In the last few years, there has been an increased focus on the potential for multinational companies (including leading Japanese companies) to pursue M&A transactions in Africa. Not only is foreign investment in the traditional extraction industries now booming across large areas of the continent but we are also witnessing huge growth in other sectors, notably telecoms, technology, infrastructure, construction, and consumer goods.
Indeed, M&A activity in consumer facing sectors has doubled in 2012 as compared to the previous year and there have been a number of record sized M&As on the continent in recent years, such as Wal-Mart Stores Inc's US$2.4 billion acquisition of Massmart Holdings Ltd, South Africa in 2011 and Bharti Airtel's US$10.7 billion acquisition of Zain’s 15 African mobile networks in 2010.
Japan's increased focus on Africa
On 1 June 2013, Prime Minister Shinzo Abe opened the fifth Tokyo International Conference on African Development with the following words: "Together with Africa, Japan will Prosper, Together with Japan, Africa will Thrive." At the conference, US$32 billion of investment to Africa over the next five years was also announced.
Real steps are also being taken to facilitate this investment. For example, earlier this year Mozambique and Japan signed a bilateral agreement, the first investment agreement of its kind that Japan has signed with a sub-Saharan African country, in order to liberalise, promote and protect Japanese investments into Mozambique.
It is worth noting that Japan's level of investment into Africa is still low compared to the UK, France and China – to put this into context, Japanese investment into Africa is around 10% of that of China in recent years. However there are still some clear examples of large-scale investments by Japanese companies in Africa, such as NTT's acquisition in 2010 of South African IT firm Dimension Data in a US$3 billion deal.
Africa: A legal and cultural overview
In terms of a brief overview of the continent, Africa comprises 54 countries, currently has a population of over a billion people and is predicted to have over 1.5 billion inhabitants by 2035 (comprising 20% of the world population). In recent years, sub-Saharan Africa has also been experiencing steady economic growth of around 5-6% in GDP, which has led to a growing middle class and increasing urbanisation. In fact, the combined GDP of Africa's 54 nations makes it the fifth largest economy in the world after the United States, China, Japan and India.
However, despite the obvious potential of an economy of this size, there remain significant challenges. Foremost among such challenges is the political climate of many of the continent's nations. While we have seen a period of relative political stability and reduced conflict in many regions of the continent over the past decade, recent events in Egypt highlight that even the most politically stable countries can quickly develop explosive political problems.
M&A specific issues for Japanese companies looking to invest
While political risk applies to any transaction in politically unstable regions, there are a number of considerations that Japanese companies should be particularly aware of when considering M&A transactions in Africa.
Local law and regulatory considerations
One of the key issues that Japanese companies will need to address in relation to their M&A transactions in Africa is the need to recognise that there is no single African legal or regulatory regime. While the legal regimes can generally be divided into three major systems (common law, civil law and Sharia law), there are often significant divergences even in countries based on similar legal systems. Therefore, it is necessary to pay close attention to local laws, particularly in the realm of tax, employment, land and security, as local law may apply in these spheres notwithstanding the choice of law elected in the M&A documentation.
In addition, local law will of course apply to any local company which is incorporated or acquired by a foreign investor. Ultimately, this is important when setting up local companies, conducting local due diligence, drafting local transfer documentation and obtaining local legal opinions. State entities and government organs are also likely to play a significant part in any deal and this will require careful attention and understanding of these bodies, in particular identifying the underlying motivations of individual ministries/regulatory bodies.
In terms of local regulatory issues, there will be a wide range of factors to consider at an early stage, including merger control regimes, foreign direct investment regimes, foreign exchange control, and local licence requirements. Having contacts on the ground with government and regulators are particularly important. Caution should however always be exercised when dealing with local authorities, including information flows and anti-corruption considerations.
Other key considerations on any M&A deal
With the state often taking a close interest in the deal, there are also a range of political risks which should be considered when drafting M&A documentation, including:
- change of law or arbitrary application of the law;
- direct or indirect expropriation;
- renegotiation risk;
- force majeure events such as natural disasters or war/civil unrest/terrorism; and
- ensuring bilateral investment treaty protection.
In terms of financing, it is often legally impossible in Africa to take a comprehensive security package and so it is necessary to assess what is possible by reference to market practice for international financings in the relevant country. It will often be necessary to think creatively, for example, giving consideration to whether equivalent forms of security are available, and/or what the true implications are of not obtaining necessary consents.
Also, not surprisingly, it is often necessary to ensure that corruption and bribery risks are addressed both in the due diligence as well as the M&A transaction documentation. Relevant corruption and anti-bribery laws for Japanese companies include not only Japanese laws and local laws in respect of the target's home jurisdiction(s) but also legislation such as the US Foreign Corrupt Practices Act and the UK Bribery Act 2010 which can impact Japanese companies regardless of the jurisdiction of the target.
Post integration issues are also a concern in any M&A transaction but such issues are of particular concern in African M&A given the significant cultural, linguistic and social differences between Japan and most African nations.
Finally given the lack of an independent and sophisticated judiciary in certain jurisdictions, the possibility of disputes and mitigation of that risk needs to be contemplated from the outset, with considerations on choice of arbitration forum and ability to enforce any decisions (such as under the New York convention) paramount.
The role of international counsel
The choice of local counsel with expertise in M&A matters and exposure to cross-border M&A activities (particularly as they relate to Japanese companies) is essential when pursuing M&A activities in Africa. Experienced international counsel such as Herbert Smith Freehills can assist Japanese companies by working alongside local lawyers where necessary, for example with (i) deal management and coordination; (ii) problem solving and application of wider experience; and (iii) ensuring quality control.