Q&A with Isidora & Company: Legal issues in buying a private company in Tanzania
The Citizen’s front-page headline on Thursday (27 June 2019) “Acacia rejects Barrick buyout attempt” caught my attention, because I am currently considering buying an existing private company in Tanzania, as opposed to starting from the scratch.
The chance to own my own business would be a dream come true. I am, however, apprehensive about what I may be getting into; hence, I’d like you to comment on the legal issues that a buyer must consider when buying a private company in Tanzania. Kind regards, Mwene.
Congratulations, Mwene, on your new adventure. There are many legal issues that a potential buyer must consider when buying a private company in Tanzania. The issues discussed here are typically pertinent to share purchases, as opposed to asset purchases, since share purchases the buyer acquires not just the assets, but all of target company’s liabilities.
Due diligence
Due diligence enables the prospective buyer to dig deeper into the details about a company so as to confirm the accuracy of the seller’s claims. The information gathered helps to make a good purchasing decision. Appropriate due diligence provides assurances on the status of the company.
Share purchase agreement
After the buyer and the seller have agreed on the terms and conditions (“T&Cs”) of the sale, and buyer has reached a decision to acquire the company then next logical step is to enter into a share purchase agreement (“SPA“). In the SPA, the parties agree to transfer title to the shares (share acquisition) or the assets of the business (business acquisition), subject to the satisfaction of conditions precedents. In major sectors of the Tanzanian economy such as, mining; telecoms; banking and finance; and insurance, authorities would always require the SPA before consenting or approving such a transfer. The agreement should also include warranties and indemnities by the buyer to the seller, and official search on these is critical.
Real estate and IP rights
It’s also critical to confirm whether titles of all the properties of the company involved in the transfer are valid and enforceable by ensuring that they are registered in accordance with the relevant Tanzanian laws and regulations. A prospective buyer has to check out if there are any liabilities against the said properties or involvement of any third party, whose approval might be required. Moreover, a buyer has to confirm whether the company owns intellectual property rights (IPRs) and if so, whether the IPRs are protected.
Employees
If the target company has employees, the seller of the company has to decide whether he wants to continue with the employees or not. The seller has to ensure all employees’ entitlements, including PAYE, pension contributions, WCF contributions, are well settled before transfer is made. Accordingly, the provisions of the Employment and Labour Relations Act, 2004 and related laws need to be adhered to. Additionally, the nature of the employment contracts, notices issued by either party to the contracts, or labour cases must be considered.
Tax issues
Governments all over the world are traditionally jealousy of their tax bases, and the government Tanzania is no exception. If not handled well, tax considerations can considerably complicate the purchase of a company. Therefore, a buyer must be aware of all taxes to be paid by the target company and whether the company has no any tax liabilities unattended to the TRA as well as municipal authorities and any other authority.
Changes in the Companies Act
You may also wish to consider that on Thursday 27 June 2019, the Parliament of Tanzania passed the Written Laws (Miscellaneous Amendments) (No. 3) Bill, 2019, which proposes to amend the Companies Act 2002 by giving the Registrar of Companies wide powers to strike out a company but allowing a company, member or creditor aggrieved by the Registrar’s decision to apply, within five years, to the court for restoration of the company.
The Registrar is, however, not allowed to register another company with the same name within such period of 5 years. The Bill awaits presidential assent and therefore it has not yet come into law. The list of issues highlighted above is not exhaustive. Other specific legal issues may be called into question.
Please do send us your questions by email to: [email protected]
DISCLAIMER: The purpose of this weekly Q&A column with Isidora & Company Advocates is intended to educate the public on Tanzanian law matters, and is not a substitute for the role of your legal counsel. For any legal issue you face, you are strongly encouraged to contact your legal counsel.
Paul Kibuuka ([email protected]) is a tax and corporate lawyer, tax policy analyst and chief executive of Isidora & Company.
