Economic drivers combined with globalisation and the urgent needs for companies to increase their market share are increasingly pushing them to enter into business relationships with other companies in the form of asset or share purchases.
In spite of the continent’s size, no more than 3% of the global merger and acquisition (M&A) market is involved in M&A activities in Africa. Furthermore, according to the African Development Bank, M&A deals on the continent totalled $27 billion in 2011 down from $44 billion in 2010.
Energy, mining and utilities sectors are expected to remain the main sectors for takeovers in the continent.
1. Why do companies enter into M&A transactions in Africa?
There are multiple reasons for companies to enter into M&A transactions in Africa. . The expected benefits that motivate the companies include among other reasons, strategic and financial considerations.
On the one hand, strategic reasons are the most common catalysts for M&A deals, with the goal of minimizing competition and production costs, whilst also promoting diversification of economic activities.
Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product’s market. This was the case in 2015 when Nigeria’s number two mobile phone company, Globacom, offered to buy Cote d’Ivoire’s fourth largest mobile operator Comium in a $600 million deal.
By buying out one of its suppliers or one of the distributors, a company can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs. If a company buys out a distributor, it may be able to transport its products at a lower cost. In 2016, we advised Tata Motors on a $20 million acquisition of its supplier Unitech Senegal.
A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry’s performance on its profitability. Moreover, M&A transactions can lead to a diversification of risk because the company’s investments lie in different classes of assets, helping the return from the total portfolio of assets to be stable.
On the other hand, in terms of financial considerations, companies enjoy a series of financial benefits through M&A transactions. Mergers frequently offer tax benefits to a company, thereby reducing its financial burden. M&As also increase a company’s debt building capacity, because more stable earnings act as assurance to lenders
These opportunities for economic development were understood very early on by African countries, which responded by enacting regional competition legislation, such as through the “Organisation pour l’Harmonisation en Afrique du Droit des Affaires” (OHADA, translating as the organisation for the harmonization of business laws in Africa), in order to improve market conditions and attract investors.
2. OHADA as a tool for a sub regional integration
OHADA is a system of business laws and implementing institutions adopted by 17 West and Central African nations on 17 October 1993 in Port Louis, Mauritius.
The OHADA framework currently regulates eight areas of business law (commercial law, corporate law, securities, debt recovery and enforcement, bankruptcy, arbitration, accounting and transport.
The preamble and Articles 1 and II of the OHADA Treaty set out, in general terms, its purpose and scope. The main objective is to create a better investment climate to attract investment in order to foster more growth in this market, which includes 225 million of Africans.
3. The different steps of the M&A process
The provisions of Articles 189 to 199 of the OHADA Uniform Act on Companies contain general provisions dealing with three different types of restructuring: mergers, scission and partial business transfers, regardless of the type of company concerned.
According to these Articles, a merger is a transaction whereby two companies join to form a single company, either by the creation of a new company or by the absorption of one company by the other.
A scission is defined as being a transaction whereby a company’s assets and liabilities are shared out amongst several existing or newly created companies. A partial business transfer is a transaction whereby a company contributes an autonomous division of its activity to another existing or newly created company.
Generally, when we act for companies entering into M&A transactions, our diligences mainly consist in three steps out of the preliminary analysis and feasibility study.
The first step involves the signature of an engagement letter between the entity and the Law Firm to outline the scope and terms of the assignment. Attention should also be born on primary considerations such as whether the acquisition will be financed through debt or equity, or a combination of both.
The pre-acquisition is the second step. It includes the due diligence exercise, which consists in completing an exhaustive evaluation of the target company (review of the employment contracts, financial matters, litigation) or the acquiring company. It needs to be tailored to each particular transaction because if you are in the seller side you also need to know the company you merger with.
The due diligence process allows the counsel to see exactly what is the value of the targeted company and to assess the risks.
At the end of this step, we draft a due diligence report outlining the outcome of our work. This report should mention (a) that the project is viable because we have found nothing that can jeopardize it or (b) we have encountered problems that may jeopardize the process and what should be done to address the issues.
A few weeks ago, the corporate diligence team that I lead was involved in a major M&A deal for a multinational beverage company. The scope of work was to summarize the terms of every contract and to flag any significant issues. In the course of our review of the different contracts, we realized that the seller was not the legal owner of the land on which his plant was located but it was rather a lease.
Obviously, this was an important fact since the value of the transaction had been substantially reduced because the land was not the ownership of the seller. This issue was flagged for our client and the seller was required to negotiate the ownership of the land in order to pursue the deal.
In principle, if the conclusion of the due diligence is not conclusive, the client cannot go through the third steps.
This final step is the process of the acquisition per se. In this stage we advise the company on the negotiating, the drafting and the reviewing of the contracts until the signing of the deal. We also assist the client on the registration at the Trade Registry and the Tax Office.
The pre-acquisition is the most important steps of the process as it will involve counsels from every department of the law firm: corporate, real estate, tax, litigation, IP, etc.)
The job of the counsels is to summarise the terms of every contract, financial document and to flag any significant issues, which will then be folded into a formal “red-flag” memo to the client.
Finally, the Uniform Act provides for a range set of legal formalities required in connection with M&A projects. Among the most important requirements are: the formalities at the Trade Registry, the report of the Board of Directors, the report of the auditor, the collective decision-making by the general meeting of shareholders.
4. Legal effects of the M&A transactions
M&A transactions result in three major legal effects, which are:
- The complete transfer of the assets of the absorbed company;
- The winding-up, without liquidation, of the absorbed company, and;
- The increase of the capital of the absorbing company.
The transfer of assets means that all the assets and liabilities of the absorbed company are transmitted to the absorbing company, even if they were not all included in the restructuring agreement, including the absorbing company being obliged to pay a debt of the absorbed company, even if it did not appear in the restructuring agreement.
Consequently, it is crucial to emphasise the importance of undertaking the due diligence investigation. A comprehensive due diligence will enable to validation of the value of the transaction and identify risks as well as the future obligations which have not yet materialised in the accounting and corporate documents.
5. The advantages of undertaking M&A in the OHADA space
There are a number of advantages for investors relying on OHADA law to enter into M&A transactions. In many African countries, the national laws are out of date, uncertain and in some cases, unpublished. Consequently, this situation proves to be a major obstacle for investors wishing to enter into M&A business in these countries.
With the harmonisation of the laws, investors benefit from a secure and stable legal framework common to 17 African countries. Otherwise stated, an investor can operate in any OHADA country with the confidence that the law remains the same.
In addition, the OHADA system also offers judicial stability and better access to justice for businesses with cross border transactions. Foreign companies can arbitrate a dispute through the OHADA Common Court of Justice and Arbitration or through national courts, whilst still having the option of arbitrating elsewhere.
M&A transactions are often made complex by the necessary coordination of various subjects such as: corporate law, labour law, tax law, occupational health and safety law. However, to date, the harmonization of business law in the OHADA space only takes into account corporate law.
Therefore, for a company aiming to enter into M&A transactions in several OHADA member states, one of the biggest challenges would be to deal with different law and constraints from different countries at the same time.
As an example, a leading insurance company, whose medical branch had decided to acquire hospital infrastructure, conducted a recent M&A operation in Côte d’Ivoire. The main challenge during this operation was to bear in mind that since the medical sector is a regulated activity. In buying the assets or effecting a change of control through acquiring the majority of shares, the purchasers had to ensure that the holder of the ministerial authorisation to conduct the medical activity continued to be a shareholder in the new company.
Tax law also exhibits major differences depending on the OHADA member state where the M&A transaction takes place. For example, in Senegal, all transfers of shares are subject to a 1per cent tax on the price of the transfer, whereas in Mali, a flat registration fee of XOF 6,000 is applied, regardless of the amount of the transaction.
Particular attention should also be given to the administrative contracts made between the absorbed company and the State. The issue here would be to determine whether an absorbed company that has an operating license, authorisation or concession could transfer that benefit to the absorbing company.
In addition, the majority of OHADA member states are from the civil law system. As such, the involvement of the notary is required in certain jurisdictions to authenticate the deems related to the M&A transaction. Consequently, this situation entails additional costs since the notary’s fees are calculated on the total amount of the operation.
To conclude, OHADA generally provides an attractive framework for M&A transactions for foreign investors as it regulates eight areas of business law common to 17 sub-Saharan countries as well as a common Court of justice and arbitration, which is competent for recognition and enforcement of the awards in OHADA member states.
However, the OHADA system still has some weaknesses that may have impact on restructuring or M&A operations. For these reasons, there are plans underway to harmonise other areas including competition law, intellectual property law, banking law, labour law, and evidence and contract law across the region. However, with the law as it currently stands, vigilant due diligence enquiries and negotiations will ensure that risks are minimised in the M&A transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
*Associate and Head of the Corporate Department at Geni & Kebe Law Firm.
LLB (Dakar), LLM (University of Pretoria), Diploma on Business Law and International Protection of Human Rights
 “Fusions et Acquisitions en Afrique”, Groupe de la Banque Africaine de Développement, 2012 available at (accessed on 24th March 2017) https://www.afdb.org/fr/blogs/afdb-championing-inclusive-growth-across-africa/post/mergers-and-acquisitions-in-africa-10163/.
 n2 above.
 M&A Africa: Top 8 deals that took place in 2015 available at http://afkinsider.com/109931/africas-top-10-mergers-and-acquisitions-deals-in-2015/2/
 Benin, Burkina Faso, Cameroon, Central African Republic, Comoros, Congo, Ivory Coast, Gabon, Guinea, Equatorial Guinea, Guinea Bissau, Mali, Niger, Senegal, Chad and Togo.
 B. Le Bars, “Droit des sociétés et de l’arbitrage international”, Joly Editions, p.269.
 n6 above, p. 272.
 S. Edward Walker “The importance of Due Diligence in M&A Transactions”, 2016
 Trinity Law Firm, The Harmonisation of business law in Africa & its impact on investors.
 A. Imboua-Niava, O. Henri Tella & H. Kouao “Ivory Coast, Mergers & Acquisition 2016 5th Edition” 2016.