Feature

posted 28 Apr 2010 in Volume 12 Issue 10

Regional focus: Africa rising

Last year South Africa recorded its lowest M&A activity by value since 2003, but outbound investment interest and robust regulatory protection promote the country as a key market to move in, says Law Abroad chairman Kerry Underwood.

South Africa’s commercial legal system within which business operates is based on English law and the concepts and statutory framework, combined with a flexible common law system governing contract law. This means that South Africa holds few surprises for English businesses or lawyers.

South Africa is the largest economy in Africa and accounts for a quarter of the continent’s gross domestic product (GDP). Its own GDP in 2008 was US$ 277bn.

Legal entities

There are a number of entities that may be used to carry out business or to invest in South Africa, the most important of which are:

Individually, as a sole proprietor;
Jointly, with others in partnerships;
Through a private or public company;
By the registration of a juristic person incorporated outside South Africa as an “external company” in South Africa ;
A trust;
A close corporation – a simpler form of corporate entity that does not require an audit, (but close corporations are being phased out by the new Companies Act).

It is not necessary for any person involved to be a citizen or resident of South Africa, but non-resident status can be a problem for banking purposes.

Banking

South Africa’s banking system and financial markets are efficient and well regulated. The central bank, the South African Reserve Bank contains a Banking Supervision Department, which regulates local and foreign banks and deposit-taking institutions. Banks are monitored, and their activities regulated, by various bank acts.

Foreign banks can establish local branches in South Africa in accordance with the Banks Act 1990. ABSA is wholly owned by Barclays. Standard Bank is partly owned by Lloyds.

South Africa’s banking system has not been subjected directly to the sub-prime problems affecting the banking systems of Europe and North America.

One serious drawback for foreigners doing business in South Africa, however, is that it is impossible to have a South African bank business account without one of the directors or owners being a South African national or having temporary residence status (which is generally only granted after significant investment!)Consequently, if you are setting up a business in South Africa you will need to operate through a UK bank and make arrangements for the transfer of salaries, and so on.

Doing business in South Africa

The South African government refers to ‘Five Key Aspects to Assure Investors’, and lists them as a stable democracy; a sound monetary policy; free market principles; its constitution; and its status as an emerging market.

South Africa’s GDP growth for 2008 was 3.1 per cent and inflation for 2009 was 7.2 per cent. South Africa’s stock exchange is the 17th largest in the world. South Africa itself is the world’s 22nd largest economy.

The South African government also has a Business Process Outsourcing Incentive Fund for South African and non-South African investors, establishing projects that are primarily to serve offshore clients.

Sub-Saharan Africa’s economy generally is also booming, with average GDP growth of 4.5 per cent in 2009 and recent discoveries of vast oil deposits off the coasts of West and East Africa.

South Africa refers to itself as the ‘gateway’ to 200 million sub-Saharan Africans. That is a gateway both to a significant and emerging market and to a huge pool of low-cost labour.

Undoubtedly, part of the reason for “Africa rising” is the low base from which it starts, but that still makes it potentially very attractive for law firms to base part of their operation there.

According to the World Bank’s Doing Business 2010 South Africa, the country is ranked 34th out of 183 for ease of doing business. This ranking is derived from ten separate factors (see table).

Getting credit

One area where South Africa scores very well, and a crucial area in the current economic climate, is in getting credit, where it is ranked second in the world with only Malaysia outranking it.

The ranking is not just about the ease of getting credit, however, but also about the legal rights of both borrowers and lenders.

With 10 being the maximum, South Africa also scores nine in terms of the strength of legal rights index and has done so for the last three years. In terms of depth of credit information it scores a maximum six out of six, and again has done so for the past three years. Depth of information measures the extent to which the rules of a credit information system facilitate lending based on the scope of information distributed, the ease of access to information and the quality of the information.

Protecting investors

The country is also ranked 10th out of the world’s 183 countries for protecting investors.

In its introduction to this section, the World Bank says: “Companies grow by raising capital, either through a bank loan or by attracting equity investors. Selling shares allows companies to expand without the need to provide collateral and repay bank loans. However, investors worry about their money, and look for laws to protect them”.

A 2007 study by Doidge, Kardyi and Stulz found that the presence of legal and regulatory protection for investors explains 73 per cent of the decision to invest, with company characteristics explaining only between four per cent and 22 per cent. Good protection for minority shareholders is also associated with larger and more active stock markets.

Legal services in 2010

The South African legal profession is very closely based on the system in England and Wales and is divided into two branches: advocates (barristers), who are briefed by attorneys (solicitors). As in England and
Wales attorneys (solicitors) may work in partnership, but advocates (barristers) may not. Senior counsel (SC) are the equivalent of Queen’s Counsel.

Attorneys who have practised for three years may appear in all courts. Judges are generally drawn from the ranks of advocates.

The South African legal profession is facing a shake up as a result of the Legal Practice Act, however, which will change the structure and governance of the profession, although not as radically as the Legal Services Act 2007 will alter the delivery of legal services in England and Wales.

English law firms cannot practise South African law in South Africa, but they can operate as law firms carrying out English legal work, and thus can take advantage of lower overheads, especially lower labour costs.

Legal secretarial work is now carried out by at least two companies: Law Abroad Secretarial Services (part of my own firm) and Global Secretarial. Law Abroad plc offers a range of legal services to UK law firms.

Meanwhile, Johannesburg-based South Africa law firm Routledge Modise now trades as Eversheds, the UK law firm with which it has had an association for some time.

As for the market for legal services within South Africa itself, there was considerable consolidation in 2007 and 2008, brought about by the merger of several of the larger law firms, but this process slowed in 2009, probably related to concerns about the effect of the credit crunch. The largest South African law firm now has approximately 800 staff.

Turning to commercial legal work, and in particular mergers and acquisitions, 2009 saw a total of 85 deals valued at US$6.8bn, a decrease of 61 per cent by value and 42 per cent by volume from 2008. In 2008, there were 146 deals with a total value of US$17.4bn. At the same time only two ‘mega deals’ were recorded in 2009, compared to seven in 2008. There was also a drop in total deal value from US$9.3bn to US$2.2bn. 2009 saw South Africa’s lowest M&A activity by value since 2003 and by volume since 2005. “This was exacerbated by the collapse of the proposed US$24bn tie-up between telecom giants MTN in South Africa and Bharti Airtel in India due to regulatory concerns,” Mergermarket said in a statement.

The most active industry by value for the full year in South Africa was the energy, mining and utilities sector, with a total value of US$2bn and 12 announced deals, representing 30 per cent of the market by value and 14 per cent by volume.

Mergermarket said the financial services industry saw the most transactions, however, with 21 per cent of overall deal announcements.

According to Mergermarket, UBS Investment Bank took the lead in the financial adviser value tables, advising on four deals with a total value of US$2.7bn. The Swiss bank was followed by Goldman Sachs, which advised on three deals with a value of US$1.9bn. Both firms jumped four spots from their 2008 rankings.

Meanwhile, Deutsche Bank and Deloitte jumped ten and 34 places respectively from their 2008 rankings, claiming third and fourth positions. South Africa’s Standard Bank, which advised on seven deals with a total value of US$906m, topped the financial advisor volume table, an improvement of three places on 2008.

In the legal advisor league tables, South African law firm Edward Nathan Sonnenbergs ranked first by value and third by volume, having advised on 18 transactions with a total value of US$2.7bn.

DLA Cliffe Dekker Hofmeyer followed with 20 deals worth US$1.5bn, but according to the Ernst and Young round up of current mergers and acquisitions activity, released on 24 March 2010, DLA is now the current market leader. Werksmans maintained its status as the most active firm in the region however, with 22 deals valued at US$981m. Looking ahead, Mergermarket said it expected 2010 to be “a tough one”.

However, Vernon O’Connell, director of Durban law firm V O’Connell Inc and a keen observer of the legal scene in South Africa and the UK, sees opportunities for firms in the market.

“My impression is that the large players have not felt the squeeze as hard as firms in the UK or the US. This is probably due to the fact that South Africa simply did not feel as much pain during the credit crunch as did the rest of the world. Most of the larger South African law firms appear to recognise the opportunities presented by the emergence of Africa as a new market, and at least one of them has the declared intention of expanding aggressively into other African countries”.

Offshore appetite

In its report Law firm of the 21st century – The clients’ revolution, Eversheds states:

“The greatest change over the past two years has been among clients whose appetite to outsource and use technology has increased. Thirty eight counsel were actively implementing or considering outsourcing low-level work to low-cost jurisdictions and a further 29 per cent were receptive to the idea of outsourcing provided they had suitable work... However, their shift in attitude is not equalled by private practice: 56 per cent of clients reported that they had not received offers of alternative resourcing from their external advisors as a result of the recession.”

Thus, law firms in the UK are not keeping up with their clients’ demands for offshoring.

The Eversheds report says that commercial clients will expect their legal service providers to make use of the full range of options to ensure that work is done at an appropriate level and cost, and that the options will include low-cost jurisdictions, technological solutions, legal process outsourcers, legal publishers, premium law firms and the in-house legal department.

“In South Africa there is, at last, considerable interest in the subject of legal process outsourcing, due in no small part to the opening of Law Abroad plc’s offices in Durban and Cape Town, and the appetite on the part of government for a bigger piece of the business process outsourcing pie,” says O’Connell.

He also believes that the profiling of South Africa during the World Cup will have a positive effect on promotion of the country as an LPO destination.

‘Africa Rising’ looks set to apply to legal services in South Africa as much as to other sectors in the country and in sub-Saharan Africa generally.

– KerryUnderwood@underwoods-solicitors.co.uk