South Africa attracts foreign direct investment

By Christo Els and George Sibanda, Webber Wentzel Bowens.

Following South Africa’s peaceful transformation into a democratic society, the South African government put in place sound macro-economic policies. These policies are now starting to pay dividends, as evidenced by a lowered rate of inflation and a sustained and accelerated economic growth rate. The days when South Africa had to rely on its natural resources to fuel economic growth are long gone. Today, the South African economy is largely driven by manufacturing, buoyant consumer spending and tourism.

Despite economic successes, South Africa, as well as Africa in general, has been slow to attract the foreign direct investment (FDI) that will ultimately make a difference to sustained growth on the African continent. FDI is a broad term encompassing various forms of investment into a particular country, from a source originating outside that country. It is a well-established fact that FDI benefits the countries receiving it: FDI is a conduit to sustainable development and essential in job creation.

There is evidence that the pace of FDI into South Africa is accelerating. Last year saw the two largest FDI transactions in the South African capital market since the first democratic elections took place in 1994: the Absa transaction and the VenFin transaction. In the Absa transaction, Barclays Bank acquired a controlling interest in Absa Bank. Following on Barclays’ heels was another British firm – Vodafone Group Plc, which acquired all of the issued shares in VenFin Limited, indirectly increasing its stake in Vodacom Group, South Africa’s largest cellular telephone operator, to 50 per cent. Webber Wentzel Bowens acted in both these transactions. In the Absa transaction, WWB assisted the target company, Absa; and in the VenFin transaction, the acquirer, Vodafone.

Although FDI may take on many forms, South African attorneys usually get involved in transactions where the investment takes the form of an acquisition of an existing South African business. Such a transaction generally takes the form of a sale of business, a scheme of arrangement pursuant to section 311 of the South African Companies Act or a general offer to the shareholders of the target company.

If the corporate identity of the target company is to be retained, an acquirer usually opts for a scheme of arrangement or a general offer, or even a combination of the two.

A scheme of arrangement involves a court-sanctioned process which requires the support of the target company and the acceptance of the offer by 75 per cent of the scheme members present and voting at a duly convened scheme meeting. Once the approvals have been obtained, the court will be required to sanction the scheme. Once the scheme becomes unconditional, the shares of all of the scheme members are acquired, regardless of whether they voted in favour of, abstained or voted against, the scheme.

On the other hand, a general offer allows shareholders to accept or reject the offer individually (no meeting takes place to approve the offer) and the offeror will only be allowed to squeeze out the minority shareholders if at least 90 per cent of the offerees accept the offer.

Usually, the specific circumstances and regulatory framework within which the target company finds itself, will dictate the method utilised by an offeror to achieve the take-over. Although currently the favoured method is a scheme of arrangement, it is interesting that both the Absa and the VenFin transactions used a form of the general offer.

The Absa transaction utilised a scheme of arrangement for the acquisition of an initial 32 per cent of the target company’s shares, with the balance (up to a controlling interest) being acquired pursuant to a general offer.

The VenFin transaction was structured as a general offer. The offer was ultimately accepted by 98.52 per cent of the offerees, entitling Vodafone to invoke a provision of the Companies Act to squeeze out those shareholders who failed to accept the offer. As at the date of this article (March 2006), the process of expropriating the shares held by minority shareholders in VenFin was still under way.

Significant portions of an FDI transaction in the capital markets involve navigation through complex regulatory frameworks. If the target company is listed, the parties would need to comply with the regulations set out in the Listings Requirements of the Securities Exchange operated by JSE Limited. If the target company is a public company, or a private company with more than 10 beneficial shareholders and a market capitalisation in excess of R5 million, the Securities Regulation Code and Rules of the South African Securities Regulation Panel will apply.

FDIs inevitably also require approval from the Exchange Control Department of the South African Reserve Bank (though, it must be noted, the exchange regulation policies are currently under review) and the relevant Competition Authorities. In certain sectors (such as banking), the approval of the Minister of Finance is also a requirement before an offer may be launched. Empowerment requirements, including compliance by foreign-controlled companies with the various empowerment codes, are also factors meriting consideration in FDI transactions.

Given its status as Africa’s dominant economy, South Africa will remain an attractive opportunity for foreign investors, especially those investors wishing to break into the African market. South Africa can provide high returns for the discerning enterprise wishing to benefit from a strong economic growth rate or entry into the African market. Although the legal and regulatory requirements for entry and investment may be familiar to investors from the UK, it remains imperative that practitioners specialising in FDI transactions consult with their South African counterparts earlier rather than later in a transaction. It is hoped that as FDI transactions into South Africa continue to increase, the legal and regulatory requirements for entry and investment will become more flexible, accommodating and familiar to investors from the UK and other countries.

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