Vodacom: Appeals Kenya Safaricom Stake Ruling Invalidation

• A Kenyan High Court invalidated the government's sale of a 15% Safaricom stake to Vodacom, ordering its return to the state.
• The court cited violations of public finance management laws, lack of public participation, and undisclosed takeover details as reasons for the ruling.
• Vodacom Group plans to appeal the decision to the Court of Appeal and will seek a stay of execution.
• If the appeal fails, Kenya may need to refund approximately $1.9 billion received from the sale.
• The ruling highlights legal challenges for Kenya's privatization efforts, including issues with competitive bidding and regulatory approvals.

The court's decision mandates the return of the 15% stake to the government, citing a litany of legal breaches including public finance management and participation failures.

A Kenyan High Court has invalidated the government's sale of a 15% stake in Safaricom Plc to Vodacom Group, ordering the return of the shares to state ownership. The ruling, delivered on Tuesday in Nairobi by judges Francis Gikonyo, Roselyne Aburili, and Tabitha Ouya, found that the divestiture contravened public finance management laws and failed to meet public participation requirements, rendering the transaction "invalid, null and void."

In response to this significant legal setback, Vodacom Group has announced its intention to appeal the decision to the Court of Appeal. The South African-based wireless carrier also plans to seek a stay of execution pending the outcome of its appeal. Following the announcement, Vodacom's shares experienced a nearly 4% decline in Johannesburg trading, marking their steepest drop since July 27, before partially recovering. Conversely, Safaricom shares saw a jump of up to 2.2% during Kenya's trading session.

The High Court's decision to invalidate the Vodacom Safaricom share sale appeal was based on several critical legal deficiencies. Judges highlighted that essential transactional documents, including the share-purchase agreement and a dividend rights purchase pact, were not made available for public scrutiny. Furthermore, the state failed to provide a competitive selection process for Vodacom as the buyer, a point of contention for the court.

Additional constitutional violations were identified, including the upfront monetization of future dividends, which the court deemed to disenfranchise citizens. The transfer of control over a strategic national asset to a foreign shareholder was also cited as a threat to national security. The court emphasized that the divestiture constituted an acquisition of effective control, or a "takeover," a detail not disclosed to the public. The parties involved also neglected to apply for exemption from takeover requirements, and there was no evidence of approval from the Competition Authority Kenya Vodacom approval. Moreover, the procurement of transaction advisory services from KCB Investment Bank was found to be in contravention of Kenyan laws.

Should Vodacom's appeal prove unsuccessful, the Kenyan government, which is currently facing financial constraints, could be compelled to refund approximately $1.9 billion already received for the stake. The original transaction, completed on June 30 after a Court of Appeal conservatory order was lifted and all conditions precedent were fulfilled, saw Vodacom increase its shareholding in Safaricom from around 40% to approximately 55% following the acquisition of the additional stake in December. This move reduced the Kenyan Treasury's interest in Safaricom to 20%.

The sale generated about 204.3 billion shillings, equivalent to $1.6 billion, supplemented by an additional 40.2 billion shillings from the securitization of future dividends. This ruling highlights critical legal risks for M&A transactions involving state assets in Kenya, particularly regarding public finance management, public participation, and competition law compliance.

The Vodacom appeal Kenya Safaricom stake ruling comes amidst President William Ruto's administration's broader strategy to privatize state assets. This initiative aims to generate project financing for a substantial $39 billion infrastructure pipeline, which includes railway expansions, airport upgrades, road construction, power lines, dams, and irrigation projects. These endeavors are intended to stimulate the $141 billion economy by creating jobs and reducing transport and energy costs.

Funding for this ambitious build-out is slated to come partly from the sale of state assets, such as Kenya Pipeline Co, alongside co-investment from the private sector. The Kenya High Court Safaricom stake invalidation introduces significant Kenya privatization legal challenges, underscoring the necessity for meticulous adherence to legal and regulatory frameworks in such high-profile transactions to avoid invalidation, even post-completion.

This ruling highlights critical legal risks for M&A transactions involving state assets in Kenya, particularly regarding public finance management, public participation, and competition law compliance. Lawyers advising on such deals must ensure meticulous adherence to these requirements to avoid invalidation, even post-completion, and should monitor the appeal's outcome for precedent.

Source: Original reporting via financial news outlets