SOUTH AFRICA: INVESTMENT STRATEGIES FOR FOREIGN BUSINESSES
South Africa offers significant foreign direct investment opportunities, especially with the rapid expansion of opportunities on the African continent. Its location at the southern tip makes it a gateway to markets within and beyond Africa, and its abundant natural resources including gold, platinum, diamonds and coal, make it a prime destination.
With a population of more than 59 million, Africa’s second-largest economy also offers a vast consumer market for businesses selling their products and services.
Well-developed infrastructure, financial services, telecommunications and legal systems, together with a dynamic private sector experienced in operating in challenging emerging market conditions, make it an attractive jurisdiction for investors.
Despite some challenges, a stable political environment with a democratically elected government, independent judiciary, constitutionally enshrined human rights, sensible fiscal and monetary policies, and a free press provide a conducive environment for businesses to operate.
Government efforts to improve governance, tackle corruption and address bottlenecks hindering economic growth are promising and bolster investor confidence. However, investors will need to carefully navigate South Africa’s unique business environment to unlock its significant potential.
Foreign direct investment
South Africa has few restrictions on foreign investment, with tax breaks and incentives for small enterprises, strategic industrial projects and exporters. The Department of Trade and Industry and Competition offers a range of incentive schemes to encourage growth of competitive new enterprises and creation of sustainable industries.
South Africa is also a member of many international bodies, co-operation agreements and treaties that aid in foreign investment. Commencement of the African Continental Free Trade Area Protocol, aimed at increasing intra-continental trade and protecting, promoting and liberalising investment across Africa, has already generated interest from investors as the remaining protocols are finalised.
The Promotion and Protection of Investment Act provides foreign investors with the same rights as domestic investors. Foreign investors also benefit from the legal protection of property rights granted by the constitution.
Although there is no overarching legislation limiting foreign ownership, regulations affecting foreign ownership can be found in certain strategic sectors such as energy, mining, banking, telecommunications and defence. Recent amendments to the Competition Act have also introduced national security provisions aligned with international trends, requiring authorisation for notifiable mergers involving a list of national security interests. This provision is, however, not yet in force.
The primary corporate legal entities are public or private companies, personal liability companies, close corporations, trusts and partnerships. Offshore entities may also operate by registering as an external company, though the most common form of business vehicle used by foreign companies is a private limited liability company that is simple and cheap to establish, either incorporating a new entity or purchasing an 'off-the-shelf' company.
Mergers and acquisitions
Principle methods of acquisition or business combination of a private company are a sale of shares, sale of business, amalgamation, merger or issue of shares. For a listed public company, there are schemes of arrangement, tender offers, sale of assets, mergers or amalgamations, each with their own pros and cons linked to approval thresholds, tax and timing considerations. Hostile bids have not traditionally been common, although this is changing.
Stake-building is not uncommon prior to launching an offer, and shareholder disclosure requirements have been introduced into law. The mandatory offer threshold is 35%, and the squeeze-out threshold is 90%. Typically, early phases of negotiations are conducted in confidence, with disclosure if the confidentiality of price-sensitive information cannot be maintained.
Standstills, exclusivity arrangements and non-solicitation provisions are not uncommonly dependent on the leverage of the parties, often coupled with break fees or match rights, subject to regulatory restrictions. Consideration may be in the form of cash, shares or both.
Irrevocable undertakings are typically sourced shortly before offers are made to minimise the window of restricted trading. South African law imposes statutory obligations on directors to act in the best interest of a company, coupled with restrictions on frustrating a transaction once a board receives a genuine offer.
Shareholder activism, while not traditionally an important force, is on the rise, most notably linked to environmental, social and governance (ESG) and remuneration. Due diligence is becoming increasingly important, with the scope expanding to include these and other factors.
Regulators are generally professional and commercially minded. For private companies, the primary regulators are the Companies and Intellectual Property Commission, and the Companies Tribunal. For public companies or companies that meet certain thresholds, the Takeover Regulation Panel, which regulates takeovers and affected transactions, is also relevant.
For listed entities, the primary exchange is the Johannesburg Stock Exchange (JSE), which, along with the Registrar of Securities Services and the Financial Services Board, regulates securities trading, central securities depositories and listed companies.
The Companies Act and King Code on Corporate Governance are generally applicable. In some cases, where merger thresholds are met, approval of a transaction will require competition and antitrust approval from the Competition Commission and/or Tribunal. The Financial Surveillance Department of the South African Reserve Bank has oversight of exchange control aspects of cross-border transactions. The relevant sector-specific regulator may also play a role.
Exchange control laws
Approval of the South African Reserve Bank, usually through authorised dealers, is required for most movement of capital and funds in and out of borders. South Africa’s exchange control regulations focus on promoting a stable currency and preventing capital flight. However, this should not be seen as a restriction, since all that is required is obtaining relevant approval upfront by showing that the transaction is for fair value and on arms-length terms.
The National Treasury is further relaxing requirements to encourage investment, moving away from a conservative approach that disallowed any capital flows without permission to an exceptions approach with pro-investment allowance of all capital flows, save for a limited list of risk-based capital flow measures.
Broad-based black economic empowerment (B-BBEE) is a unique and central part of South Africa’s economic transformation strategy to decrease racially based income inequalities. In terms of the B-BBEE Act and procurement legislation, every organ of state and public entity is legally bound to take into account and, as far as possible, apply codes in determining criteria for issuing of licences and procuring services.
Companies are scored on the extent to which they meet targets linked to previously disadvantaged person ownership, management, procurement and other metrics. There is no “hard law” requiring that any private entity must meet specific B-BBEE targets in terms of sector-specific legislation and licence terms, apart from certain strategic sectors such as mining, telecommunications and gaming.
However, there is a commercial imperative to strive to improve any company’s B-BBEE rating to the extent that it will be doing business with local companies or government entities that consider B-BEE important for their own procurement score.
Competition and antitrust laws are regulated by the Competition Act, which prohibits any anti-competitive behaviour such as price-fixing, bid-rigging, market allocation and abuse of dominance. It also regulates M&A, prohibiting any transactions that would substantially lessen or prevent competition in the market. The Competition Commission and Tribunal have the power to investigate and prosecute any violations of the competition law, which can lead to fines, divestitures and other penalties.
South Africa has a well-educated and skilled workforce, particularly in finance, engineering and technology, making it an attractive destination for companies seeking to establish operations on the continent. It also has a highly regulated labour environment, with various laws and regulations governing the relationship between employers and employees.
Foreign investors must be aware of the labour law landscape in the country. The Constitution and Bill of Rights protect workers’ rights, and labour laws are designed to promote social justice, economic growth and employment creation. There are various laws and regulations that govern employment contracts, including the Basic Conditions of Employment Act, Labour Relations Act and Employment Equity Act.
It is notable that South Africa has a strong labour union movement, with many workers belonging to trade unions that negotiate collective bargaining agreements with employers. Strikes and other forms of industrial action are common, and the labour laws provide for procedures to be followed in the event of a dispute between employers and employees. Compliance with labour laws and regulations is strictly enforced and penalties for non-compliance can be severe.
It is important to seek legal advice and assistance when investing in South Africa, clearing the way for successful investment. To quote South African President Cyril Ramaphosa: 'We invite you to be part of South Africa’s growth story.'
This article was first published by Asia Business Law Journal here.