Africa, alongside other emerging economies, presents challenges and risks to investors that are fundamentally different to those in more mature economies.
In the first of a series of publications looking at investing in Sub-Saharan Africa we offer our thoughts, based on our own recent experiences, on some of the key legal considerations for investors in the region. In coming months we will delve into some of these areas in more depth as well as looking at other areas of which we hope will be of interest.
A wider definition of “risk”
The legal risks facing an investor in Africa (and the business they are looking to invest in) are frequently wider and more critical to the progression of deals than is the case in other continents. As a result the legal tools commonly used to minimise or share these risks, such as deferred payment structures, the use of warranties and indemnities and insurance solutions, are often inadequate. Investors may face political, reputational and regulatory issues which will impact on the robustness of key contracts and constrain an investor’s future ability to exit its investment or enforce its rights. There may also be legal and practical requirements to have a local partner which will require further risk appraisal and add further complexity.
It is therefore critical to ensure the correct advisory team with suitable international and local experience is appointed to enable these issues to be identified as early as possible in the process. Communications within the deal team and its advisors then need to be efficient to ensure that the issues that are identified in the diligence process are factored into the early stage negotiations.
Planning for the future
An even greater focus on your exit strategy is critical given the increased number of legal and regulatory hurdles that are likely to be in play. These hurdles may take the form of local ownership rules, on-going indigenisation requirements and the need for tax and exchange control approvals.
A good understanding of these issues will enable you to identify the best way to structure the investment at the outset and mitigate any negative impact they may otherwise have on any eventual exit process. This may be as simple as structuring the investment through an offshore jurisdiction (for example, to avoid the need for local party consents to share transfers). However it may be more complicated, involving advance clearances from exchange control and tax authorities. It will also be important to ensure that the negotiations with any joint venture partner around exit mechanics, including the key transfer clauses dealing with drag rights and deadlock resolution mechanics, are conducted in the context of a proper understanding of the practical issues and constraints that will apply.
A thorough knowledge of available bi-lateral investment treaties and double tax treaties is also required to ensure that structuring considerations are properly thought through.
Preparing for all eventualities
Consideration of the issues surrounding enforceability of judgments should form a key part of the early stage diligence exercise. There is little point in having a well drafted contract governed by English law if there are jurisdictional and practical hurdles in enforcing any judgment in the country in question (whether because the countries involved are not parties to the New York arbitration convention, for example Angola or Ethiopia, or otherwise).
In addition, in multi-jurisdictional transactions, differing rules and customs between the relevant countries may affect process, timing and execution risk (for example, customary and legallyrequired execution formalities in common law systems such as Ghana compared with OHADA jurisdictions such as Benin).
Prioritising key contracts
Finally it is critical to understand that the business you are investing in may be dependent on one or more key concessions or licenses granted by governments, government bodies or regulators. The approach that is taken to ensuring these contracts are robust is fundamental. In some cases political risk insurance may be available but in many cases it will not be, or it will not cover the specific risks that are of greatest concern.