Law in Kenya: African leader

East Africa’s most dynamic economy is a magnet for international advisers, but the local bar’s protectionism remains a barrier to growth. Marialuisa Taddia reports.

There is a buzz around Kenya among UK lawyers. The country has one of the most sophisticated legal sectors in Africa, on a par with Egypt, Nigeria and South Africa, observes Kamal Shah, who heads Stephenson Harwood’s Africa practice from London.

‘I have come across some superb lawyers in Kenya. They are very international in their thinking and service delivery. Many of them have trained in London or have come over for secondments. It is very easy working with local lawyers.’

That is a big bonus once foreign lawyers get to Kenya, but the reason for heading to the country is deal-making. As other African economies have been feeling the pinch from the crash in commodity and oil prices, Kenya, a net importer of oil, has benefited from low energy prices and private equity investment. Private equity (PE) firms invested nearly $1bn in Kenyan businesses in the first eight months of 2015, with financial services attracting the most cash, according to Burbidge Capital data. Last year, Kenya’s GDP grew at a faster rate (5.6%) than that of other major African economies such as South Africa and Nigeria (1.3% and 2.8% respectively).

‘Kenya is quite a diversified economy. It is not reliant on a particular commodity or oil,’ says Roddy McKean, an M&A lawyer with a focus on PE. He is a director in the corporate group of Nairobi-based Anjarwalla & Khanna, one of the country’s biggest firms with over 90 lawyers. ‘The [high] level of corporate deal activity that we have seen over the past two to three years is continuing,’ McKean adds. Total deal value reached over $3.2bn in 2015, a 48% increase on 2014.

Kenya’s other big plus is the capital city’s position as a regional hub for east Africa. ‘Nairobi is becoming increasingly important as a base for investors to develop a regional footprint, so by being in Nairobi you benefit from a lot of the investment inflows into the region,’ McKean observes.

Kenya is the biggest economy in the East African Community (EAC) regional economic bloc. It has the most developed financial and banking systems, and the Nairobi Securities Exchange is the fourth-largest stock exchange in Africa in terms of trading volumes. Furthermore, as Kenya-born Shah observes: ‘Kenya has got a great aviation hub and is well served in terms of infrastructure. Many multinationals have their headquarters in Nairobi, and that is only going to grow.’ Google, Visa, KFC and Coca-Cola have all chosen Nairobi as either their regional or Africa headquarters.

‘There is a lot of interest from international and global firms in Kenya at the moment,’ says Stephen Shergold, chair of Dentons’ Africa executive committee, but he adds: ‘When evaluating opportunities, you can’t really look at Kenya in isolation but as part of the broader East African Community.’

The opportunities for foreign lawyers in east Africa extend north and south beyond the confines of the six EAC members, and include Zambia and Ethiopia, which is one of the world’s fastest-growing economies. Yet McKean notes: ‘The investment into Ethiopia will often come through Nairobi.’

Kenya has also registered on foreign lawyer radars as other major African jurisdictions have become less attractive. One senior international lawyer says: ‘South Africa is a very highly populated legal services market. There isn’t a lot of market share to win. Rates and profit margins are pretty depressed so it’s not necessarily an attractive market to go and grow your business.’

So, foreign firms wanting to expand in Africa are looking at Kenya, and are putting ‘a lot of pressure’ on Kenya’s law society at the moment, he adds.

The pressure on the Law Society of Kenya (LSK), which represents about 8,000 practitioners, is to open up Kenya’s legal market to foreign players. Nationality requirements ban foreign entry: only advocates, who must be Kenyan nationals, can practise and advise on Kenyan law. Foreign law firms can form associations with local firms, but are not permitted to use their own brand or name.

Only a few foreign firms, including Bowman Gilfillan of South Africa, DLA Piper and Dentons have a presence in Kenya through associations. The market for corporate and commercial services is dominated by local firms such as Anjarwalla & Khanna; Coulson Harney; Hamilton Harrison & Mathews; Kaplan & Stratton; and Walker Kontos.

In February 2014 Githu Muigai (pictured), Kenya’s attorney general and titular head of the profession, was quoted on Kenyan online newspaper Standard Digital as saying: ‘I have been telling the LSK that we cannot keep this legal market closed forever. We must and will open it up for competition. And our members must be ready for that competition.’

Muigai cited declining professional standards among Kenyan advocates as his justification for liberalisation. In June 2014, he set up a taskforce, including the LSK, the Kenya School of Law and Kenya Law Reform Commission to review the Advocates Act; this led to a draft Advocates Bill, on which the commission solicited comments from the profession and the public. But there has not been much progress since, according to the LSK.

Although attitudes towards foreign lawyers are gradually changing, Kirkland & Ellis partner Chiraag Shah, a dual-qualified Kenyan advocate and English solicitor, observes: ‘There is [still] a degree of hostility by the local bar to international law firms.’

LSK members mainly practise in high street firms or as sole practitioners, providing services such as litigation and conveyancing. That is the segment of the profession concerned about opening the market to outsiders – although it is not the one that is going to be affected, McKean argues. The bigger threat is arguably to the larger firms serving big companies. Yet McKean says: ‘We don’t feel threatened by international firms coming in. We take the view that there will always be a role for a leading independent [domestic] firm in any legal market.’

Furthermore, the influx of foreign firms will have a positive impact on the profession because the talent pool will increase. Nairobi will become ‘the regional centre for transactional work’ and so attract young lawyers to the capital, McKean argues.

Hit on mandatory fee rates

Legal fees are regulated in Kenya. A review of the Advocates Remuneration Order (ARO), gazetted in April 2014, raised advocates’ rates by about 40% for services such as mortgages and charges, filing a civil suit and registration of trademarks. The rate increase – promoted by the Law Society of Kenya but opposed by the Competition Authority of Kenya because it was deemed anti-competitive – has significantly widened the fee gap between Kenya and its fellow EAC partners.

The fee hike is also hurting some of the larger domestic firms in areas such as project finance, where lenders typically take security over land and lawyer fees are charged as a percentage of the value of the security. ‘Where you are acting for a lender and the lender wants to take security over land, you get into some very, very high figures in legal fees. We generally find that we are losing a lot of project finance work as a result,’ Kaplan & Stratton’s Nigel Shaw says. ‘We comply with ARO and are losing a significant amount of business to other advocates who take a different view to the one we are taking,’ he adds.

Some foreign investors have either restructured or reconsidered their investments in Kenya because of the ‘prohibitive’ costs, Coulson Harney’s Richard Harney says.

‘Clients find it a disincentive to doing business when they have to pay a lot of money to lawyers on this mandatory scale,’ he adds. If firms were allowed to negotiate alternative fee structures such as capped fees, the same services and products would be delivered to clients ‘at a much more reasonable cost’, he suggests.

‘We would welcome a relaxation of the ARO rules, certainly in areas that do not warrant the level of fees that advocates are supposed to charge, for example in conveyancing and bank securities work,’ Harney says. The charges also affect foreign firms because they are required to use Kenyan advocates to draft and register land documents.

Despite discontent among some of Kenya’s large corporate firms, ARO is a key part of the income of smaller firms. There are ongoing talks between the attorney general of Kenya, the chief justice of Kenya and the Law Society of Kenya around ARO.

‘There is a view that the order should be dispensed with and advocate fees left to market forces,’ says Itoto Echakara, parliamentary affairs and legislation officer at the Law Society of Kenya. ‘However, the order ensures quality service to the public. The order [also] ensures that the service providers are adequately remunerated for their service whatever the outcome.

‘This is important because it allows the service providers to avoid undertaking unwholesome activities in order to ensure positive outcomes as well as access to justice.’

Some suggest external pressure will inevitably lead to change, whether through law or stealth (or both). ‘My sense is that the Kenyan market will open up in the near term,’ the senior international lawyer says. International firms’ interest in ‘closer integration’ with Kenyan firms will not only put ‘a lot of pressure on the LSK to make changes’, but also ‘firms will come up with innovative ways to partner more closely’.

Perhaps the best example of this is the tie-up between Coulson Harney and South Africa’s Bowman Gilfillan. Richard Harney and fellow partner Philip Coulson left Kaplan & Stratton to launch Coulson Harney as part of Bowman Gilfillan’s Africa Group in September 2008. The firm has since grown to comprise 80 lawyers and has seen ‘25% incremental growth annually’. Coulson Harney managing partner Richard Harney says: ‘Foreign law firms can operate in Kenya if they enter into the right relationship with local firms.

‘We are operating on a single-firm principle, so we are not a network, we are not an association,’ Harney says of the firm’s membership of the Bowman Gilfillan Africa Group, which has offices in six African countries. Client referral is by no means the cornerstone of the relationship, he notes; member firms have ‘fully integrated’ IT and financial systems, business development, client service and governance.

Other tie-ups involve Dentons, the world’s largest firm by number of lawyers, which has ‘a very close association’ with Kenya’s Hamilton Harrison & Mathews that dates back to legacy UK firm Denton Wilde Sapte. ‘It is a deep, longstanding relationship and one where we both work quite hard to win business together,’ Shergold says. The association does not preclude Dentons or its Kenyan partner from using other firms if clients request this.

Berwin Leighton Paisner (BLP) is on the lookout for a partner in Kenya as it seeks business opportunities linked to energy and natural resources, finance and infrastructure. Partner Alexander Sarac says: ‘We want to grow BLP’s Africa business and are looking for closer relationships in key jurisdictions with one law firm, instead of two or three preferred law firms.

‘We have identified a law firm we want to build a much closer relationship with,’ adds Sarac, who joined BLP’s Dubai office in January as energy and infrastructure partner. He moved from DLA Piper in Dar es Salaam, Tanzania, where he built a significant Africa-based infrastructure practice.

Sarac, who is dual-qualified in England and Germany, says a fully branded office in Kenya is not a requirement for giving ‘excellent legal advice’ to clients, provided international firms have ‘strong partnerships’ with high-quality, full-service local firms. Kenya has a few outfits that fit this description. He reckons exclusive associations are not feasible, particularly for local firms: ‘To ask a Kenyan law firm to commit to exclusivity in a relatively small market seems unfair.’

All the major Kenyan firms work with a variety of overseas law firms, including from China, India, Singapore and the UK. Coulson Harney, for example, has ‘excellent relationships’ with Freshfields Bruckhaus Deringer, Clifford Chance and Baker & McKenzie, and is a member of the Lex Mundi network, Harney says.

Local firms have also been expanding beyond their domestic market. In addition to Coulson Harney, other local players have joined pan-African networks. Anjarwalla & Khanna is part of the African Legal Network (ALN), an alliance of independent top-tier firms in 13 African countries. ‘Increasingly, the work that many of us do is across the continent. We need therefore to have a link with the top firms in all the relevant jurisdictions,’ McKean says. Some 90% of his practice is outside Kenya.

Kaplan & Stratton, which has about 60 lawyers, is part of Lex Africa, an alliance of leading firms in over 20 African countries. Partner Nigel Shaw, a dual-qualified Kenyan advocate and English barrister, says: ‘We do a lot of regional work. Investors moving into east Africa will typically establish themselves in Nairobi initially and they will have their regional head office [there]. That leads on to work for us not only in Kenya, but also within east Africa.’

The EAC, headquartered in Arusha, Tanzania, is expected to increase pan-regional business for firms, some believe. ‘Historically, one of the reasons why African economies didn’t grow was because African countries didn’t trade with each other,’ McKean observes.

The EAC established a common market in 2010, introduced a single customs territory in 2014 and will launch a single currency by 2024 – the last step before political federation. ‘What the EAC is trying to do is harmonise laws across the community to make trade across borders much easier,’ McKean says. For example, there is already a competition regulatory framework in place, and an EAC competition authority to enforce it is expected to begin work this year.

McKean reckons the EAC will also drive the expansion of pan-east African networks of law firms: ‘That is what clients want and what they are doing in their own business. They are creating pan-African or pan-regional businesses and therefore having one firm that can service all their needs in the countries they are in makes a huge difference.’ ALN is in five of the six EAC partner countries.

With or without the EAC, firms are buoyant about prospects in the region. ‘It is still early days for the EAC, they are still working things through,’ Shaw notes, adding: ‘The east Africa region is incredibly vibrant at the moment. There is a lot happening here. There is a lot of investment.’

Torrent of new laws

So, what type of work are lawyers busy with? First and foremost, mergers and acquisitions driven by private equity firms.

This year Kenya is forecast to be one of the top three African destinations (after South Africa and Nigeria) for inbound acquisitions from overseas and ‘a leading M&A hotspot in east Africa’, according to a survey of 100 M&A practitioners in Africa published by Mergermarket. That is driven by Kenya’s diversified economy, consumer growth and increasing trade among EAC partners. The survey highlights one of the top PE deals in Africa in 2015: the $257m acquisition by Norway’s Norfund AS and NorFinance of a 12.22% stake in Kenyan bank Equity Group Holdings.

US firm Kirkland & Ellis is renowned for its private equity work. Shah says that over the past few years, the firm has seen an increased focus on Africa by PE sponsors from the US, UK and continental Europe. Kenya is typically ‘a testing ground’ for east Africa, with clients starting with an initial investment there. ‘The aim is then to expand as quickly as possible, and the EAC is giving [our clients] a lot of opportunities to do so.’ In turn, Kenyan businesses are keen on investment from overseas PE firms because it gives them ‘international kudos’ to sell their product and services across the region, Shah observes.

Overseas buyers are targeting a wide variety of sectors: from logistics, transport, education and healthcare, to horticulture, fast-moving consumer goods, telecoms and insurance. Kirkland & Ellis recently advised US private equity firm Sun European Partners on the purchase, for an undisclosed sum, of the horticulture business of London-based James Finlay Ltd – a cross-border deal spanning several jurisdictions including Kenya, Tanzania and South Africa.

Last year, Coulson Harney worked on one of the largest deals in east Africa, worth $170m. It advised the shareholders of Kenya’s insurance group UAP Holdings Ltd on the takeover of the company by Anglo-South African group Old Mutual, and the subsequent merger of UAP and Old Mutual in Kenya.

Infrastructure and project finance is another big growth area. Kaplan & Stratton is advising Europe’s Alten Energías Renovables on two solar PV renewable energy projects in the country. Dentons is acting for Kenya Power and Lighting Company and the Ministry of Energy on licensing matters in relation to a 74 MW power plant in Kenya; and Gulf Power on the $2bn financing of a 980 MW coal-fired power station in Lamu County, Kenya, with separate secured project finance loan facilities from Standard Bank and International Commercial Bank of China. BLP is advising governments and sponsors on infrastructure projects including ports, roads and energy across east Africa.

In August 2010 Kenya adopted a new constitution, which has led to ‘a torrent of new laws coming through the system’, Harney says. Relevant to corporate law firms are the recently enacted Companies Act 2015 and the Insolvency Act 2015, which are ‘closely modelled’ on the British Companies Act 2006 and insolvency legislation. ‘Those two pieces of legislation are creating a lot of interest and obviously a lot of work for lawyers,’ Harney says. As in the UK, insolvent companies in Kenya can now enter into administration and voluntary arrangements as alternatives to bankruptcy, and that will generate more restructuring and refinancing work, Harney predicts.

The modernisation of Kenya’s legislation will increase transparency in business, bringing further investment into the country by ‘creating a more regulated market to international standards’, McKean argues. ‘One of the issues that many international investors have about investing in Africa is that the regulatory framework is very opaque,’ he says.

Kenya discovered its first oil reserves in 2012 in the north-west Turkana region, but progress in this area has been marred by low prices and setbacks in the construction of a pipeline. ‘We were starting to get involved in the oil sector with a number of companies, but that hasn’t really progressed, particularly due to the collapse of oil prices worldwide,’ Shaw says. ‘At the moment it’s a wait-and-see game.’ The mining sector, too, is in a temporary lull as the government revises its mining policy.

In capital markets, lawyers expect an uptick in new listings on the Nairobi Securities Exchange once current market volatility ends, as private equity investors seek to realise returns on their investments. Harney says: ‘It is not a booming sector at the moment, but legislation and regulation around capital markets is increasing, and there are companies looking more closely at going for listings on the stock exchange as PE [exits] or diversification of family-owned privately held companies.’

Despite subdued IPO activity, firms such as Coulson Harney have over the past three years advised on the issue and listing on the NSE of several corporate bonds. The government is also planning to issue new eurobonds (Kenya’s first eurobond, in June 2014, raised a record-breaking $2.75bn).

Firms also report an increase in international arbitrations, with London as a favourite seat. Dentons, for example, is acting for Kenya Broadcasting Corporation, defending a substantial damages claim in a London arbitration claim brought by a joint venture partner.

Corruption and security

Kenya was ranked 139 out of 168 countries in the 2015 edition of Transparency International’s corruption perceptions index. ‘Corruption is the elephant in the room that nobody wants to talk about, but it very much exists,’ says Kirkland & Ellis’s Shah. ‘It is almost a way of life in Kenya that you would have to pay somebody to get things done. It kind of gets its way everywhere.’

Another development affecting business security has of course been the series of terrorist attacks perpetrated by Somalia’s al-Shabaab, including an assault on Nairobi’s Westgate shopping mall in September 2013 which killed 67 people. These have led to a fall in tourism revenue (down by 3% last year).

‘New clients are a little uncomfortable about the political and security side because of [these] terrorist attacks, but when you talk to them a bit more and introduce them to local lawyers they get comfortable quite quickly,’ Stephenson Harwood’s Shah says.

Despite these clouds on the horizon – lawyers predict an economic slowdown ahead of Kenya’s general elections in August 2017 – the regulatory and business environment means east Africa’s biggest economy will remain attractive to big law firms both international and local.

Source: The Law Society Gazette by: Marialuisa Taddia, a freelance journalist

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