This article was written by Mr. Noah E Mwesigwa and was published in the IFLR1000 2009 Edition.
Introduction
Uganda has had an impressive business and investment drive in the last couple of years. The discovery of oil, the successful Commonwealth Heads of Government Meeting held last year and the stable economy have fuelled increased investor confidence and attracted more investment into the country. This has led to an unprecedented increase in M&A (most notably in the finance and banking sector) and in the level and quality of competition between banks for the provision of financial facilities and services to customers.
In 2007, the Central Bank licensed five new commercial banks, bringing the total number licensed to over 20, with several large banks opening in Uganda on their own account or through the acquisition of majority stakes and interests in existing banks, financial institutions and microfinance deposit-taking institutions.
The Companies Act
M&A among private companies is principally governed by the Companies Act. Cap 110 revised laws of Uganda and particular statutes or Acts governing specific areas of business. Examples of the latter include the Financial Institutions Act 2004 (which governs all aspects relating to banks and the banking industry) and the Insurance Act (which governs all insurance companies and brokers, and the insurance industry in general). The specific provisions and authorisations in the memorandum and articles of association or charter of the business entities merging are also taken into consideration.
Dissenting shareholders
Most significantly, as in any other jurisdiction, it deals with cases of dissenting shareholders. This is presently catered for in our laws and is possible in two instances: first, where the purchase of the shares of the assenting members has not been concluded; and second, where the purchase of the shares of the assenting members has been concluded.
The Companies Act provides that in the case of a contract involving the transfer of shares or any class of shares, where the offer to purchase and acquire shares has, within four months of making the said offer, been approved by the holders of at least 90% of the shares whose transfer is involved, then the acquiring company may, within two months of the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder, stating that the acquiring company wants to acquire his shares, unless the dissenting shareholder applies to court within one month and obtains an order prohibiting the acquisition.
The dissenting shareholder may apply to the court, challenging the terms of the proposed sale and will be required to demonstrate the unfairness of the proposed sale for the court to exercise its discretion in his favour. The courts place a high burden of proof on the dissenting shareholder, given that 90% or more of the shareholders will have already approved the offer in question. The test applied by the courts is whether the offer is obviously unfair, patently unfair, and/or unfair to the meanest intelligence. Unfairness is gauged relative to the general body of shareholders rather than the particular circumstances of the individual dissenting shareholder and generally the courts will only exercise their discretion in exceptional cases.
Where the dissenting shareholder does not obtain a court order or fails in his application for the said order, the acquiring company will be entitled and bound to acquire the shares on the same terms agreed and provided to the assenting shareholders.
Upon expiry of the notice or the failure of the court action, the acquiring company is required to send a notice (of the expiry of the period of notice or the failure of the court action) to the target company and pay the consideration for the dissenting shareholder's shares. The acquiring company is also required to submit a signed share transfer form to the target company. The share transfer form is signed by an appointee of the acquiring company on behalf of the dissenting shareholder and by the acquiring company on its own behalf. The target company is then required to register the said transfer and hold the funds in trust for the dissenting shareholder.
In the second instance, where the shares of the dissenting shareholder are sought to be acquired after the completion of the transfer of shares or any class of them from the assenting shareholders to the acquiring company, the Act provides that where such a contract for the transfer of shares was approved by at least 90% of shareholders within four months of an offer being made and, pursuant to that contract, the shares have been transferred to the acquiring company, then, within one month of the transfer, the acquiring company may give notice of that fact to the dissenting shareholder.
Any such dissenting shareholder will, within three months of the date of such notice to him, require the acquiring company to acquire his shares. Where the shareholder gives such notice, the acquiring company will be bound to acquire the shares under the same terms as it did the shares already transferred to it.
Whereas the Act has provided a procedure for overcoming hurdles related to minority dissenting shareholders, it has, in the same vein, clearly posed problems for the expeditious closure of M&A transactions. The above provisions have the effect of stalling or delaying the completion of any such transaction by no less than six months in either case at the very least. Worse still in the second instance, the Law is silent on the consequences when the dissenting shareholder does not respond within the three months: does the offer lapse, is he bound, or can he sit back and keep the acquiring company waiting indefinitely?
We can only hope that continuing Ugandan law reforms will adequately address this.
