The sluggish growth of the South African domestic market due to socioeconomic, labour and energy supply challenges, exchange rate pressures and regulatory uncertainty in the resources sector is likely to continue having a cooling effect on inbound foreign direct investment in the near term.
South Africa’s economic malaise, however, has focused domestic corporates’ attention on opportunities available in other African markets – specifically mobile telecommunications, technology, financial services and fast-moving consumer goods – which are likely to continue to drive outbound mergers and acquisitions (M&A) from South Africa in the near term. There is also increased activity in private equity, with more investment funds looking at opportunities in Africa. Sectors such as mining, oil and gas, energy, real estate, infrastructure and retail continue to offer opportunities for African investors.
When it comes to deals in South Africa, we cite the revised Black Economic Empowerment (BEE) Codes of Good Practice, which became effective in May 2015, as the stimulus in the restructuring of BEE agreements in the country. The revised Codes now have five pillars – ownership, management control, skills development, enterprise and supplier development and socio-economic development. Failure to reach the minimum requirement on a priority element such as ownership now carries a penalty, which must be taken into account when structuring a deal.
In anticipation of the new codes, BEE transactions were key drivers for M&A activity in South Africa in the past year. However, innovative ways to fund these BEE deals and minimise shareholder impact are proving crucial. Fundamentally, many African jurisdictions are also looking to pass, or have imposed, some similar indigenisation legislation that aims to increase local participation in their developing economies. Insights from the South African BEE legislation and deal structures are proving especially useful in this respect.
BEE legislation has been reasonably effective in helping to bring about transformation in the ownership, management and employment equity aspects of businesses in South Africa. As much as we can be critical of the way in which some ownership transactions have been concluded, there would undoubtedly be fewer black shareholders of South African companies had BEE not been introduced. The same can be said of the management and employment structures of companies, where BEE legislation has worked together with the employment equity legislation to increase the participation of black people within management and the employment of black people generally.
In addition, we note that getting to grips with human issues across multiple jurisdictions is a big challenge for investors in cross-border deals in Africa, as the process requires expert labour legislation knowledge in each country as well as flawless co-ordination between all the jurisdictions involved in the deal. In this regard, having access to a network of business law firms all sharing their labour law expertise can significantly speed up and simplify a cross-border deal and also reduce legal risk.
In the last few years the South African government has moved to streamline the country’s labour environment and to respond to the increased informalisation of labour and ensure that vulnerable groups receive adequate protection. South Africa’s labour legislation is now among the most progressive in the world. The recent raft of amendments to our labour law guidelines are a mechanism to ensure that our labour legislation continues to remain relevant within the global investment context.
Considering the variety of laws across many different jurisdictions, it is clear that cross-border deals in Africa require a specialist knowledge of each country in which the deal takes place. Most importantly it has to be said that, as Africans, we must stand together when it comes to investment on our continent.
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