial ownership determined?
The term “beneficial owner” is defined as “the natural person who ultimately owns or controls a legal person or arrangements or the natural person on whose behalf a transaction is conducted, and includes those persons who exercise ultimate effective control over a legal person or arrangement.”
This definition is broadly drafted and it covers not only ownership but also extends to any person who has effective control over a legal person. Accordingly, the amendment will, additionally, require disclosure of the details of the natural person(s) who control a legal person owning a company’s shares. It will, therefore, be necessary to carefully consider, in relation to ownership arrangements and structures, not only matters of ownership but also control, particularly since a natural person can contractually be granted control rights without enjoying any ownership rights.
Key issues arising out of the definition of “beneficial ownership” under the Companies Act
At its simplest, any standard nominee relationship between parties will now require disclosure. Under such arrangements, the registered holder of shares would usually enter into a bare trust (nominee agreement) under which it is provided that the registered shareholder holds the shares in trust (or as nominee) for its principal. It is now the case that disclosure of the details of the real beneficial (true economic) owner of the shares will be required.
What about more complicated ownership and control arrangement? For example, the position of an offshore trustee who holds shares through an offshore holding company under the terms of a discretionary trust will need to be considered. It is often the case that such trusts may include the office of a third-party protector who is given certain rights to control the actions of the trustee and the disposal of the trust assets. It will therefore be important to assess whether the mandatory disclosure shall extend to both the trustees and the protector (in the latter case due to the possible control rights). Interestingly, the general principles under the Common Reporting Standards (commonly referred to as CRS) require the disclosure of a protector.
In the case of control, a careful analysis of the control rights in the relevant trust deed will also have to be considered. Similarly, the role of an enforcer under a purpose trust will require careful review. Do the rights granted to an enforcer amount to control rights which require disclosure? For parties to a shareholders agreement at an offshore level, it will be necessary to consider the control rights under a shareholders agreement to establish if the controllers will need to be disclosed. In this regard, “synthetic structures” which may grant control rights to third parties will also require review with regard to the required disclosure obligations which arise. Critically, the tax consequences of such arrangements will need to be considered especially if a controller is tax resident outside Kenya.
How will private equity funds be treated? As it will be appreciated, it would generally be practically impossible to determine the beneficial owners in the case of a PE fund possibly with many thousands of owners in various parts of the world.
It is the case, given the complex nature of certain ownership structures and the fact that control can be exercised in many different ways, that determining the beneficial ownership and control of a company’s shares will be a complex process which must be carefully undertaken on a case-by-case basis to ensure full compliance with the law.
What is the disclosure threshold?
The Companies Act does not provide for a specific threshold in shareholding or control in respect of which beneficial ownership information should be disclosed. The beneficial owners whose information is required under the Draft Regulations as currently drafted are individuals who directly or indirectly hold at least 10 percent of the issued shares or voting rights of a company, or individuals who hold a right to appoint or remove a director, or actually exercise “significant influence or control” over a company. The expression “significant influence or control” has not been defined and will also be required to be considered on a case by case basis.
The proposed beneficial ownership criteria is similar to that in the UK criteria except that in the UK, the threshold for holding shares and voting rights is 25 percent. Taking into consideration that the term ‘control’ is defined in the Income Tax Act (Chapter 476, Laws of Kenya) to include ‘the holding of shares or voting power of 25 percent or more’, the proposed threshold of 10 percent is low and may therefore lead to disclosure of beneficial shareholders who are not in a position of influence in a company.
What are the tax implications?
As set out above, the definition of the term “control” under the Income Tax Act is wide and encompassing. Where a Kenyan entity is deemed to be controlled by a non-resident person, there are various tax implications, including thin capitalisation rules, deemed interest and transfer pricing rules, which would be applicable and should be considered. Whereas previously it would not be apparent that an entity is foreign controlled, the mandatory disclosure of beneficial ownership information would now make this information publicly available. In this regard, arrangements which would result in control being deemed to vest in non-resident persons should be analysed carefully to determine the potential tax implications which might arise.
What are the anticipated practical challenges in implementing the beneficial ownership disclosure requirements?
The recent changes may pose various practical challenges to companies seeking to comply with the disclosure requirements including the following:
operationalisation of the Draft Regulations – the Draft Regulations are yet to be gazetted into law and therefore there is no clarity or much needed guidance on compliance requirements given the penalties for non-compliance.
shareholders with complex structures – in instances where companies have shareholders such as pension schemes and private equity funds, it will be difficult to pinpoint the individual beneficial owners due to their complex ownership structures.
narrow exemptions – Listed companies are exempt from lodging the register of beneficial owners. It is however not clear whether a register of beneficial owners would be required for companies limited by guarantee which operate as non-profit organizations and in some cases may have hundreds of members where none of the members have significant control/ownership interest in the company.
local content requirements – Alternative structures which take into account the relevant regulatory requirements, company law issues and tax considerations should be considered for companies operating in sectors with mandatory local shareholding requirements including telecommunications, insurance, engineering and pharmaceutical companies.
privacy concerns – one of the key concerns with the beneficial ownership requirements is confidentiality and data protection requirements for affected individuals. It is still not clear whether any person who does an official company search in relation to a company will be provided with information on the register of beneficial owners. The Government has also not provided an assurance in relation to the safe processing and storage of information, especially now that stakeholders decry the inadequate data protection regime in Kenya.
timelines for compliance – companies are required to lodge a register of beneficial owners with the Registrar of Companies within 30 days of completion. This is unclear, given the fact that different companies may prepare and complete their registers at different times. It is expected that the Draft Regulations will provide more clarity on this issue.
company officers – company officers including a company secretary will need to take action swiftly to ensure compliance.
Penalty for non-disclosure
Failure to comply with the disclosure and filing requirements is an offence under the Companies Act which, on conviction, attracts a penalty of up to KES 500,000 (approx. USD 4,800) on each officer who is liable and further penalties for each subsequent offence.
Noting that trust arrangements may only be privy between the principal and the trustee, and in some cases, the company may be unaware of such arrangement, it remains to be seen how this requirement will be implemented and how compliance will be monitored. Internal measures will therefore need to be considered to mitigate the liability of the company for failure by a shareholder to disclose an existing trust arrangement.
Conclusion
There is no doubt that the disclosure of beneficial ownership requirements will have a significant impact on existing trust and shareholder control arrangements and how these arrangements should be structured going forward. An analysis will need to be undertaken on a case by case basis to adopt appropriate ownership structures that do not contravene the beneficial ownership requirements.