Q: What is TGR’s legal speciality?
A: TGR Attorneys is a black-owned law firm specialising in all aspects of corporate and commercial law. Among our many teams, we have professionals in M&A, general corporate and commercial, banking and finance, competition, commercial litigation, mining law and real estate.

The M&A team is the largest in the firm and renders services in a wide range of areas in commercial ventures. We regularly advise our clients on M&A transactions across the continent. In this way, we have formed strong partnerships with law firms throughout Africa.

Q: How is the current business sentiment in both SA and Africa as a whole shaping the M&A environment?
A: The ‘perceived’ ease of doing business in any country certainly shapes and influences M&A activity. For instance, the role and competence of government agencies – including but not limited to the judicial system – are key and important considerations for investors.

Two great examples of this are currently in play – the Mining Charter (which, on being released for public comment, was heavily criticised by an important stakeholder, the Minerals Council South Africa), and the release of an open letter from Telkom’s CEO addressed to political parties, which makes recommendations for fixing the economy. Issues such as these affect M&A activities as regulatory certainty is fundamental to savvy investors.

Q: M&A requires in-depth due diligence, given the complexity of risk. How does this influence your approach?
A: Businesses thrive on taking calculated risks. The aim of due diligence in M&A transactions is not to eliminate risk completely but rather to identify risks for investors; formulate strategies to work around the risks identified, if any; and allow investors to make an informed decision when concluding M&A transactions.

As legal advisers, it is our role to thoroughly investigate a target company and provide a report for investors, outlining the potential pitfalls on acquiring a target – the red flags so to speak – to enable clients to consider strategies of mitigating those risks. The outcome of the due diligence informs the acquiring party’s decision to continue with the purchase, go back to the negotiation table or to walk away from the deal completely.

Q: Please describe these aspects of due diligence
A: In conducting a due diligence exercise, we compile and submit a bespoke due diligence questionnaire, setting out a list of issues that we require information on, and which must be completed by the target company. The scope of due diligence varies from deal to deal. Often for a comprehensive due diligence exercise, the questionnaire focuses on, inter alia, corporate documents relating to organisational structure; incorporation and constitutional documentation of the target company; details of the capital structure particularly in relation to the shareholders (with the view to understanding the ultimate beneficiaries of the shareholding); information pertaining to borrowings, financing and liabilities; material contracts; employees and employee benefits; pending litigation; information pertaining to politically exposed persons; immovable property; intellectual property; tax and exchange control; and general regulatory compliance.

In circumstances where time constraints apply,or to save costs, an acquiring company may only be interested in having a limited due diligence conducted on the target company. In such a case, our role as legal advisers would be to ascertain ownership of the shares and/or assets to be acquired, identify material risks and liabilities, and establish change-of-control provisions set out in material contracts that may be triggered by the acquisition.

Q: Do you help clients identify a target for an M&A?
A: Yes, especially if a client has a good, sound business idea, we will facilitate a business relationship with a suitable party. Our selection of potential target companies is largely dependent on our client’s commercial needs. In some instances, our client will have a sound business idea but may not be in possession of the required funds to proceed with a transaction. We would then facilitate a relationship between the client and investors or investment companies. In other instances our client may want to dispose of a minority shareholding to a BEE entity for transformation purposes, in which case we would introduce our client to suitable BEE individuals or entities. Alternatively, our client may be an investment company looking to acquire assets, in which case we will facilitate a relationship between our client and companies looking to expand.

Q: Who assesses the business value of an M&A target business?
A: The valuation of a business falls outside the purview of legal advisers and is determined by corporate finance advisers following a thorough financial due diligence. However, the outcome of legal due diligence is instructive to corporate finance advisers in making an informed valuation of a business. The corporate finance advisers will also have to take note of the outcome of the technical due diligence.

Q: What market trends impact this practice area?
A: There are numerous factors that at times maybe industry specific. For instance, in the minerals sector, the demand and global price of a given commodity or mineral may have a huge impact on M&A activity. The cost of the transaction itself, or the cost of the capital, is also a significant market factor. This is why credit ratings are important, as they speak to investor confidence.

With the introduction of empowerment legislation (namely the B-BBEE Act), the requirement to meet BEE ownership targets has also greatly impacted the deal-making environment. Various sectors of the economy – including tourism, marketing, advertising and communications, property, forestry and agriculture, petroleum, mining, transport, construction, ICT and finance– have introduced sector codes and charters to facilitate transformation in these industries. This has directly resulted in an increase in M&As across the board.

Q: How regularly does the law change with regard to M&As?
A: Whereas the Companies Act, 71 of 2008 (read with the regulations thereto) and the JSE listings requirements are the key pillars in M&A from a legal perspective, they are a melting pot of legislative prescripts. The Companies Act is generally static. Other legislation, especially industry-specific legislation (for example, in the banking, mining and communications sectors), changes on a fairly frequent basis.

Q: In SA, What are the nuances that typically impact an M&A deal?
A: M&As in this country are affected by the political and regulatory environment. A unique feature of SA markets, arising from its history, is that there are many new entrants who may not have extensive experience in concluding M&A transactions. Additional factors that impact M&A deals in SA and Africa as a whole include credit ratings and international investment. If there is political uncertainty or economic instability in a country, international investors become reluctant to invest in that region, and this in turn hinders deal-making.

What’s more, occurrences of corruption and corporate scandals are a turn-off to investors, due to potential reputational risks associated thereto. M&A activity is likely to decline in countries experiencing these challenges.

Q: How extensive is M&A in Africa currently? And are we seeing more M&As as investment opportunities,or cross-border transactions?
A: In past years, M&A activity in Africa was on the rise. The continent is enriched with essential commodities, and deals were often done in Africa to acquire raw materials such as gold, copper and rare earths. Companies with highly developed technologies and engineering sought to exploit these essential commodities. Compared to previous years, however, M&A activity is currently sluggish. Unfortunately, deal activity is influenced by other factors including political and regulatory certainty. According to media reports, the number of M&As in SA halved in 2017 due to political risk and a slow-moving economy.

Analysts, however, are expecting a much busier year ahead. It’s hoped that recent political changes, particularly in Southern Africa, will influence deal activity in a positive way. For instance, the new political dispensation in SA and Zimbabwe could be key to unlocking M&A activity in those countries. This process will not happen overnight but rather will occur once the economic environment normalises and investor confidence is restored, especially among foreign investors that sought to divest in the country.

Until investor confidence is completely restored, it is anticipated that foreign investors will be more selective in assets and avoid investing in heavily regulated sectors – for instance, mining. Rather, safer investments would be made in assets such as the food sector, which could be leveraged into Africa.

By Kerry Dimmer
Image: Clinton Prins
Repro: Karin Livni