Kenya: Legal Due Diligence – Sector Review

Most agribusiness players undeniably require agricultural land except for those in the food logistics sectors e.g., warehousing, transport, storage and/or export. A FAO[1]country profile in 2015 indicates that 47% of Kenya's land mass comprises agricultural land.

According to the Kenya Economic Survey, 2020, agriculture contributed approximately 34% of Kenya's Gross Domestic Product in 2019. This has been a steady increase from approximately 30% in 2015. With an increasing population nationally and regionally providing exponential demand and adequate arable land, the sector continues to offer significant investment returns.

Technology innovations are a key spark behind the above growth, with significant investments into both agribusiness and agritech. According to Partech Partners' Africa Tech Venture Capital Report, Kenya accounted for 79% of the equity funding into agritech in Africa, with a total of approximately USD 141 million being invested in 2020. Given the popularity of the sector with investors, we look at the key issues to be considered during legal due diligence prior to an investment.

Key issues

Restrictions on Foreign Ownership of Agricultural Land

The Land Control Act (Chapter 302, Laws of Kenya) (the "LCA") declares certain transactions involving agricultural land to be controlled transactions. These include sale, transfer, lease, mortgage, exchange, partition/division or other disposal of or dealing in agricultural land. The issue, sale, transfer, mortgage or disposal of shares in a private company or co-operative society that owns agricultural land is also a controlled transaction.

This means that a private owner of agricultural land cannot engage in any of the specified transactions without the consent of the relevant Land Control Board (LCB), established under the LCA.

The LCA requires LCBs to refuse consent in any case in which the land or share is to be disposed of by way of sale, transfer, lease, exchange or partition to a person who is not a citizen of Kenya, a private company or cooperative society all of whose members are citizens of Kenya, a group representative incorporated under the Land (Group Representatives Act, 1968 (Chapter 287 Laws of Kenya) or a state corporation within the meaning of the State Corporations Act, 1986 (Chapter 446, Laws of Kenya).

Acquisition of agricultural land in Kenya by foreigners, is therefore excluded. Foreigners may, however, apply to the President of Kenya to be exempted from these restrictions, but this may be difficult to obtain.

While there are ways in which land holding structures have been undertaken by foreign investors, ownership through private companies with direct or indirect foreign shareholding is not an option, particularly with the enactment of Companies (Beneficial Ownership Information) Regulations, 2020, which compel all companies incorporated in Kenya to disclose their ultimate beneficial owners. It is therefore critical that foreign investors look into the ownership structure of busines ventures owning or leasing agricultural land and seek appropriate legal advice in the early stages of deal evaluation.

Regulatory Quagmire

Historically, there were a plethora of regulators in the agricultural sector. Prior to the enactment of the Crops Act 2013 and the Agriculture and Food Authority Act (AFA) 2013, whose goals were to consolidate regulation of the agricultural sector, there were approximately 13 state boards/parastatals each dealing with key cash crops and agricultural sectors.² The Crops Act repealed 12 old agricultural sector legislations while the Agriculture and Food Authority Act repealed three.

There has been disgruntlement with the manner in which the Crops Act 2013 and the Agriculture and Food Authority Act (AFA Act) 2013 were enacted at the county level, as the Constitution of Kenya provides that the role of the national government is to create an agriculture policy while the implementation of such policies is to be devolved to the counties. Instead, the AFA Act established the Agriculture and Food Authority, an entity comprised of national government nominees, to be the successor of the disbanded state boards and to administer the Crops Act.

The transition from the disbanded state boards to AFA was not swift and towards late 2020, it emerged clear that that the government was not satisfied with AFA's performance. The government is taking steps to dissolve the AFA and re-establish individual state boards/parastatals to regulate key cash crops. It is not yet clear if re-establishment of the previous state boards/parastatals will factor in the county government's role as per the Constitution.

Note that the Crops Act and the AFA Act do not deal with the dairy sector or fish management, which are governed by their own statutes.³ There are also a wide range of environmental statutes and legislation that are relevant, particularly for food manufacturing or processing businesses.⁴ Did we mention the plants, seed, water and irrigation statutes?⁵ All these legislations have several regulations, policies or guidelines which sector players must abide by.

We always recommend that the correspondence file between a target and its regulator is reviewed as this can provide insight into any non-compliance issues the regulator has picked up, any impact on key permits/licenses held and whether the target has remedied the same. With the changing regulatory landscape and vast legislation in the sector, this can be an uphill task. Nevertheless, a prudent investor with the help of their legal team and preferably the relevant target as well, should be able to navigate the regulatory maze successfully.

Permits/licenses required

While all businesses require a standard business permit (which may or may not be consolidated with fire inspection licences, food hygiene licences and advertising permits depending on which county the target operates in), targets in the agribusiness will usually require a lot more licenses/permits than your average business. Food hygiene is a critical licence for manufacturing and processing businesses, and these are not only given to the target as an entity, but to each employee coming into direct contact with food. Environmental permits such as effluent discharge licence, licence to transport solid waste, licence to operate waste disposal site, noise emission licences amongst others would be required from most businesses such as those in aquaculture, dairy and meat processing. Manufacturing licenses are required by businesses that manufacture or process scheduled crops (as defined by the Crops Act) for sale. Per the Crops Act, raw cashew nuts, pyrethrum, bixa, macadamia cannot be exported without the written authority of the Cabinet Secretary in the Ministry of Agriculture, Livestock, Fisheries and Cooperatives. In practice, the AFA issues export licences to entities processing these crops for export. A thorough understanding of licences/permits required in order to be assured that the target in mind is fully compliant.

Casual labourers and/or Unions

Employee management in merger transactions is a delicate matter that is often times overlooked. Investors should note that the nature of labour force employed in this sector is likely to be classified as casual (daily wage reliant) and is also likely to be unionised or unionisable. Full acquisitions or incoming majority investors requirements may sometimes trigger re-negotiations with unions. The treatment of casual labourers from a tax and accounting perspective often conflicts with the legal perspective. Liabilities in this area may be imperceptible if one does not give this a keen eye.

Other issues to note

A significant proportion of Kenya's agricultural produce, especially of cash crops, is exported to various jurisdictions. These include the European Union, the United Kingdom, United Arab Emirates and United States of America. Most of these destinations have strict requirements for such exports. Where the target's focus is primarily export markets, investors should note to peruse any applicable certifications required for such exports from Kenya. For example, phytosanitary certificates, necessary approvals from the Kenya Bureau of Standards (KEBS) and farm/packhouse inspection reports will be critical operational documents. On the international side, certification from SGS and similar bodies gives additional assurance as to the quality of the target's products.