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Students and teachers are transferable assets in a merger transaction

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  • 08 . November . 2023
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Mugambi Mutegi, Manager, Communications & External Relations – Competition Authority of Kenya

Recently, a Kenyan X user (@MihrThakar) asked whether he would be required to seek the Competition Authority of Kenya’s (CAK) approval when merging kiosks.

This query was borne of a ruling by Kenya’s Competition Tribunal ruling that, among others pronouncements, established that students and teachers are assets capable of being acquired during a merger and that payment of the purchase price is not a prerequisite to prove the acquisition has occurred, if other parameters have been fulfilled.

These findings are part of a judgment in which the Tribunal threw out Makini School’s appeal against a Ksh. 7.2 Million penalty imposed by the CAK following its acquisition of a Kisumu-based school without requisite authorization.

This matter dates back to 2019 when the CAK became aware that Makini had acquired and renamed R.K. Bhayani Nursery and Primary School and absorbed its students and teachers.

On its part, Makini argued that upon the death of Bhayani’s sole proprietor in 2017, the school ceased being an operational business capable of being acquired, adding that it was in the process of being wound up.

Further, the school contended that it only took over a property lease and that the co-option of Bhayani’s teachers and students was done as part of community service. Thirdly, Makini claimed no merger happened since no consideration was paid.

The school also argued that teachers and students are independent natural persons that can neither be owned by another person nor be subject to a sale or acquisition.

However, the CAK successfully countered this position, noting that the school was operational when Makini absorbed it, as evidenced by new leases signed months after the amalgamation and communication with the new parents and teachers.

The regulator further argued that students, teachers and support staff are assets of a school business and are, therefore, subject to the merger analysis process. The Tribunal agreed with this position, stating that a “school without students is not in business” and that the students and teachers constituted an enterprise that changed control alongside the school’s physical infrastructure.

The Competition Act stipulates that payment of the full purchase price (consideration), or more than 20% of it, shall constitute implementation of a proposed merger. However, the Tribunal held that a merger can be implemented without payment of a single shilling, noting that payment of the consideration is not a “prerequisite” once acquisition of control is fulfilled.

The Makini matter is critical on several fronts. First, whenever a party is dissatisfied with the CAK’s decision, and exercises their right to challenge it before the Tribunal, it presents a forum for the agency’s decision-making processes to be publicly critiqued.

Appeals are an opportunity for third party interpretation of the law where the regulator and the regulated hold divergent positions, thereby forming critical jurisprudence. This aspect was especially tested in the Makini matter.

The Tribunal’s ruling provides clarity for stakeholders seeking to acquire a business located on leased property, or purchase an entity whose existence is intrinsically tied to the people in the business. It is also now lucid that you need not pay a purchase price for an acquisition to crystalize.

The ruling has also reiterated the importance of businesses adhering to the Competition Act when undertaking mergers and acquisitions. The rule is that if the merging parties’ combined turnover/assets is over Ksh.1 Billion, you need CAK’s approval before implementing the transaction.  These transactions are significant enough to warrant assessment if they may negatively impact competition in their markets or if they will occasion adverse effects to the Public.

So, @MihrThakar, based on the typical revenue derived from kiosks, such a transaction would not necessitate regulatory assessment or approval. You may consolidate your businesses.

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