SOUTH AFRICA: CORPORATE LAW UPDATE

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In this, our South African M&A Corporate Law Update, we discuss the most noteworthy trends, regulatory changes and decisions of significance to M&A in South Africa during the second half of 2022 and leading into 2023.

Navigating global disruption has been a key theme across all jurisdictions as we emerge from a global pandemic, grapple with the consequences flowing from the Russia/Ukraine conflict and China’s zero Covid policy (which has been eased since December 2022), tackle inflation and impacts on supply-chains and pricing, and prepare for possible recession.

Although M&A is down from the extraordinary levels of 2021, it remains healthy by historical standards and there are early indicators of continuing resilience or an uptick.

We are seeing certain developments in M&A in Africa that are consistent with global trends. While cross border transactions remain noteworthy, consistent with de-globalisation initiatives that are evident in most jurisdictions, there has been a shift to a greater focus on  regional activity and the expansion of local companies into Africa. Another trend that is mirroring what is being seen globally is the increase in corporate simplification by way of unbundlings and take privates and an uptick in private equity, particularly in southern Africa.

Despite the economic effects of Covid-19, we are only now starting to see the expected spike in formal restructurings and insolvencies given the increasing interest rates, increased price of crude oil and inflation.

Key themes driving M&A in Africa are linked to attractive valuations, competitive positioning, simplification, digital infrastructure and environmental, social and governance (ESG). From a sector perspective, sub-Saharan Africa is showing increased activity in the financial, natural resources and TMT sectors; East Africa is most active in healthcare, financial services and FMCG and West Africa is most active in fintech and mining.

In South Africa, economic growth in the third quarter came in well above market expectations. Challenges, such as intensified load shedding, protracted strikes at Transnet and potential greylisting by the Financial Action Task Force (FATF) have potentially already been priced into projections although the full impact of aggravated load shedding still needs to be assessed. The country is showing encouraging improvements in advancing its renewables ambitions (and also some set-backs) and avoiding greylisting, with radical legislative reform in both spaces. However, these ongoing challenges combined with recent political instability with developments around Phala Phala could weigh on near-term investment prospects. Despite this, South Africa is still perceived as a safe haven within emerging markets, benefiting from elevated trade, a lift in fixed investment, steady fiscal improvement, relative underweight positions by investors, cheap assets and an earnings growth momentum greater than that of other emerging markets.

From a sectoral perspective:

  • As it pertains to TMT, the Independent Communications Authority has initiated the second phase of the licensing process, making available radio frequency spectrum to prospective licensees to provide mobile broadband wireless access services in the low and mid-International Mobile Telecommunications frequency bands within the designated frequency ranges. This will contribute to the goals of deploying 5G in South Africa, meeting targets under the SA Connect national agenda and achieving the UN sustainable development goals.
  • Recent developments in the Energy sector have far reaching consequences. Measures have been implemented aimed at:
    • improving Eskom performance (linked to structure, processes, people and budget);
    • accelerating procurement of new generation capacity (doubling capacity for wind and solar from 2,600 to 5,200 MW, with RFPs for battery and gas to follow);
    • increasing private investment in generation capacity (removing the licensing threshold for embedded generation completely following the success in raising it to 100 MW, and waiving or streamlining regulatory requirements);
    • enabling business and households to invest in rooftop solar (selling surplus to Eskom); and
    • transforming the electricity sector for future sustainability (restructuring Eskom and finalising Electricity Regulation Amendments to enable private sector investment).

The President has also created a National Energy Crisis Committee.  South Africa continues its preparations for a more stringent regulatory environment and we are starting to see asset disposals as companies adjust their portfolios and reposition themselves for the energy transition. 

  • Major incidents, cyber-crime and associated data breaches globally continue to rise in the second half of this year. The need for cyber controls, threat updates, monitoring and training, incident response plans (reviewed and tested frequently) and a multidisciplinary team to assist with the often unintended consequences and litigation that flows from a major incident event, cyber-attack or data breach is critical, particularly as this space becomes an increasingly regulated minefield.
  • In the Insurance space, linked to the uptick in disputes, regulators continue to respond with market conduct regulation both in terms of local and international trends.  A flurry of merger and acquisition activity has found both sellers and buyers seeking warranty and indemnity insurance outside of private equity transactions (where it has been a consistent feature for some time) – this market will become more mature over time as dealmakers become more familiar with the pros and cons of, and process related to, such insurance. Financial inclusion, transformation and ESG continue to be important issues in the insurance sector. Certain insurers also appear to be imposing ESG requirements on clients.
  • Rapid developments and collaboration between start-up tech disrupters and mature organisations continue in the Fintech space. In a long-awaited move, South Africa has seen the recent adoption of crypto assets as financial products with further changes  anticipated in the near future.
  • The Mining sector, increasingly seen as a key player in the just transition to low-carbon economy, has not been without challenges this year, faced with supply chain constraints, load shedding, logistics strikes, contracting activity in some advanced and emerging market economies and shareholder activism in the form of ESG pressures. Opportunities in this space are linked to increased self-generation of electricity and a rise in commodity export volumes, with a focus on providing feedstock necessary for wholesale decarbonisation and commitment to advancement in a socially responsible way, seizing investment opportunities and capitalising on the commodities super cycle.
  • Reshaped by the Covid-19 pandemic, the Pharmaceuticals and Healthcare landscape in Africa is changing. With healthcare costs on the continent projected to rise 12%, industry players are deploying digital healthcare technology to rein in costs, sharpen their competitiveness and increase access to healthcare services. In turn, healthcare users have been enthusiastic in their uptake of digital health services, which have proliferated since the pandemic. On the mergers and acquisitions front, the pharmaceutical, medical and biotech industry is the most active in the sector, especially in private equity. Health data security and privacy are a priority as African governments move to regulate cross-border flows of sensitive personal information and the threat of cyber-attacks grows.

Also relevant across sectors are developments in the African Continental Free Trade Area space. Set to be the world’s largest free trade area, there are now 54 countries that are signatories to the agreement and 44 countries that have ratified the agreement. Negotiations to conclude phase 1 protocols covering trade in goods, services and dispute settlement mechanisms have made early progress. 2022 also saw the start of negotiations on Phase 2 protocols, focused on intellectual property, investment and competition policy, which are on the verge of conclusion. The Phase 3 protocols on e-commerce and digital trade are now at design stage.

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