What steps are needed for a share purchase merger in Uganda, and how long does due diligence take?

Share transfer arises from a legal sell or purchase of shares from another Company which is allowed in Uganda. You need a lawyer to first review the compnay memorandum and articles of association and then draft a share purchase agreement with he terms of share sale. Just like any other contract. The company has to convene a meeting and approve this transaction and thereafter effect the changes to the company incorporation structure after a share valuation is conducted. As for mergers, a lot of factors have to be considered which your email does not details. The new Anti-competition Act also requires that an approval is obtained before a merger is effected. As for the due diligence, you have to look at matters like business as a going concern, tax and litigation matters, statutory compliance issues, third party interest on the shares for mortgages (SIMPA) etc before any purchase of company shares.

• Legal:
  
  
  
  • Review all incorporation documents, including the Memorandum and Articles of Association.
  
  
  • Verify legal existence and good standing with the Uganda Registration Services Bureau.
  
  
  • Review material contracts, intellectual property ownership, and licenses/permits.
  
  
  • Assess pending or past litigation and potential legal liabilities.
  
  
  • Check for any third-party interests, such as mortgages or liens on company assets or shares.
  
  
  
  


• Financial:
  
  
  
  • Analyze audited financial statements (balance sheets, income statements, cash flows) for the past 3-5 years.
  
  
  • Verify tax compliance and review all tax filings and any pending tax disputes.
  
  
  • Assess all debts, loans, contingent liabilities, and guarantees.
  
  
  • Conduct a valuation of tangible and intangible assets.
  
  
  
  


• Regulatory:
  
  
  
  • Verify compliance with industry-specific regulations.
  
  
  • Ensure all necessary business licenses and permits are in place and transferable.
  
  
  • Assess environmental compliance and potential liabilities if applicable to the business.
  
  
  
  


• Human Resources & Operations:
  
  
  
  • Review all employee and contractor agreements, HR policies, benefits, and any labor disputes.
  
  
  • Analyze the organizational structure and identify key personnel.
  
  
  • Evaluate supply chain, production capacity, and IT systems for integration potential. 
  
  
  
  

• Mandatory Notification: Notice of a proposed merger must be given to the Ministry after the Boards of Directors have accepted the proposal. Failure to notify a notifiable merger is an offense liable to a fine of up to 10% of the annual turnover of the involved parties.


• Thresholds: The specific financial thresholds for mandatory notification are set by the Minister via statutory instrument.


• Timeline: Once a complete notice is received, the Ministry has 120 days to inquire into the merger and determine if it has an adverse effect on competition. If no decision is communicated within this period, the merger is deemed approved.


• Regional Consideration: If the companies operate in two or more EAC Partner States and meet the relevant thresholds (combined turnover/assets in the EAC of ≥ USD 35 million, etc.), you may also need approval from the East African Community Competition Authority (EACCA), potentially leading to dual filing obligations with the COMESA Competition Commission (CCC) as well. 

• Contractual Safeguards:
  
  
  
  • Include specific clauses in a Shareholders' Agreement that require the minority shareholder's consent for major decisions, such as mergers, significant asset sales, or changes to the company's constitution.
  
  
  • Establish a clear dividend policy and detailed share valuation mechanisms in the agreement to ensure fair value if a buyout is mandated.
  
  
  • Provide the minority shareholder with the right to appoint a director or an observer to the board to enhance transparency and oversight.
  
  
  
  


• Statutory Rights:
  
  
  
  • Right to Vote: Minority shareholders can vote on fundamental changes affecting the company, such as mergers, at the Annual General Meeting (AGM) or via proxy.
  
  
  • Protection against Oppression and Mismanagement: A shareholder can petition the court or the Registrar of Companies if the company's affairs are conducted in a manner unfairly prejudicial or oppressive to their interests.
  
  
  • Pre-emption Rights: Existing shareholders typically have the right of first refusal on new share issues, which protects against the dilution of their shareholding.
  
  
  • Independent Valuation: The law lacks a mandatory independent valuation process for shares during takeovers, which is a potential concern; however, courts can order a buy-out and refer valuation issues to an expert in the event of a dispute.
  
  
  • Legal Action: Shareholders can institute legal proceedings (derivative actions) to protect their interests if their rights are violated or the company's actions are illegal or ultra vires (beyond its powers). 
  
  
  
  

When merging your Uganda-based company with another local business via share purchase, you must conduct extensive due diligence, seek mandatory regulatory approval from the Ministry responsible for trade (which enforces the Competition Act), and implement specific measures to protect minority shareholders.

Due Diligence

Due diligence involves a thorough investigation of the target company across several areas:

Legal:
- Review all incorporation documents, including the Memorandum and Articles of Association.
- Verify legal existence and good standing with the Uganda Registration Services Bureau.
- Review material contracts, intellectual property ownership, and licenses/permits.
- Assess pending or past litigation and potential legal liabilities.
- Check for any third-party interests, such as mortgages or liens on company assets or shares.

Financial:
- Analyze audited financial statements (balance sheets, income statements, cash flows) for the past 3-5 years.
- Verify tax compliance and review all tax filings and any pending tax disputes.
- Assess all debts, loans, contingent liabilities, and guarantees.
- Conduct a valuation of tangible and intangible assets.

Regulatory:
- Verify compliance with industry-specific regulations.
- Ensure all necessary business licenses and permits are in place and transferable.
- Assess environmental compliance and potential liabilities if applicable to the business.

Human Resources & Operations:
- Review all employee and contractor agreements, HR policies, benefits, and any labor disputes.
- Analyze the organizational structure and identify key personnel.
- Evaluate supply chain, production capacity, and IT systems for integration potential.

Approvals and Timelines

The Ministry responsible for trade (the Ministry) is the authority for competition regulation in Uganda.

Mandatory Notification:
Notice of a proposed merger must be given to the Ministry after the Boards of Directors have accepted the proposal. Failure to notify a notifiable merger is an offense liable to a fine of up to 10% of the annual turnover of the involved parties.

Thresholds:
The specific financial thresholds for mandatory notification are set by the Minister via statutory instrument.

Timeline:
Once a complete notice is received, the Ministry has 120 days to inquire into the merger and determine if it has an adverse effect on competition. If no decision is communicated within this period, the merger is deemed approved.

Regional Consideration:
If the companies operate in two or more EAC Partner States and meet the relevant thresholds (combined turnover/assets in the EAC of USD 35 million, etc.), you may also need approval from the East African Community Competition Authority (EACCA), potentially leading to dual filing obligations with the COMESA Competition Commission (CCC) as well.

Protection of Minority Shareholders

Protection for minority shareholders is primarily derived from the Ugandan Companies Act, 2012 and contractual agreements.

Contractual Safeguards:
- Include specific clauses in a Shareholders' Agreement that require the minority shareholder's consent for major decisions, such as mergers, significant asset sales, or changes to the company's constitution.
- Establish a clear dividend policy and detailed share valuation mechanisms in the agreement to ensure fair value if a buyout is mandated.
- Provide the minority shareholder with the right to appoint a director or an observer to the board to enhance transparency and oversight.

Statutory Rights:
- Right to Vote: Minority shareholders can vote on fundamental changes affecting the company, such as mergers, at the Annual General Meeting (AGM) or via proxy.
- Protection against Oppression and Mismanagement: A shareholder can petition the court or the Registrar of Companies if the company's affairs are conducted in a manner unfairly prejudicial or oppressive to their interests.
- Pre-emption Rights: Existing shareholders typically have the right of first refusal on new share issues, which protects against the dilution of their shareholding.
- Independent Valuation: The law lacks a mandatory independent valuation process for shares during takeovers, which is a potential concern; however, courts can order a buy-out and refer valuation issues to an expert in the event of a dispute.
- Legal Action: Shareholders can institute legal proceedings (derivative actions) to protect their interests if their rights are violated or the company's actions are illegal or ultra vires (beyond its powers).