Disconnection between legislation and regulation

CANVASSING colleagues in various African countries to distil many years of collective mergers and acquisitions (M&A) experience in Sub-Saharan Africa, Koos Pretorius and Doron Joffe, directors and joint heads of ENSafrica’s corporate commercial department together with director, Ian Hayes, identified the key challenges and an accelerating trend of improvements in M&A regulation in several jurisdictions on the sub-continent.

Pretorius and Joffe report that despite improvements, the key challenges remain: an uncertain and shifting regulatory landscape; a disconnection between official requirements and the practical implementation thereof; the risk of bribery and corruption; and burdensome and costly formalities.

“A significant increase in the adoption of new legislation and regulations is becoming apparent across many jurisdictions as Sub-Saharan African economies continue to diversify and further industrialise,” says Pretorius.

“It is not uncommon to find specific legislation in force without the necessary regulations having been drafted,” he adds. Joffe says they also encountered instances where both legislation and regulations are in force, but the regulatory bodies are not yet operational to enforce the relevant law.

“This regulatory uncertainty can lead to a separation between what is officially required and how transactions are implemented in practice. Because of this, it is highly advisable to engage local regulators as soon as possible when contemplating a transaction in Sub-Saharan Africa, notwithstanding the time periods that may be provided for in the applicable statute,” contends Joffe.

Bribery and corruption remains a risk for clients conducting M&A activity in Sub-Saharan Africa, according to Pretorius and Joffe, particularly those clients who are subject to extensive and detailed anti-bribery legislation such as the United States’ Foreign Corrupt Practices Act or the UK Bribery Act.

They argue that the risk is amplified by the broad application of relevant legislation to associates or affiliates of a party involved in any bribery or corruption. This is a particular challenge to private equity funds or similar funds and the portfolio companies that they control.

For example, a US or UK-based portfolio company owned by a private equity fund may be deemed to be in violation of applicable anti-bribery legislation due to the actions of another portfolio company of that fund in another jurisdiction.

A recent survey by ENSafrica Forensics of 88 organisations across the continent found that 24 percent of respondents had experienced an incident of bribery or corruption in the past 24 months.

Joffe and Pretorius report that in several jurisdictions, there remain requirements for deal documents to be translated into a local language and there is stamp duty and other costly fees payable to file and process documents. The costs and time required to comply with such formalities should not be underestimated, as they have the potential to derail or delay transactions as they near closing.

However, the M&A challenges, particularly those related to legislative uncertainty, are symptoms of the rapid growth and industrialisation taking place across the continent. There remains much to be lauded in Sub-Saharan Africa, according to Pretorius and Joffe.

They say the introduction of legislation related to consumer protection, com- petition law and financial services across Sub-Saharan Africa is bringing muchneeded certainty to several jurisdictions.

“We are also starting to see an increase in regional-level regulation, such as the Common Market for Eastern and Southern Africa (COMESA). COMESA’s competition commission has recently increased the merger notification thresholds, reduced filing fees and simplified the guidance it provides in response to constructive criticism from market participants,” says Joffe.

Pretorius says Sub-Saharan Africa continues to offer unparalleled opportunities to investors who are willing and able to deal with the unique challenges arising in M&A transactions in the region.

ENSafrica chairman, Michael Katz adds, “In regards to M&A transactions, we have a very healthy pipeline, which includes pure domestic M&A within South Africa as well as cross-border M&A both into and out of South Africa. It also involves a multiplicity of sectors including retail, mineral resources, construction, financial services, oil and information technology. The quantum of some of these transactions is very material.”