Category: Uncategorized

A company may distribute its assets to its shareholders for an array of reasons, including as a return on investments, to support its ongoing operations, or when it ceases operations. In Kenya, the distribution of a company’s assets is mainly regulated by the Companies Act, 2015 (the Companies Act) and the Insolvency Act, 2015 (the Insolvency Act) together with the regulations made thereunder. There are also sector-specific laws governing the distribution of assets in regulated industries like banking, insurance, capital markets, retirement benefits and telecommunications. The existing regulatory framework seeks to protect creditors and minority shareholders and to guarantee the equal treatment of shareholders.

There are various ways of distributing the assets of a company, including via liquidation, dividend in specie, distribution in specie and share buyback. We discuss these options below.

Distribution upon Liquidation

Liquidation or “winding up” is a procedure under which the assets of a company are realised and distributed to creditors in a statutory order of priority pursuant to procedures under the Insolvency Act. In the event of any surplus, distribution is made to the company’s shareholders.

Section 381 of the Insolvency Act contemplates two types of liquidation, being voluntary liquidation and liquidation by the Court. Voluntary liquidation may be initiated by the members or creditors of the company in accordance with the provisions of the Insolvency Act.

A members’ voluntary liquidation is deemed to have commenced after the passing of the special resolution by the members of the company after which the company ceases to carry on its business, except in so far as may be necessary for its beneficial liquidation.

Where a company is to be liquidated through a members’ voluntary liquidation, the directors are required to convene a directors’ meeting and make a statutory declaration (commonly known as a declaration of solvency), in the standard form prescribed under the Insolvency Act, to the effect that they have made a full inquiry into the company’s affairs, and that having done so, they have formed the opinion that the company will be able to pay its debts in full, together with interest at the official rate, within such period (not exceeding twelve (12) months from the commencement of the liquidation) as may be specified in the declaration.

It is important to note that the statutory declaration by directors has to be made within five (5) weeks before the date of passing the resolution or on the date of the resolution but before the passing of the resolution. The declaration must include the latest statement of the company’s assets and liabilities, in the standard form prescribed under the Insolvency Act, at the latest practicable date before the declaration is made. The declaration is also to be lodged with the Registrar of Companies within fourteen (14) days after the date of the resolution.

Creditors play no part in a member’s voluntary liquidation since the assumption is that their debts will be paid in full. The Registrar of Companies dissolves the company after three (3) months from the date of receipt of the final accounts of the company by removing the company’s name from the Register of Companies.

Section 406 of the Insolvency Act outlines the process of initiating a creditors’ voluntary liquidation. A creditors’ voluntary liquidation is commenced by the directors convening a general meeting of members to pass a special resolution to wind up an insolvent company and appoint a liquidator. Thereafter, the directors must also convene a meeting of creditors within fourteen (14) days of members passing the resolution to wind up the company.

The Second Schedule to the Insolvency Act sets out the priority of claims in an insolvency as first, second or third priority claims. The claims which take first priority are the expenses of administration or liquidation. Second are the company debts, as listed in the Second Schedule, to the extent that they remain unpaid. The third priority claims relate to the tax obligations incurred by the company under the Income Tax Act (Cap. 470) Laws of Kenya as well as the Excise Duty Act, 2015.

Once priority claims have been settled, secured creditors holding fixed and floating charges will rank ahead of unsecured creditors. Shareholders are the last to be paid to the extent of the capital they contributed to the company.

Dividend in specie

A dividend in specie, is a dividend which is to be satisfied otherwise than in cash. The dividend can be a transfer of company shares, physical assets, assignment of a debt or the transfer of the benefit of convertible debentures. A company will typically declare a dividend of a specified amount which it will satisfy by transferring a non-cash asset of equivalent value to its shareholders.

A company is generally permitted to undertake a dividend in specie, as provided under section 485 (3) of the Companies Act, unless explicitly prohibited by its articles. A company’s articles will more often than not authorise a company, subject to approval by its shareholders, to declare a dividend of a specified amount and for such amount to be satisfied by the transfer of non-cash assets of equivalent value to its shareholders.

It is important to note that distributions can only be made out of profits or capital available for this purpose as stipulated in section 486 of the Companies Act.

Distribution in specie

Also known as distribution in kind, this involves circumstances where a company identifies a non-cash asset that it wishes to transfer to a shareholder or sister company (for example, as part of an intra-group reorganisation). The transfer is known as a distribution in specie but there is no requirement to declare a dividend.

Whereas a dividend is typically described in a company’s articles as a “distribution payable in respect of a share”, a distribution in specie is a “distribution consisting of or including, or treated as arising in consequence of, the sale, transfer or other disposition by a company of a non-cash asset”. Therefore, since the provisions in a company’s articles only apply to dividends, shareholder approval is not generally required for a distribution in specie.

Although a distribution in specie is flexible for the directors of a company since it does not involve shareholder approval, this method of distribution has certain limitations. Specifically, a company may not distribute assets in specie if the value of the proposed assets exceeds what it can distribute to its shareholders. Where a company distributes assets of a higher value than it should, this may result in legal issues for the company and the recipient of the asset. It may be viewed as an unlawful return of capital, as the distribution exceeded the distributable value. Where a shareholder knowingly receives assets categorized as an unlawful distribution, they may be expected to either return the asset back to the company or pay the value of the asset.

It is important to note that section 486 of the Companies Act provides that distributions can only be made out of profits of a company available for distribution or capital. Therefore, before opting for distribution in specie as a mode of asset distribution, the company should ensure that it has sufficient distributable profits.

Share Buyback

A share buyback is a purchase by a company of its own shares from a shareholder. Companies typically repurchase their own shares from the market in instances where they want to consolidate ownership of the company, increase share prices or reduce the cost of capital. Share buybacks by private limited companies are governed by Part XVI of the Companies Act.

A limited company undertaking a share buyback must comply with the provisions of the Companies Act, failing which the transaction would be declared void. Further, the failure constitutes an offence by the company and every officer in default. The officer in default is liable to fines as prescribed in the Companies Act.

A company is permitted to repurchase its own shares, provided that it is not restricted or prohibited from doing so in its articles and subject to complying with the procedural requirements set out in the Companies Act. Under the Companies Act, a limited company may not purchase its own shares unless they are fully paid.

Further, section 449 (2) provides that a limited company may purchase its own shares only out of distributable profits of the company or the proceeds of a fresh issue of shares made for the purpose of financing the purchase. A private limited company may however purchase its own shares out of capital as provided under section 449 (1) of the Companies Act. Under section 484 of the Companies Act, a company that agrees to purchase its own shares is not liable in damages for failing to redeem or purchase any of the shares.

A share buyback is a viable option only where the company’s capital or distributable reserves are sufficient to cover the cost of the shares. Payment of the shares may be made through a non-cash asset.

Conclusion

The foregoing is a synopsis of the various ways a company may distribute its assets in order to achieve its desired objective considering the structure, unique needs of the company, prevailing laws and other considerations.

It is important to note that each method of distribution is subject to legal and tax implications, such as payment of income tax, stamp duty and capital gains tax. Therefore, a company should obtain legal and tax advice before embarking on the distribution of its assets.

The global effort aimed at addressing the harmful effects of climate change has gained impetus over the last decade. Indeed, countries and organisations across the globe have progressed from making mere pledges to reduce greenhouse gas emissions, to actively creating and implementing policies and legislation aimed at achieving the same. Most notably, institutional frameworks have been established to encourage the achievement of net zero emission targets.

The Paris Agreement of 2015 has been instrumental in advancing the role of voluntary cooperation and market-based approaches in this regard. This article focuses on the realisation of Article 6 of the Paris Agreement (Article 6) in Kenya. Article 6 creates a mechanism by which countries can voluntarily co-operate to achieve their emission reduction targets.

Article 6 and the Concept of Voluntary Co-operation

Carbon markets are one of the tools used by countries to reduce their greenhouse gas emissions. Carbon markets enable countries and private entities which have net-zero commitments, to buy carbon credits generated from projects which reduce or remove greenhouse gases from the atmosphere. The goal of Article 6 is to provide flexibility in achieving emission reduction targets, while also promoting sustainable development and ensuring environmental integrity.

Article 6 does this by providing various mechanisms through which voluntary co-operation by countries can be achieved. Firstly, Article 6.1 encourages party states to utilise voluntary cooperation to meet their self-defined emission reduction targets known as Nationally Determined Contributions (NDCs). Articles 6.2 and 6.3 introduce the concept of Internationally Transferrable Mitigation Outcomes (ITMOs), which are carbon dioxide offset units that can be used by party states to achieve their NDCs. The focus on voluntary cooperation and the introduction of ITMOs as a trading unit serves the purpose of facilitating a transition to the Sustainable Development Mechanism (SDM) introduced under Article 6.4, which aims to promote sustainable development, alongside efforts to mitigate greenhouse gas emissions. The Article 6.4 mechanism is intended to build on the Clean Development Mechanism (CDM) under the Kyoto Protocol of 1998. The process of transitioning CDM activities to the Article 6.4 mechanism is expected to begin in January 2024.

The other mechanism introduced under Articles 6.8 and 6.9 is the non-market-based approach, which aims to promote voluntary cooperation between countries in areas such as technology transfer, capacity building and financial and technical support.

Voluntary cooperation between countries, as envisioned under Article 6, creates a great opportunity for developing countries such as Kenya. The concept recognises the relationship between climate change and sustainable development. Further, it creates a framework that can spur the economies of developing countries by encouraging cooperation that can foster job creation, the development of projects, and the provision of water, food and renewable energy.

Given Kenya’s Vision 2030 agenda, as well as her status as a leading renewable energy producer globally, the country is a well-placed partner in the realisation of Article 6. Kenya is a signatory to virtually all major international treaties and conventions on the mitigation of climate change.

Accounting and Reporting

Article 6 calls for robust accounting to ensure the integrity of ITMOs. A major concern for investors and buyers of carbon credits is the gaps in accounting for how carbon credits are sold and thereafter retired to avoid double counting. Article 6 requires that ITMOs be subject to a rigorous accounting framework which ensures that emissions reductions are real, measurable and permanent, thereby entrenching integrity.

Within Kenya’s Ministry of Environment, Climate Change and Forestry’s (the Ministry) draft strategic plan for 2023 – 2027, strategies to enable the country to meet its climate change obligations are set out. The strategic plan envisages the development of carbon market frameworks. This is intended to accelerate climate change adaptation and mitigation programs. It also intends to provide an incentivizing framework for investment in carbon markets, as well as establish and support institutions to oversee carbon market activities in Kenya. To achieve this, a national carbon registry will be established and maintained. There will also be a deliberate effort to support carbon market sector players to effectively engage in carbon markets.

The Climate Change (Amendment) Act 2023

Currently, the guiding statute on carbon trading in Kenya is the recently passed Climate Change (Amendment) Act, 2023 (the Amendment Act). The Amendment Act builds on the Climate Change Act, 2016 which provided measures to achieve lower carbon emissions but fell short of creating an institutional framework for carbon trading. This gap precipitated the need to bolster existing legislation, thereby ushering in the Amendment Act.

The Amendment Act is the first major policy step Kenya has taken to operationalize Article 6. The Amendment Act introduces a national carbon registry, which is a central database with up-to-date information on all carbon credit projects in Kenya, authorisations granted to project developers, Kenya’s carbon budget and the greenhouse gas units available to trade, as well as the amount of carbon credits issued and transferred in Kenya and the cancellation and retirement of all carbon credits issued within the country.

The Amendment Act regulates the trading of carbon credits and ITMOs, whether they occur through private equity transactions, the voluntary carbon market or bilateral and multilateral trade agreements. It is anticipated that the national carbon registry will be part of a raft of measures that will bolster investor confidence in carbon offset projects in Kenya, as well as encourage Kenyan firms to participate in carbon trading. These measures are intended to create transparency in the generation and transfer of carbon credits.

The Amendment Act also envisions the creation of a national authority which will be the custodian of the national register. This body will authorise and approve participation in carbon offset projects that fall under the Paris Agreement. Furthermore, it will monitor and report on carbon offset projects. This will assist in meeting the requirements of Article 6 on robust reporting.

Further Policy Initiatives on Reporting

The Ministry’s draft strategic plan for 2023 – 2027 proposes the creation of a Climate Change Mitigation and Knowledge Management Directorate (the Directorate). The Directorate will be tasked with coordinating the creation and application of guidelines for the processes and regulations governing the carbon market. It will also co-ordinate a national climate change knowledge and information system and evaluate and report on Kenya’s compliance with international responsibilities. This system will facilitate voluntary cooperation between Kenya and other countries. This will be achieved by improving the institutional framework for carbon trading and creating transparency in the transfer of carbon credits and ITMOs.

Benefit Sharing

The Paris Agreement is conscious of the nuances between climate change mitigation, equitable access to sustainable development and the eradication of poverty. Parties engaging in carbon trading are encouraged to make provisions for benefit sharing with local communities and ensure environmental integrity.

Following the enactment of the Amendment Act, a project developer hoping to commence a carbon offset project in Kenya will be required to do so through a Community Development Agreement (CDA), which outlines the connections and responsibilities of the project’s proponents to the public and community and where the project is being developed. This provision works to cushion the impacted communities and to ensure environmental protection and the equitable distribution of funds generated from carbon offset activities. For land-based projects, the Amendment Act requires a provision in the CDA for annual social contributions of at least forty percent (40%) of the project’s aggregate earnings, while for nonland-based projects, the requirement is that at least twenty-five percent (25%) of the project’s aggregate earnings should count towards the annual social contribution to the community.

Under the Amendment Act, the CDA should contain information relating to the stakeholders of the project, the annual social contribution of the aggregate earnings of the previous year of the community to be disbursed and managed for the benefit of the community, how the project developers will engage local stakeholders, how the benefits from carbon markets and carbon credits will be shared between the project proponents and impacted communities and the proposed socio-economic development around community priorities, among other things.

Environmental Integrity

Article 6 provides that all voluntary cooperation projects must ensure environmental integrity, particularly because developing countries are vulnerable to resource exploitation.

Kenya’s commitment to environmental protection is established in the preamble of the Constitution of Kenya, 2010, which explicitly provides that the environment is the country’s heritage, which it is determined to sustain for the benefit of future generations. Further, the Amendment Act requires all carbon offset projects to undertake an Environmental Impact Assessment before obtaining approval.

Conclusion

Kenya has made great strides in enacting and proposing legislation to facilitate a conducive environment for carbon trading. Once instituted, this regulatory environment is expected to encourage stakeholders across the carbon trading value chain to leverage the opportunities offered by Article 6 in carbon trading projects within the country. By recognising and harnessing the potential of carbon trading as a means of voluntary cooperation, Kenya is a step closer to meeting its sustainable development and emission reduction goals. Carbon trading is a useful tool in mitigating climate change and its growth ought to be encouraged.

In recent years, the financial services landscape has undergone a remarkable transformation, driven by the convergence of technology and finance. Fintech companies, at the forefront of this evolution, have harnessed digital innovation to revolutionise access to financial resources, particularly in regions with limited traditional banking infrastructure.

Digital credit providers (DCPs) leverage technology and data analytics to assess borrowers’ creditworthiness and provide quick and convenient access to short-term loans or credit facilities. Notable examples of DCPs include Inventure Mobile Limited (trading as Tala), M-Kopa Loan Kenya Limited, and Ngao Credit Limited. As of April 2023, the Central Bank of Kenya (the CBK) had licensed thirty-two (32) DCPs to operate in Kenya. While the growth of fintech companies has brought about significant benefits, it has also raised concerns regarding consumer protection and data privacy. For instance, many borrowers who access loans through online platforms often lack a comprehensive understanding of how these companies operate, or even their official identities.

To address these concerns and align the industry’s operations with the Constitution of Kenya 2010, the CBK – exercising its powers under section 57 of the CBK Act – formulated the Digital Credit Providers Regulations 2022 (the Regulations). These Regulations are designed to govern the licensing, operations, and compliance requirements of DCPs in the country. Notably, the Regulations do not apply to banks, financial institutions, microfinance institutions, Sacco societies, or any entity whose digital credit business is regulated under any other written law, or any other entity regulated by the CBK.

Compliance Requirements

The Regulations introduce a framework to ensure that DCPs operate responsibly, protect consumers, and maintain the integrity of the financial system, an overview of which is as follows:

a)Licensing

Rule 4(1) of the Regulations prohibits a person from carrying on a digital credit business in the country without licensing from the CBK. Contravention of this provision constitutes an offence that attracts a penalty, upon conviction, of imprisonment for a term not exceeding three (3) years or a fine not exceeding KES 5,000,000. An application for a licence is submitted in a prescribed form (CBK DCP 1), which contains information such as the name and address of the applicant and the source of funds for the proposed business. Rule 4 (3) further requires the application to be accompanied by documents such as the applicant’s data protection policies and procedures and the applicant’s Anti-Money laundering and combating the financing of terrorism policies and procedures (which shows their commitment towards combating anti-money laundering and terrorism financing).

If satisfied that the applicant meets the requirements of the Regulations, a licence is issued within sixty (60) days of submission of a complete application, and it remains valid unless suspended or revoked by the CBK. The CBK is also obliged to publish the name of every licensed DCP in the Kenya Gazette and on its website within thirty (30) days of issuing the licence. The CBK is further required to publish the names and addresses of all licensed DCPs in the Kenya Gazette and on its website before the 31st day of March of every year.

Once licensed, DCPs are required to pay annual fees and submit a return to the CBK, certifying their compliance with the Regulations by the 31st day of December of every year. However, it is worth noting that the CBK retains the authority to suspend or revoke a licence, as per Rule 9 (1) of the Regulations. This can occur if the licencee fails to pay annual fees or a monetary penalty imposed by the CBK, provides false information during the licence application process, or ceases to carry on the business of a DCP. Before such revocation or cancellation, the CBK is required to notify the DCP and allow it to be heard.

1. b) Credit Information Sharing and Data Protection

The Regulations allow DCPs to disclose both positive and negative credit information regarding their customers to licensed credit reference bureaus (CRBs). This disclosure is only permitted when such information is reasonably required for the performance of the functions of either the DCP or the licensed CRBs. However, the Regulations impose restrictions on submitting negative credit information in relation to a customer where the outstanding amount does not exceed KES 1,000. Before submitting negative information, DCPs are mandated to notify the concerned customer at least thirty (30) days in advance.

After submitting credit information to a CRB, DCPs are required to notify the customer within thirty (30) days from the date the information was submitted. This ensures that customers are informed about any changes to their credit history. Moreover, the information submitted must be timely, complete and accurate.

Most importantly, information derived from CRBs is to be used by DCPs in making decisions on customer transactions or for purposes authorised under the Regulations. DCPs are therefore required to implement measures to ensure the security of the information submitted or provided to CRBs. Accordingly, sharing of information with third parties is only permitted under the Regulations or relevant laws. This is because the security of shared information is crucial for confidentiality and integrity.

c)Conduct of Digital Credit Business

To further protect consumers, DCPs are prohibited from introducing a new digital credit product to the market or varying the features of an existing product without prior approval from the CBK. Additionally, DCPs are obliged to notify the customers at least thirty (30) days in advance before effecting such variations. The Regulations stipulate a maximum limit on the amount DCPs can recover from a non-performing loan, which prevents them from continuously accruing interest beyond the principal amount. To this end, the in duplum rule is applicable to DCPs, as affirmed in the case of Mugure & 2 others v Higher Education Loans Board (Petition E002 of 2021) [2022] KEHC 11951 (KLR).

Moreover, Rule 20 of the Regulations prohibits DCPs from engaging in any of the listed actions against a borrower or any other person during debt collection. Some of the prohibited actions include the use of threats, violence, or other means to harm the borrower, their reputation, or property if they fail to settle their loans; use of obscene or profane language sent to the borrower or the borrower’s references or contacts for purposes of shaming them or accessing the customer’s phone book or contacts list and other phone records for purposes of sending them messages in the event of untimely payment or non-payment.

d)Consumer Protection

DCPs are required to issue transaction receipts or acknowledgements of customer transactions, whether conducted electronically or through other acceptable means. To address customer concerns, a complaints redress mechanism should be established with dedicated communication channels. Complaints should be promptly resolved within thirty (30) days and records of such complaints and resolutions maintained.

DCPs are also obliged to implement secure and reliable information systems that uphold information confidentiality, integrity, and availability to minimise disruptions. Further, DCPs must provide detailed terms and conditions of loan agreements to customers prior to granting the loan. Some of the information contained in the terms includes the loan amount, the interest rate to be charged and whether on a reducing balance, the date on which the amount of credit and all interest are due and payable and how the same may be calculated and the annual percentage rate of interest.

Challenges

While the Regulations aim to foster a safer and more transparent financial ecosystem, they also present formidable hurdles that fintech companies must navigate. Some of these challenges include the following:

a)Delayed Approval Process

Since the implementation of the Regulations, numerous DCPs have submitted their licensing applications to the CBK. However, prevailing reports indicate that many DCPs are still awaiting approval. These delays are attributed to the comprehensive documentation required for each application, coupled with increased industry scrutiny. Consequently, this situation has disrupted the operational continuity of the DCPs and has made potential investors hesitant to provide funding without the CBK’s certification.

b)Compliance Costs and Administrative Burden

To ensure compliance with the Regulations, DCPs are forced to allocate resources and invest in compliance measures. This includes the establishment of mechanisms for tracking and reporting various operational aspects, such as transaction receipts, customer complaints and credit information sharing. These compliance efforts impose financial burdens and administrative complexities, particularly for start-up DCPs.

c)Risk Assessment and Responsible Lending

The Regulations underscore the importance of responsible lending practices. DCPs are required to implement effective risk assessment models that accurately evaluate a customer’s creditworthiness. This requirement can be challenging, particularly when dealing with customers who lack traditional credit histories. Additionally, limitations on debt collection procedures and techniques have contributed to a rise in loan repayment defaults, forcing fintech companies to write off some debts as bad debts.

d)Product Innovation and Regulatory Approval

Introducing new digital credit products or modifying existing ones requires obtaining regulatory approval. This can slow down the pace of innovation for DCPs, potentially hindering their ability to respond quickly to market demands and adapt to changing customer needs.

Conclusion

As fintech companies endeavour to adapt to the evolving regulatory landscape, the intricate web of compliance obligations, data privacy concerns and consumer protection mandates demand a strategic recalibration of their operations. These challenges, while formidable, also present opportunities for fintech companies to cultivate a culture of responsible innovation and customer-centricity. By embracing the challenges as catalysts for progress, fintech companies have the chance to shape financial services, bolster customer trust and drive inclusive economic growth in a technologically empowered era. Collaborative efforts between industry stakeholders and regulatory authorities are therefore pivotal in the pursuit of a cohesive financial services ecosystem.

In the recent past, Kenya has seen increased investment in its electric mobility sector, a growth which is in tandem with the shift towards a greener economy and addressing the challenges posed by climate change. Electric mobility, also known as e-mobility, refers to the use of electric vehicles (EVs), as a cleaner and more efficient alternative to traditional internal combustion engine vehicles (ICEVs).

The increased use of EVs in Kenya helps the country comply with its international obligations set out under the Paris Agreement. Indeed, Kenya has focused on a shift towards more environmentally sustainable practices, including the development of government policy to encourage investment in the same. For example, the National Climate Change Action Policy 2018-2022 includes measures aimed at reducing greenhouse gas (GHG) emissions and promoting sustainable development. It is notable, however, that there is no similar policy to encourage investment in the e-mobility sector.

Nonetheless, Kenya recently submitted its Nationally Determined Contribution (NDC) to the United Nations Framework Convention on Climate Change (UNFCCC) Secretariat on 28th December 2020, where the country committed to reducing GHG emissions by thirty-two percent (32%), below business-as-usual levels by 2030.

Industrial Developments

Although the development of policies and regulations surrounding Kenya’s electric mobility sector is still in its nascent stages, the production and development of electric buses and motorcycles, charging infrastructure and technical standards have been catalysed by key partnerships in the sector.

One notable partnership is between Kenya Power and Lighting Company (KPLC) and Deutsche Gesellschaft fúr Internationale Zusammenarbeit (GIZ). In February 2023, the partnership hosted an e-mobility conference with the aim of developing a roadmap and consultative approach for electric motorisation in Kenya. KPLC has also expressed its intention to exploit one thousand one hundred megawatts (1,100 MW) off-peak load to kick off Kenya’s transition to electric mobility.

BasiGo and Associated Vehicle Assemblers (AVA) are also in partnership, working together to build modern electric buses in Kenya. As at January 2023, AVA reported the completion of the assembly of fifteen (15) electric buses. The partnership has further set a target of producing over one thousand (1,000) electric buses within the next three (3) years, which target has in turn reportedly created more than three hundred (300) new manufacturing jobs, and additional jobs in charging, maintenance, and financial ecosystems to support the operation of EVs.

Additionally, private sector-led companies are quickly establishing charging points and battery-swapping stations to promote the growth of clean transportation. One such company is Ecobodaa, which is already testing fifty (50) electric motorcycles, with plans to expand to one thousand (1,000) motorcycles by the end of 2023. The motorcycles have a range of up to seventy kilometres (70 km) on a single charge and can be charged using solar power.

With the aim of reducing EV range anxiety, several companies are collaborating to establish charging infrastructure for EVs in Kenya with the aim of ensuring that EV users have reliable and easily accessible charging options. Various charging stations for EVs have been installed in several locations including the KenGen offices in Nairobi, Two Rivers Mall, Garden City Mall, The Hub Karen, the Kenya Ports Authority premises in Mombasa and Kisumu.

The Kenyan government has also taken steps to prioritize the electric mobility sector and introduced incentives to promote domestic production of EVs and their components. Among these incentives are tax exemptions for EV manufacturers and importers, as well as subsidies for the installation of charging infrastructure.

Notably, through Schedule 1 to the Excise Duty Act, 2015, the government has reduced the excise duty imposed on all vehicles which are fully electric-powered, from twenty percent (20%) to ten percent (10%). Additionally, KPLC has proposed a special tariff for EV charging, being KES 17 per Kilowatt hour (KWh), which will be lower than the residential tariff.

Investors therefore have a plethora of investment opportunities in Kenya’s electric mobility sector, to aid not only in its growth but to also promote sustainable development. These opportunities include EV manufacturing, EV charging infrastructure development and EV battery manufacturing.

Challenges

Electric mobility is a promising solution for Kenya’s transportation sector, which is plagued by high fuel costs and air pollution. However, despite the benefits associated with electric mobility, there are significant challenges that must be addressed in order to achieve widespread adoption.

The need to develop a comprehensive legal framework will be indispensable towards the success of electric mobility in Kenya. For instance, in Norway, the comprehensive legal framework has not only made the country a global leader in electric mobility but has also created a predictable and stable environment for EV manufacturers and investors.

In Kenya, lack of a comprehensive legal framework governing the use of EVs creates uncertainty for investors and manufacturers with respect to the legal and regulatory risks involved in such investment, the supply chain for EVs and the regulatory requirements in the sector. Notably, the existing regulations and policies do not adequately address the unique characteristics of EVs, such as their charging infrastructure and battery management.

Limited charging infrastructure is another major barrier to the success of electric mobility in Kenya. Lack of a robust charging infrastructure limits the range, accessibility, and convenience of EVs. As a result, many potential EV consumers are hesitant to make the switch from traditional ICEVs.

Technical standards ensure that EVs are manufactured to a consistent level of quality and safety. The lack of appropriate and adequate technical standards therefore gives rise to the risk of substandard battery quality, which may undermine the safety and performance of EVs and pose a challenge to regulators to enforce and monitor compliance.

Moreover, without sufficient knowledge and understanding of the advantages of EVs, consumers may be hesitant to adopt the technology. As a result, EV manufacturers are finding it challenging to market their products to potential consumers. Limited public awareness may also hinder the government’s ability to create policies and initiatives that support the growth of electric mobility.

Additionally, the high import taxes on EVs in Kenya has a direct impact on the success of electric mobility. The twenty-five percent (25%) import duty raises the price of EVs above those of ICEVs. The price disparity hinders the widespread adoption of the EVs since they are more expensive, thereby making them less attractive. Needless to state, the marked depreciation of the Kenyan Shilling has also affected the implementation of electric mobility as it has raised the cost of importing EVs and their components, including batteries, making them less affordable to Kenyan consumers. Additionally, the high cost of importation might affect the availability of spare parts and maintenance services for the EVs.

Recommendations

As the demand for cleaner and more sustainable transportation options continues to grow in Kenya, there is a pressing need to address the legal, technical, and economic challenges facing the adoption of electric mobility.

To promote the development of a robust electric mobility ecosystem in the country, it is crucial to adopt a range of strategies to help overcome these challenges. For instance, development of a comprehensive legal framework tackling the registration and licensing of EVs as well as the construction and operation of charging infrastructure and battery-swapping stations is encouraged. This is especially so because the construction of charging infrastructure requires the allocation of land for that purpose.

Additionally, to make EVs more affordable and competitive with ICEVs, as well as to encourage the development of charging infrastructure in the country, the government can offer tax incentives such as reduced or waived registration fees for EVs, income tax incentives for individuals who purchase or lease EVs, lowered or waived parking fees for EVs and tax credits or rebates for EV buyers to offset the cost of EVs.

Further, to foster public-private partnerships, the government can work with EV manufacturers, technology providers, and charging stations to accelerate the development of electric mobility infrastructure. This can be made possible by providing incentives such as tax breaks or subsidies for companies that invest in the sector. Additionally, the government can partner with private investors to finance the development of electric mobility infrastructure, with the former providing funding for electric mobility infrastructure projects, and the latter contributing technical expertise and finance.

In order to raise public awareness about the benefits of EVs, the government can also work with media outlets to increase the coverage of EVs and their benefits. This may include interviews with EV owners, feature stories on EVs, and coverage of events related to electric mobility. The government may also use social media outreach to raise awareness.

Conclusion

The implementation of electric mobility in Kenya presents a promising opportunity to reduce the country’s carbon footprint and dependence on fossil fuels, while simultaneously promoting economic growth and innovation. It also presents numerous opportunities in various sectors of the economy such as data protection and privacy, intellectual property, financial structuring, and regulatory compliance.

Despite facing several challenges, there is growing momentum towards the adoption of EVs in the country. With the right policies and continued investment, the government and private sector can work together to accelerate the development of electric mobility in Kenya and create a cleaner and more sustainable future.

The Government of Ghana has admitted that the country is going through some economic challenges. Even though the political actors do not agree on the cause of the challenges, they agree on the fact that there are economic challenges. One evidence of the economic challenges is the international and domestic debt restructuring that the Government acting through the Ministry of Finance is undertaking. With the domestic debt restructuring, the Government has implemented the domestic debt exchange (DDE). One unintended consequence of the debt restructuring activities by the Government is declining investor confidence in the debt market, especially in the acquisition of government debt instruments. These negative or adverse economic effects may also have some advantages. One such advantage is that they present solutions to the fundamental challenges of businesses in Ghana in terms of access to funding for the business and the cost of funding. Since investors are reluctant to invest in Government instruments, funds are available looking for investment opportunities. Private sector businesses must take advantage of this to attract such investments. This article explains how private-sector businesses must position themselves to attract such funds.

Challenges of Assessing and Cost of Funding

Private businesses need capital to operate and expand. The capital is injected either as equity or debt. In other instances, companies capitalise on their profits. Access to funding and the cost of funding have been the twin problems bedevilling the start and growth of businesses in Ghana. A simple online search lists these twin issues as major issues affecting businesses and entrepreneurs in Ghana. Whilst there may be many reasons accounting for this, one major reason is the fact that the government competes for scarce funds available, especially from investors on the domestic market. In such competition, investment in government instruments is generally the winner.

Preference for government instruments and securities

Investors have traditionally preferred government instruments or securities. The general assumption has been that investing in government instruments or securities is less risky than investing in private businesses. This has accounted for instances where even financial institutions (banks and non-banking financial institutions) invest a considerable part of their funds in government instruments and securities. As it is always said, the government is crowding out private access to capital. It is assumed that the risk of government default on its debt obligations to investors is very low. It is not that often that there is a default of sovereign debt obligations in comparison to the default of corporate entities to satisfy their debt obligations.

However, the economic challenges leading to government debt restructuring are debunking these assumptions. Investors are therefore reluctant to invest in government securities and instruments. The under-subscription to the recent debt instrument issued by the government in the domestic market is clear evidence of this position. Even instruments issued on behalf of government corporates (Cocoa Bill) have also been undersubscribed, leading to the government’s inability to pay maturing debts, hence rolling over the maturing debts in circumstances that can be construed as default.

These circumstances signify dwindling investor confidence in investing in government instruments and securities. Undoubtedly, government instruments can now be considered high-risk instruments as there is the possibility of default by the government or delay in honouring its maturing debt obligations. This, it is suggested, is an advantage to private businesses looking for funds. Investors now hold funds looking for investment opportunities. Banks, non-banking financial institutions, and institutional and private investors will now be reassessing their investment strategies in terms of the risks of investing in government instruments and securities.

Attracting Investors

The increasing risks of investing in government instruments or securities will mean investors will look to diversify their investment portfolio into what they traditionally considered riskier than the government instruments and securities. Investors will therefore consider the option of investing in instruments issued by private businesses by looking out for equity and debt options for private businesses. However, for such businesses to attract investors, they must consider restructuring their equity and debt instruments to be attractive to investors. In addition, there must be mechanisms that reduce risks that account for the hesitation of investors to traditionally invest in such businesses.

As indicated, businesses traditionally require investment in the form of equity and debt. In equity investment, shares are issued to investors in return for consideration – cash or non-cash considerations. Such equity investors are deemed “owners” of the business. The returns on the investment are an increase in the price of the shares and dividend distribution when the company makes profits.

Alternatively, the investors invest in a business by acquiring debt instruments. The investor becomes a lender who grants a loan to the company with clear terms on interest and repayment. The return on the investment is the interest payable on the principal by the company, who is the borrower.

For the corporate entities to attract funds that previously would have been invested in government instruments, it is suggested that private businesses must efficiently structure their equity and debt instruments to attract such investors and back such instruments with suitable mechanisms to minimise risks of the investors.

Structuring corporate instruments to attract investors

Most government instruments are fixed-term instruments with fixed returns. That is the number one attraction to investors. The certainty of knowing what to expect periodically as the coupon payment and the expectation of a definite date for the payment of the principal. In order to attract such investors, private businesses need to structure both equity and debt instruments to mimic these requirements.

Traditionally, corporate entities make applications to banks and non-banking financial institutions for loans. The lenders essentially dictate the terms. A change in this approach will be for corporate entities to properly structure their debt instruments to attract investor lenders to be interested in acquiring such instruments. These may take the form of corporate entities issuing corporate bonds or a series of loans on terms dictated by the corporate entities. Nothing stops a corporate entity from structuring its debt instrument similarly to government treasury bills or bonds. This type of structuring need not be limited to public companies since private companies can issue such instruments through private placements. Well-structured and thought-through terms on which a corporate entity requests a loan is likely to attract a positive response than just an application for a loan, especially if it is not from a bank. This calls for a properly written business plan or information memorandum on the business which clearly explains the sources of the receivables to be used for the repayments.

In relation to equity instruments, corporate entities should create different classes of shares that allow for payment of pre-determined fixed dividends with obligations on the company to acquire the shares back on pre-determined dates. This is permitted under our laws in the form of redeemable preference shares as to dividends. As a way of giving further assurances to investors, the dividends are made cumulative dividends by default under the law unless expressly otherwise indicated in the constitution of the company. The law allows for different rights and interests to be attached to different classes of shares. Private businesses need to understand what attracts investors to government bonds and seek to attach such rights and interests to the share instruments being issued to attract such investors.

The government domestic debt exchange reveals that many individual bondholders hold government debt instruments. This means corporate entities must not only position to attract institutional investors. Entrepreneurs must move from where they approach family, friends and potential business partners asking for funds without clearly structured instruments or terms on what they are offering. Such an approach must be based on clearly structured financial instruments or securities offered for funds from family, friends and other potential investors.

In addition to having well-structured instruments, corporate entities must establish their creditworthiness by putting in place mechanisms that give the investors (both equity and debt) comfort in acquiring the instruments on offer. These will include having a properly structured contract that reduces risks of not obtaining receivables that are to be used for the repayment, establishing escrow, waterfalls or debt service accounts that ensure the clear process of settling the liabilities and providing security as a fallback measure for lenders to recover their debts. In addition, having good corporate governance systems boost the confidence of the investors.

Conclusion

Whilst we all dwell on domestic debt exchange and international debt restructuring and its negative effects, businesses need to look beyond that and fashion out how they are able to not only survive but also strive in the midst of economic challenges. This requires tapping into funds hitherto that may be invested into government securities. However, for businesses to attract such funds, they must change their approach to raising funds by taking the lead in the process.

As it is said, success is where opportunity meets preparedness. Businesses and entrepreneurs must be prepared first by properly structuring the financial instruments on offer to attract investors who are reluctant to invest in government instruments.

To finance infrastructure projects, developing countries like Kenya are increasingly looking towards public-private partnerships (PPPs). PPPs do indeed present an opportunity for governments to receive private sector funding for infrastructure projects, whilst keeping such funding off sovereign balance sheets. PPPs allow the private sector to significantly contribute to the development, operation, and maintenance of public infrastructure projects by providing innovation and efficiency. Globally, private-sector participation in infrastructure development has proven to be effective in both emerging and mature markets. In Kenya, the Public-Private

Partnerships Directorate (the Directorate) reports that ten (10) PPPs, cumulatively worth USD 450,000,000, are presently in the post-procurement stage.

The country has recently introduced a new PPP regulatory framework through the Public Private Partnerships Act, 2021 (the PPP Act). The PPP Act was intended to address many of the pitfalls of its predecessor, including in the procedure required for Privately Initiated Proposals (PIPs).

This article explores the regulatory framework for PIPs under the PPP Act, the challenges that may arise, and how such challenges can be mitigated against.

Essence of PIPs

The PPP Act now enables private parties to propose projects to contracting authorities for implementation, aside from the standard direct procurement method where the government or contracting authority issues a tender for a proposed project. Generally, PIPs involve a private sector entity reaching out to the government with a proposal to develop an infrastructure project that may not have been budgeted or planned for. For this reason, PIPs are required to be in line with government policies and development objectives.

Accepting PIPs allows governments to benefit from the knowledge and ideas of the private sector on how to provide services people need. This is a significant advantage where limited government capacity means that the private sector is better placed to identify infrastructure bottlenecks and to devise innovative solutions. PIPs also provide the government with information about where commercial opportunities and market interests lie.

A PIP, as defined by the PPP Act, is a proposal that is originated by a private party without the involvement of a contracting authority and may include information that enables the complete evaluation of the proposal as if it were a bid. Such a proposal should justify why open competitive bidding would not be a suitable method of pro-curing the project. A review fee, capped at the lower of zero-pointfive percent (0.5%) of the estimated project cost or USD 50,000, is then paid to the contracting authority.

The receiving contracting authority then evaluates the proposal, including its alignment with national priorities, social necessity, value for money, fiscal affordability, contingent liabilities, fair market pricing, the sufficiency of supporting documentation and risk transfer efficiency. If satisfied, the authority submits the proposal to the Directorate.

Thereafter, the Directorate is expected to assess the private party’s compliance with set criteria within ninety (90) days, where such criteria may include public interest, project feasibility, partnership suitability and affordability. Following its assessment, the Directorate then submits an assessment report to the Public Private Partnership Committee (the Committee), which decides whether the project should proceed to the project development phase and what procurement method should be applied to the project.

Once approved, the proposal then enters the project development phase, where the private party undertakes essential activities like scoping, feasibility studies, impact assessments, partnership suitability evaluation, risk analysis and creating a comprehensive risk matrix. This phase is usually concluded within six (6) months of the Committee’s acceptance but may be extended for legitimate reasons.

Benefits of PIPs

PIPs provide governments with a unique opportunity to leverage the private sector’s ideas and expertise regarding the provision of essential services and other public goods. They utilise the unique knowledge the private sector has as a result of being in close contact with people at the grassroots level, which knowledge is crucial in the provision of services that are relevant to the people. Through PIPs, the government may benefit from proprietary information, trade secrets and intellectual property that is owned by private parties. In addition, PIPs provide foreign investors with the opportunity to pick sectors to contribute to, thereby participating in Kenya’s ongoing development.

PIPs are particularly advantageous in situations where governmental resources are constrained, since the private parties would play the lead role in identifying an opportunity for development and subsequently bear the cost of developing, building, operating and maintaining the project. The government, on its part, ensures that there is value addition to the public through these projects as it looks to improve and enrich the lives of its people. In addition, by giving private parties a leading role in building public infrastructure, PIPs allow for private parties to present joint proposals where they may undertake the proposed infrastructure project with a suitable partner who may best add significant value. This allows them to share risk, thereby presenting a more attractive opportunity for private sector players keen on getting involved in infrastructure and development.

PIPs can also expedite project development if used properly by allowing private entities to lead the fact-finding phase of PPP projects, minimising bureaucratic delays and enhancing the contracting authority’s approval speed. Likewise, the expertise and experience of private entities, either jointly or individually, would allow for increased efficiency at all stages of the project.

Ultimately, PIPs aid in creating an enabling environment for the growth of PPPs and, consequently, overall economic development as a result of increased PPP activity.

Challenges and Mitigation

Although PIPs encourage increased PPP activity, such proposed projects are still required to be undertaken for the benefit of the public at large and as such, should be in line with government development plans and priorities. A key concern relating to the use of the PIP method is that it may deny projects the benefit of a competitive procurement process. It is arguable that PIPs limit transparency, competition, and ultimately the value for money on the overall project due to how the procurement process is undertaken.

In a PIP method, a single bidder puts forward a proposal for consideration by the government agency based on the assessment of the proposed project. Had open competitive tendering been used, different private companies would have submitted bids to participate in the PPP project, where such competition generally aids in determining fair prices and quality, ultimately securing the government’s best deal. Generally, competition in a project helps boost value for money for the project by ensuring that the public receives the optimum balance between delivery of the project and price. With the reduced competition seen in PIPs proposals, concerns may be raised about the value for money of the proposed project.

To counter these concerns, the government can proactively work to enhance transparency by furnishing clear guidelines and practices pertaining to PIP submissions. An example of this may be through encouraging an additional round of bidding for projects that have already received submissions, to give an opportunity for price discovery. Another option that may be considered is the use of incentives, such as a “bid bonus system”, where the government grants an advantage to the original project proponent in the form of a premium used in the bidding procedure. This acts as an incentive to encourage private-sector involvement in PPPs through PIPs.

Further, PIP proposals may foster corruption due to the lack of transparency and competition that is inherent to their procedures. It is therefore important for contracting authorities to ensure that the assessment and approval of PIP proposals are free from external influences. In addition, it is important to put in place proper measures and procedures to ensure proper scrutiny and a competitive edge for each PIP. For instance, the “Swiss challenge” system may be of use where the PIP proposer is granted the right to counter-match the best offer from the competitive process and if they manage to do this, they are awarded the contract.

Lastly, the existing shortcomings of government agencies entrusted with various aspects of PPP execution may be dealt with by providing regular training to boost their knowledge and competencies in the respective procedures and processes of PPPs and PIPs. This will significantly strengthen their proficiency in overseeing PIPs.

Conclusion

PIPs may be a significant tool to unlock Kenya’s growth potential by filling gaps in development and infrastructure in the economy. PIPs provide further opportunities for the government and the private sector to join forces to finance and implement projects that benefit the public sector. By embracing PIPs and providing additional initiatives to address its existing concerns, Kenya can unlock new opportunities for private sector engagement, stimulating economic growth and ultimately improving the quality of life for its citizens through the successful implementation of PPP projects. In moving towards a more sustainable and inclusive future, these proposals can play a vital role in shaping our nation’s development landscape.

In ClientEarth v Shell Plc & Others (2023) EWHC 1137, which is a recent decision by the English High Court, the Court declined an application by ClientEarth- a non-profit environmental law organization and minority shareholder of Shell Plc (Shell), to bring a derivative action on behalf of Shell against its directors, arising out of alleged acts and omissions of the said directors relating to the company’s climate change risk strategy.

A derivative action is a means through which a shareholder can litigate on behalf of a company against a third party – usually a director or other shareholder – whose action has injured or threatens to injure the company. It is therefore a tool of accountability to obtain redress against wrongdoers, in the form of a representative suit filed by a shareholder on behalf of the company. However, it should be noted that a shareholder must first obtain permission from the Court to commence a derivative action (the Permission Stage).

The Permission Stage is necessary since claims of this nature are an exception to the rule that it is a company acting through its proper constitutional organs, and not one of its shareholders, which should determine whether to pursue a cause of action that may be available to the company. The Permission Stage further provides a filter for what may be termed as “unmeritorious” or “clearly undeserving” cases.

Claims made in ClientEarth v Shell Plc

As stated above, ClientEarth sought permission to continue a derivative action against Shell on the basis that Shell’s directors had refused to act on ClientEarth’s climate change risk strategy, as well as failed to comply with an order made by the Hague District Court on 26th May 2023 in Milieudefensie v Royal Dutch Shell Plc, which imposed a forty-five percent (45%) emissions reduction order on Shell to be achieved by 2030 (the Dutch Order).

At the Permission Stage, ClientEarth sought to establish that Shell’s directors were in breach of their statutory duties to promote the success of the company, as well as their statutory duty to exercise reasonable care, skill, and diligence in adopting and pursuing an appropriate energy transition strategy so as to manage the numerous risks that climate change presents for Shell. The specific breaches alleged by ClientEarth against Shell’s directors fell into three (3) categories, namely – (i) failure to set an appropriate emissions target (ClientEarth claimed that Shell’s existing Carbon Intensity Target was inadequate); (ii) failure to have a climate risk strategy which establishes a reasonable basis for reaching the net zero target and which is aligned with the Paris Agreement; and (iii) failure to comply with the Dutch Order.

ClientEarth’s central allegation was that by adopting and pursuing an inadequate energy transition strategy, Shell’s directors were mismanaging the material and foreseeable financial risk that climate change presents for Shell, which primarily operates in the fossil fuel sector. ClientEarth also alleged that Shell’s directors were not adequately preparing Shell to overcome commercial and regulatory risks, such as lower demand and lower margins for oil and gas products, as well as the ever-increasing threat that governments worldwide would in the near-future set regulatory frameworks to restrict further exploration, production and use of hydrocarbons and their products.

Within the underlying derivative claim, the reliefs sought by ClientEarth were a mandatory injunction requiring Shell’s directors to – (i) adopt and implement a strategy to manage climate risk in compliance with their statutory duties; and (ii) immediately comply with the Dutch Order.

Shell, on the other hand, argued that the duties which ClientEarth was trying to impose on its directors were misconceived for reasons that – (i) they were inherently vague and incapable of constituting enforceable personal legal duties; (ii) it was for Shell’s directors themselves to determine the weight to be attached to the various factors which they considered to promote the success of the company; and (iii) the duties created by ClientEarth amounted to an unnecessary and inappropriate elaboration of the statutory duty of care.

Indeed, while Shell agreed with ClientEarth that the company faces material and foreseeable risks as a result of the impact of climate change, which could or would have a material effect on its operations in the future, this point did not in and of itself demonstrate a prima facie case, warranting permission to continue with the derivative claim. The more important question, according to Shell’s directors, was the nature of Shell’s response to those risks and the extent to which ClientEarth had demonstrated a case of actionable breach of duty by the directors in their management of those risks.

Shell also contended that there was good reason to conclude that the application for permission to continue the derivative action was an attempt by ClientEarth to publicise and advance its own policy agenda, which was a misuse of the derivative claim procedure, and supported the proposition that the application had not been brought in good faith.

The High Court’s Decision

The Court agreed with Shell’s arguments to the effect that the duties which ClientEarth sought to impose on the directors were an indirect attempt to impose specific obligations on the company’s directors as to how to manage and conduct Shell’s business and affairs, and that such a directive would go against the well-established principle that it is for directors themselves to determine (acting in good faith) how best to promote the success of a company for the benefit of its members as a whole.

The Court further held that through the derivative action, ClientEarth was seeking to impose absolute duties on Shell’s directors, which cut across their general duty to have regard to the many competing considerations as to how best to promote the success of Shell.

In particular, the Court found that a business of the size and complexity as that of Shell required its directors to take into account a large range of competing considerations, the proper balancing of which is a classic management decision that the court was ill-equipped to interfere with. As such, the directors were in the best position to weigh the impact of Shell’s operations on the community and the environment against the business risks for Shell which are associated with climate change.

In this respect, the Court reiterated the principle in Howard Smith Limited v Ampol Limited (1974) AC 821, where it was held that Courts of law will not sit on appeal on a company’s management decisions as Courts should not act as a supervisory board over decisions within the powers of the management of a company, which decisions were arrived at honestly.

Notably, the Court held that the need to establish a prima facie case at the Permission Stage involves a rigorous test and entails establishing that there is no basis upon which the directors could reasonably have come to the conclusion that the actions that they had taken were in the best interests of Shell. In this respect, the Court found that there were a number of fundamental reasons why ClientEarth’s allegations did not establish a prima facie case for permission to continue, namely:–

• ClientEarth had failed to establish that the directors were managing Shell’s business risks in a manner incompatible with a board of directors acting reasonably.
• ClientEarth had failed to establish that there is a universally accepted methodology as to the means by which Shell might be able to achieve the targeted reductions in emissions.
• In principle, the law respects the directors’ autonomy in decision-making on commercial issues, and their judgement as to how best to achieve results which are in the best interests of themembers.
• ClientEarth had failed to establish how the directors had gone wrong in balancing the factors for their consideration on how to deal with climate risk, and that no reasonable director could have properly adopted the approach that they did.
• The Court applied the principle of de minimis shareholding to hold that the fact that ClientEarth, together with the parties supporting it, whilst holding only a small fraction of Shell’s shares, was proposing that it should be entitled to seek relief on behalf of Shell in a claim of a considerable size, complexity and importance, which gave rise to an inference that ClientEarth’s real interest was not in how best to promote the success of Shell, but an attempt to impose upon Shell its views and those of its supporters as to the right strategy for dealing with climate change risk.

Importance of the Decision

The Court’s decision appears to have taken a “reasonableness” approach to hold that directors who are applying their best efforts to balance all considerations impacting a company cannot be deemed to have breached their statutory duties to the company for failing to elevate climate-change-related risks above other considerations, be they commercial, societal, or physical. Indeed, the Court found that attempting to bring a derivative action with the sole objective of pushing a climate-change agenda was an abuse of this very special and limited procedure provided for under the Companies Act.

This decision brings to the spotlight the inherent difficulties of enforcing environmental, social, and governance (ESG) compliance guidelines in circumstances where a company has other competing interests. Whereas there may be in place ESG guidelines in an organization or legislation geared towards ESG compliance, ensuring compliance and enforcement of the same might not be as straightforward.

In a world where ESG compliance is headlining the news every day and resulting in corporations implementing vast policy changes, this decision may, at first glance, seem like a step in the wrong direction. However, it is a perfect example of the delicate balance that most corporations will struggle to attain when trying to push the ESG agenda while ensuring that their strategies and actions are in the best interest of their shareholders.

It will also be interesting to watch the Kenyan jurisprudential space to see how our Courts will handle ESG compliance-related claims, especially in light of the various policy changes being effected in our markets, including the introduction of the Nairobi Securities Exchange ESG Disclosures Guidance Manual and the Central Bank of Kenya’s Guidance on Climate-Related Risk Management.

A climate cataclysm looms over most living things on Earth. If left unchecked, climate change would be completely and utterly devastating to life on the planet as we know it. To forestall this, we must limit global warming to one point five degrees Celsius (1.5°C) above pre-industrial levels. To achieve this, human beings, who are the chief causative agents of climate change, need to learn, unlearn, and relearn the various ways through which they can reduce their carbon emissions and adopt other practices that may slow down or hopefully avert climate change.

Climate mainstreaming has been touted as one of the most effective ways of combating climate change. It requires the systematic integration of climate considerations of individuals’, organisations’, and governments’ strategies and operations.

In today’s world, embracing sustainability is no longer a matter of preference, it is a legal imperative. A striking example lies within the Climate Change Act, 2016 (the Act), which assigns critical climate change duties to private entities. What is even more eye-opening is that the Act arguably breaks through the corporate veil, leaving no room for individuals like directors, partners, or officers to escape accountability. They now shoulder direct accountability for any failure in fulfilling the climate change duties of the entities they oversee.  The era of sustainability in governance is here, and it is not just a choice – it is the law.

Further, research has demonstrated the existence of a fundamental scalar quantity that fully defines the concept of “natural capital stock” in principle. This principle presupposes that at this point, the

equilibrium point, both human and non-human life will thrive. In recognition of this equilibrium point, together with other principles of sustainability, governments around the globe have started introducing a carbon tax, and professional accounting bodies have started developing standards for making disclosures relevant to sustainability and climate change.

The Standards

At the twenty-sixth Conference of the Parties (COP 26), held in Glasgow, Scotland in 2021, the Trustees of the International Financial Reporting Standards (IFRS) announced the formation of the International Sustainability Standards Board (ISSB). The ISSB was mandated with developing global sustainability disclosure standards. On 26th June, 2023 the ISSB issued its first two (2) sustainability disclosure standards, namely the General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2) (together, the Standards). On 4th September, 2023 the Institute of Chartered Public Accountants of Kenya, in conjunction with the Pan African Federation of Accountants, unveiled and adopted these Standards.

Under these Standards (which Standards may override the disparate standards issued by other entities such as the Task Force on Climate- related Financial Disclosures (TCFD), the Global Reporting Initiative and the Sustainability Accounting Standards Board), an entity is required to report its sustainability–related disclosures, as part of its general purpose financial reports.

IFRS S1

IFRS S1 unveils a pivotal shift in financial reporting, beckoning entities to disclose information about their sustainability-related risks and opportunities, that are useful to the primary users of their financial reports. Financial reporting is no longer just about the numbers; it is about transparency, responsibility and foresight. This standard mandates organisations to open their books, not just on profits and losses, but on sustainability-related risks and opportunities. It is a call to arms for businesses to reveal how sustainability-related riskscapital costs over the short, medium or long term. IFRS S1 demands that disclosures stay true to the core principles of fairness and materiality.

No critical nugget of information should be left unshared, if it could influence stakeholders’ decisions. Additionally, from reports and statements that adhere to this standard, one should clearly identify the financial statements to which the sustainability-related financial disclosures relate; and the entity’s performance in relation to its sustainability-related risks and opportunities, including progress towards any targets the entity has set, and any targets it is required to meet by law or regulation.

This standard is structured on the TCFD four-pillar approach, which is founded on governance, strategy, risk management, and metrics and targets. From the disclosures under this standard, one should understand; (i) the governance processes, controls and procedures an entity uses to monitor, manage and oversee sustainability-related risks and opportunities; (ii) the entity’s strategy for managing sustainability- related risks and opportunities; and (iii) the entity’s processes to identify, assess, prioritise and monitor sustainability-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process and its overall risk profile.

The IFRS S1 (which is the general standard that governs a range of sustainability topics, including those which pertain to the environment, society and governance) is more than just another accounting rule; it is a compass which guides financial reporting into the realm of sustainability. The standard illuminates the path to a more responsible and informed financial world.

IFRS S2

The IFRS S2 is a topic-specific standard that focuses on climate change. This standard requires an entity to disclose information about its physical or transitional climate-related risks and opportunities that is useful to the users of their financial reports. Like the IFRS S1, this standard is founded on the pillars of governance, strategy, risk management, metrics and targets. The users of reports and statements that adhere to this report should understand; (i) the governance processes, controls and procedures an entity uses to monitor, manage and oversee climate-related risks and opportunities; (ii) the entity’s strategy for managing climate-related risks and opportunities; (iii) the entity’s processes to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and (iv) the entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.

More specifically, on governance, the standard requires the disclosure of information relating to the governance body responsible for climate-related risks and opportunities within the entity. This information may encompass the body’s mandate, how it oversees strategies designed to respond to climate-related risks and opportunities, its decisions on major transactions, its setting and monitoring of targets related to climate-related risks and opportunities, together with the entity’s climate-related risk management processes and related policies. Information relating to the entity’s management’s role in the governance processes, and the controls and procedures used to monitor, manage and oversee climate-related risks and opportunities, should also be disclosed.

On strategy, an entity discloses the current and anticipated effects of those climate-related risks and opportunities on the entity’s financial performance and cash flows, business model, value chain, overall strategy and decision-making. The climate resilience of the entity’s business model should also be disclosed. The disclosures on climate-related risks may be categorised into climate-related physical risks and climate-related transition risks. They may also be categorized in accordance with their expected occurrence horizons, whether the risk is expected to occur in the short, medium or long term. While disclosing under this pillar, an entity should disclose anticipated changes to its business model, and direct and indirect mitigation and adaptation efforts made in response to climate-related risks and opportunities. The entity’s detailed assessment of its climate resilience should also be provided.

With regard to risk management, an entity should disclose information about how it uses climate-related scenario analysis to inform its identification of climate-related risks; the nature, likelihood and magnitude of the effects of those risks; and how the risks are prioritized and monitored. An entity should also disclose the processes it uses to identify, assess, prioritise and monitor climate-related opportunities, including information about whether and how the entity uses climate-related scenario analysis to inform its identification of climate-related opportunities; and the extent to which and how the processes for identifying, assessing, prioritising and monitoring climate- related risks and opportunities are integrated into and inform the entity’s overall risk management process.

 

On metrics and targets, an entity is required to disclose the cross-industry and intra-industry metric categories, and the targets set by the entity. Specific to metrics, an entity should disclose; (i) their greenhouse gas emissions and the approach used to measure them; (ii) the amount and percentage of assets or business activities vulnerable to climate-related transition risks and climate-related physical risks, aligned with climate-related opportunities and deployed towards climate-related risks and opportunities; and (iii) internal carbon prices; and remuneration. Specific to targets, an entity is required to disclose; (i) the metric used to set the target; (ii) the objective of the target (for example, mitigation, adaptation or conformity with science-based initiatives); (iii) the part of the entity to which the target applies (for example, whether the target applies to the entity in its entirety or only a part of the entity, such as a specific business unit or specific geographical region); (iv) the period over which the target applies; (v) the base period from which progress is measured; (vi) any milestones and interim targets; (vii)if the target is quantitative, whether it is an absolute target or an intensity target; and (viii) how the latest international agreements on climate change including jurisdictional commitments that arise from those agreements, have informed the target. An entity whose sustainability and climate-related disclosures comply with the Standards is required to make an explicit and unreserved statement of compliance with the Standards.

Conclusion

The Standards present a notable advancement in the global establishment of harmonious environmental, social and governance standards. Reports and statements that adhere to the Standards are comparable, verifiable, timely and understandable. While the Standards may pose a formidable challenge for some, prudent entities are advised to embrace innovation and adopt new systems and processes to gather and disclose the required information. Should they do so, they may reap the benefits of improved access to capital, enhanced reputation and reduced exposure to sustainability and climate-related risks. Further, they will not only boost their profile as responsible global citizens, but perhaps our planet might also just be spared!

Have you ever been roped into an emergency technology or digital-enabled online fundraiser? The fundraiser could be aimed at raising funds to meet the medical bills of a sick person, or to contribute towards funeral arrangements. It could also be aimed at raising funds to assist a student in paying for their school fees or funding a worthwhile charitable community project. Even if you may have not participated in such fundraisers, you may have come across calls for contributions online. This method of raising funds from a large group of people using an online platform is called “crowdfunding”. As the term suggests, crowdfunding connotes raising money from a crowd or many individuals or entities to finance a project or business through a website, an internet-based portal, or such other technological application.

Crowdfunding varies depending on the objectives of the project being funded. For instance, investment-based crowdfunding, unlike donation crowdfunding exemplified above, is meant to fund a business idea or a profit-making project. Innovative start-ups have been major beneficiaries of crowdfunding, and as is the case for business associations, the law comes in to address the interests of investors, issuers and project owners; issues of liability; consumer protection; procedural compliance; money-laundering; and data protection measures among others.

Considering the rise of crowdfunding markets in Kenya and the need to promote investor confidence in the crowdfunding sector, the Capital Markets Authority (the Authority) together with the Cabinet Secretary for National Treasury and Planning, promulgated the Capital Markets (Investment-Based Crowdfunding) Regulations, 2022 (the Regulations). The Regulations clearly set out the definitions, responsibilities and liabilities of various actors or participants in crowdfunding transactions such as crowdfunding platform operators, investors, issuers, and other pertinent issues, for instance, fundraising limits and persons legally prohibited from crowdfunding. In this article, we highlight some of the salient issues outlined in the Regulations.

Important Definitions

The Regulations provide for a “cooling off period” within which an investor can withdraw from a crowdfunding transaction without any restrictions. This means that a project owner or issuer cannot provide conditional penalties in its offer documents for cancellation or withdrawal from the transaction within a certain period. However, the cooling off period has been left at the discretion of the project owner or issuer to determine. As a balance of power, the investor may negotiate for a longer cooling off period.

Another key term in the Regulations is “crowdfunding platform” which is defined to mean a website, internet-based portal or such other technological application, which facilitates interactions between investors and issuers and other related interactions.

A “crowdfunding platform operator” is an entity licensed by the Authority to facilitate a crowdfunding transaction or a transaction involving the offer or sale of investment instruments through a crowdfunding platform. An “issuer” on the other hand, is a company which issues the security or investment instrument, which is hosted on the crowdfunding platform for purposes of crowdfunding. Whereas an issuer is, in common parlance, the project owner, most of the responsibilities in a crowdfunding transaction will lie with the platform operator.

The Regulations also define a “start-up” as a company incorporated in Kenya that is newly established or has not been in existence for more than ten (10) years and is established for the purpose of developing an innovative and scalable product or service. This definition is important because the Regulations restrict raising funds via crowdfunding platforms to only micro, small, and medium enterprises (MSMEs) and start-ups. As such, not all companies are eligible to use crowdfunding as a means of raising funds under the Regulations.

Crowdfunding Platforms and their Operators

The platform operators, for purposes of investment-based crowdfunding, must be licensed by the Authority, and a person who establishes, maintains or operates an investment-based crowdfunding platform without a licence commits an offence and is liable to the penalties outlined in section 34A of the Capital Markets Act (Cap 485A) Laws of Kenya (the Act).

The conditions for the grant of licence are provided under the Regulations and among them include that the applicant should provide: (i) evidence of its financial soundness and capital adequacy confirming the financial position of the company including audited financial

statements, management accounts and certified bank statements, where applicable; (ii) detailed information of the crowdfunding website or application to be used including system capacity and security measures and evidence of its functionality; (iii) details of platform outsourcing arrangements, if any; (iv) proposed procedures to verify the completeness, correctness and clarity of the information of the issuer and investment hosted on the platform; and (v) adequate risk management framework that includes details of its fraud detection and prevention measures.

Further, only companies limited by shares with a minimum paid up share capital of KES 5 million and a further minimum liquid capital of KES 10 million or eight percent (8%) of its liabilities, whichever is higher, are eligible to be licensed as platform operators for purposes of investment-based crowdfunding. Nevertheless, the Authority may refuse to grant the licence or revoke an already issued licence, where reasons to do so exist.

On the flipside, a platform operator cannot simply opt-out of crowdfunding business without a smooth and orderly transition. The platform operator is required to notify the Authority at least thirty (30) days prior to ceasing its operation, and the Authority must be satisfied that neither investors nor issuers are disadvantaged by its closure. Additionally, the Authority may impose terms and conditions to ensure orderly cessation of business.

It is important to note that a crowdfunding platform operator is prohibited from raising its own funds through its platform; offering investment advice; handling investor funds; promising a guaranteed return to investors; and promising a guaranteed outcome of the offer to the issuer. On their part, issuers are prohibited from hosting the same offer document concurrently on multiple crowdfunding platforms.

Crowdfunding Participants and the Limits of Raisable Funds

Crowdfunding participants are the relevant issuers and investors. An issuer under the Regulations must be an MSME with a minimum of two (2) years excellent operating track record and good corporate governance. A start-up with a good operating track record and good corporate governance can also be considered as an eligible issuer. Issuers may only raise a maximum of KES 100 million within a twelve (12) months’ period. However, an issuer may apply to the Authority requesting to raise more than the capped limit within a specified duration, and the Authority may issue a notice of no-objection to such request if satisfied. Investors eligible to invest in crowdfunding investments are either sophisticated investors or retail investors, subject to investment limits prescribed by the crowdfunding platform operator but up to a maximum of KES 100,000.

The Act defines a sophisticated investor as (i) a person who is licensed under the Act; (ii) an authorised scheme or a collective investment scheme; (iii) a bank, a subsidiary of a bank, insurance company, co-operative society, statutory fund, pension or retirement fund; or (iv) an individual, company, partnership, association or a trustee on behalf of a trust which, either alone or with any associates on a joint account, subscribes for securities with an issue price as the Authority may prescribe from time to time.

The Crowdfunding Transaction

Crowdfunding transactions are required to provide for the permitted investment instruments, offering document, requirements for issuers, use of funds, transaction fees, the responsibilities of platform operators and issuers including any restrictions thereof. The investment instruments are limited to shares, debt securities including bonds or debentures or any other instruments approved by the Authority from time to time.

Platform operators are required to develop a standardised offer document which captures the details of the transaction to be used by the issuers to offer securities to the investors in line with the Regulations. An offering document should be made available for approval to the Authority at least forty-eight (48) hours before its publication on the platform. Once published, the offer period should not commence until at least fourteen (14) days have lapsed. The offer document should also clearly state the period of offer and the threshold amount for the offer. In the event the minimum threshold amount is not reached, the offer is to be withdrawn and the monies raised returned to the investors within forty-eight (48) hours, without any deductions. Any costs of such refunds are to be fully borne by the issuer. Where an offer is withdrawn, the issuer may undertake a fresh crowdfunding transaction not earlier than ninety (90) days after the withdrawal.

It is an offence under the Act for a person to make false statements in any form or context in an offering document knowing the same to be false or misleading. The offence, upon conviction, is punishable by a fine not exceeding KES 10 million or imprisonment for a term not exceeding seven (7) years where the offender is an individual, and a fine not exceeding KES 30 million where the offender is a company.

Compliance with Capital Market Regulations

Most of the obligations in the Regulations rest with the crowdfunding platform operators who are required, in addition to the Regulations, to comply with the Capital Markets (Conduct of Business) (Market Intermediaries) Regulations, 2011, the Capital Markets (Corporate Governance) (Market Intermediaries) Regulations, 2011, the Guidelines on the Prevention of Money Laundering and Terrorism Financing in the Capital Markets, and any other existing capital market laws and regulations to the extent applicable except where expressly exempted by the Authority.

Conclusion

Crowdfunding is a quick way to raise funds from many investors, especially for innovative businesses that lack capital to achieve their investment objectives such as start-ups and MSMEs. However, international investors and other sophisticated investors are usually skeptical of unregulated markets due to lack of clear procedures such as client accounts rules, codes of conduct, and investor protection. It is therefore anticipated that the Regulations will enhance investor confidence in Kenya, whilst providing additional means through which start-ups and MSMEs can raise capital.

Disputes are prone to arise in the course of construction projects. It is in the various parties’ interests (be it the employer, main contractor, sub-contractor, architect, quantity surveyor etc.) that such disputes are speedily resolved so as to ensure that the construction project does not slow down or fall off the track altogether. Adjudication is one of the foremost alternative dispute resolution (ADR) mechanisms used to settle disputes as and when they arise, and whose efficacy is most pronounced in the construction industry.

Article 159 (2) (c) of the Constitution of Kenya, 2010 (the Constitution) provides for the use of ADR mechanisms such as reconciliation, mediation, arbitration, and traditional dispute resolution mechanisms. Though not expressly mentioned, adjudication is one of the modes of ADR contemplated under Article 159 (2) (c) of the Constitution, and which the Courts are called upon to promote.

What is Adjudication?

Adjudication refers to a means of dispute resolution where a neutral person to the dispute, known as the adjudicator, considers the dispute between the parties and makes an interim but speedy determination that enables the contractual relationship (invariably of a construction nature) to continue. The Adjudication Rules of the Chartered Institute of Arbitrators, (Kenya Branch) describe adjudication as “a dispute resolution procedure based on the decision-making power of an impartial, third party neutral natural person known as an adjudicator to reach a fair, rapid and inexpensive decision upon a dispute arising under a construction contract.”

Adjudication can also be termed as a private dispute resolution mechanism whereby two or more parties agree to resolve their current or future disputes through an adjudication process, as an alternative to litigation. Parties by mutual agreement thus forego their lawful right to have their disputes determined by the Courts.

An adjudication clause gives contractual authority to an adjudicator to determine disputes between the parties, which may either be binding or temporary in nature depending on the wording of the adjudication clause. Adjudication is thus viewed as an alternative to the Court process, the latter of which is ordinarily lengthy and costly, and rarely spares the relationship between the parties.

Who are the parties to Adjudication?

The parties to an adjudication process consist of the various professionals in a construction project such as the contractor, sub-contractors, the employer, the architect, the quantity surveyor amongst others. The adjudicator, who is usually an expert in the construction industry, considers and settles the dispute within a short period of time, typically twenty-eight (28) days.

Parties to a contract who wish to refer their dispute to an adjudication process, should include adjudication as the form of dispute resolution in the contract. The most common contracts in the construction industry which adopt adjudication as a form of dispute resolution are the agreements and conditions of contract for building works popularly known as the Joint Building Council (JBC) contracts, New Engineering Contracts (NEC) and the Fédération Internationale Des Ingénieurs-Conseils (FIDIC) contracts. FIDIC is the French language acronym for the International Federation of Consulting Engineers.

When can Adjudication be initiated and by whom?

Adjudication can be initiated by any party to a construction contract which contains an adjudication clause, at any time a dispute arises in the course of the construction contract. The dispute must arise from the construction contract and the contract must contain an adjudication clause.

The inclusion of an adjudication clause in construction contracts, including JBC, NEC and FIDIC contracts, has become commonplace due to the desire by the parties to steer clear of Court process and resolve their disputes expeditiously. The adjudication clauses may differ in content in various contracts, however, despite certain differences, these clauses retain the general form which provide for:

• Possible disputes that may arise between the parties during the construction
• Timeframe for the resolution of the dispute
• Appointment of the adjudicator
• Place of adjudication

What is the process of Adjudication?

When a dispute arises in a construction contract containing an adjudication clause, the aggrieved party commences the adjudication process by notifying the other party in writing of its intention to refer the dispute to adjudication. This notice should typically include details such as:

• The date and details of the contract between the parties
• The issues which the adjudicator is expected to determine
• The nature and extent of the redress sought
• A statement confirming that the dispute referral procedures in the construction contract have been complied with within the period of the notice

Thereafter, the responding party, upon receipt of the notice, may participate in the appointment of the adjudicator within the notice period. Sometimes, parties to a construction contract may include the name of the adjudicator in the construction contract. If an adjudicator’s name is provided for under the adjudication clause, the parties may request the adjudicator to initiate the adjudication process. If an adjudicator is not named under the construction contract, the referring party should request the appointing authority or body stated in the contract to appoint an adjudicator within seven (7) days of receipt of the request and proof of payment of the appointment fee.

The appointment of the adjudicator is formalised on the signing of an adjudicator’s agreement with the parties. Once the adjudicator is appointed, the party that initiated the adjudication process sends him and the responding party a full statement of the case including a copy of the notice of adjudication, a copy of the contract and copies of the documents in support of the statement of case. Once the responding party receives the statement of the case, the said party is required to submit a response.

Adjudication follows a very strict timetable and therefore parties are subjected to fairly short timelines since the adjudication process is ordinarily meant to be concluded within twenty-eight (28) days or within such other period as might be agreed to by the parties. It is the speedy and cost-effective nature of adjudication that makes it ideal for construction projects, which are themselves time sensitive.

The adjudicator is required to act fairly and within the rules of natural justice, to follow the rules of procedure outlined in the contract, be impartial and give a written decision within twenty-eight (28) days or such other period as might be agreed by the parties. The strict rules of evidence ordinarily do not apply. Where the parties are dissatisfied with the adjudication and depending on the adjudication clause, the matter might be referred to arbitration or Court. It is for this reason that adjudication is sometimes viewed as interim or ephemeral.

The decision made by the adjudicator is legally binding upon the parties, albeit with room to challenge it as indicated above. The adjudication decision can only be challenged or set aside in Court or through arbitration. This will however depend on whether the parties have incorporated an appeal process or a clause to set aside the adjudicator’s award. The parties will normally meet the costs of the adjudicator upon conclusion of the adjudication process.

Conclusion

Adjudication is the preferred method of resolving disputes in the construction industry as it is speedy, cost-effective and allows the construction project to proceed even as the adjudication goes on. Adjudication is a markedly expeditious dispute resolution process since disputes are resolved in approximately a month’s time, thus translating into reduced costs, as compared to litigation or arbitration, which typically take longer to conclude. Like arbitration, adjudication is a private and confidential process hence the adjudicator’s decision will be confidential to the parties. During the adjudication process, the parties enjoy a form of control over the resolution of the dispute since adjudication can be instituted at any time during the construction project. It is an added advantage that an adjudicator is typically selected from a pool of experts, who ordinarily have vast expertise in the subject matter of the dispute.

It is noteworthy that the use of adjudication as a form of ADR has been growing rapidly particularly in the construction industry, where it has increasingly been adopted as the preferred form of resolving disputes. There is thus a need to create greater awareness of adjudication as a method of dispute resolution in other fields beyond the construction industry, for the advantages which it carries. Perhaps it is high time that adjudication was incorporated as a compulsory method of dispute resolution in Kenya, to emulate countries such as the United Kingdom, Australia, New Zealand, Singapore and Hong Kong which have made adjudication a mandatory method for resolving disputes in the construction industry.