South Africa's strategic location, rich resources, and sizable consumer market make it an attractive destination for foreign investment. Its robust infrastructure, financial sector, and political stability further enhance its appeal, but investors should approach its distinctive business landscape with caution to unlock its potential.
South Africa embraces foreign direct investment (FDI) with few restrictions and incentives, including tax benefits. Support for small businesses, strategic projects, and exporters is encouraged. The Department of Trade and Industry and Competition provides incentives for competitive new enterprises and sustainable industries.
International Cooperation and Agreements
South Africa actively engages in international organisations, cooperation agreements, and treaties to encourage foreign investment. Membership in initiatives like the African Continental Free Trade Area (AfCFTA) Protocol enhances its appeal to investors, fostering intra-continental trade and investment liberalisation.
Legal Protections for Foreign Investors
South Africa provides foreign investors with legal protections equal to domestic investors under the Promotion and Protection of Investment Act and constitutional property rights, enhancing their investment security.
While South Africa does not have comprehensive legislation limiting foreign ownership, sector-specific regulations apply in strategic sectors such as energy, mining, banking, telecommunications, and defence. These regulations are designed to ensure that foreign investments align with national interests and policies in these vital areas.
National Security Provisions
Amendments to the Competition Act include national security provisions for notifiable mergers, pending full implementation, aligning South Africa with international trends.
Despite its many advantages, South Africa also faces some challenges that could deter foreign investment, such as:
Public companies are listed on a stock exchange and are required to comply with a number of additional regulations. Private companies are not listed on a stock exchange and are subject to fewer regulations.
Personal liability companies are a relatively new type of corporate entity in South Africa. They offer the limited liability protection of a company, but they are also subject to some of the same regulations as close corporations, such as a requirement for a minimum of two members and a maximum of 20 members.
Close corporations are a type of corporate entity that is designed for small businesses. They are subject to fewer regulations than companies, but they also offer less flexibility.
Partnerships are the simplest form of business structure in South Africa. They are not separate legal entities, and the partners are personally liable for the debts and liabilities of the partnership.
Foreign companies can also conduct business in South Africa by registering as external companies. However, the most prevalent choice among foreign companies is to establish a private limited liability company. This option is cost-effective and straightforward, and it allows businesses to operate in South Africa without having to establish a physical presence in the country.
The best corporate legal entity for your business will depend on your specific needs and circumstances. Factors to consider include the size of your business, the type of business activities you will be engaged in, and your risk tolerance.
Acquiring or merging with private companies involves methods like share sales, business sales, amalgamation, merger, or share issuance, providing flexibility for structuring transactions based on specific goals and needs.
Acquisition Strategies for Public Companies
Listed public companies in South Africa utilise various strategies for mergers and acquisitions, such as schemes of arrangement, tender offers, asset sales, mergers, or amalgamations, each with its pros and cons.
-The case of public companies, the following acquisition strategies are commonly employed:
Stake-Building and Shareholder Disclosure
Prior to launching an acquisition offer, it is common practice to build a stake in the target company. South African law now mandates shareholder disclosure requirements. The minimum mandatory offer threshold is set at 35%, and the squeeze-out threshold is at 90%. Typically, initial negotiations are conducted confidentially, with disclosure becoming necessary if the confidentiality of price-sensitive information cannot be maintained.
Contractual Arrangements and Considerations
A contractual arrangement varies with bargaining power, including standstill, exclusivity, and non-solicitation clauses, often with break fees and matching rights, subject to regulations. Consideration can be in cash, shares, or a mix.
-Some common contractual arrangements include:
Irrevocable Undertakings and Regulatory Compliance
Irrevocable undertakings are typically secured shortly before formal offers are made, with the aim of minimising the window of restricted trading. South African law imposes statutory obligations on directors to act in the best interests of the company and places restrictions on actions that could obstruct a transaction once a genuine offer has been presented.
Rising Shareholder Activism and Due Diligence
Shareholder activism is gaining prominence, particularly concerning issues related to environmental, social, and governance (ESG) matters and executive remuneration. Consequently, due diligence in the M&A process is becoming increasingly comprehensive, encompassing a wider range of factors, including ESG considerations and other relevant aspects.
In South Africa, key regulatory bodies for private companies include the Companies and Intellectual Property Commission and the Companies Tribunal. For public companies or those meeting specific criteria, the Takeover Regulation Panel oversees takeovers and related transactions.
In South Africa, cross-border capital and fund movements typically need South African Reserve Bank approval through authorised dealers. These regulations aim to maintain currency stability, prevent capital flight, and ensure fair and approved transactions, not as strict restrictions.
Evolving Treasury Policies
The National Treasury has been gradually relaxing exchange control regulations in recent years. This is in line with the government's objective of promoting foreign investment and economic growth.
Some examples of the recent changes to the exchange control regulations include:
South Africa's economic transformation relies on Broad-Based Black Economic Empowerment (B-BBEE) to address income inequality. Government entities must legally consider B-BBEE codes for licences and procurement.
Companies are assessed on B-BBEE targets in areas like ownership, management diversity, and procurement practices. Legal requirements for specific targets are generally absent in private entities, except in select strategic sectors.
Private entities have a strong commercial incentive to improve B-BBEE ratings, especially when dealing with firms or government entities that prioritise B-BBEE compliance in procurement and evaluations.
In South Africa, the Competition Act addresses competition and antitrust matters, targeting anti-competitive practices like price-fixing and abuse of market dominance. It also regulates mergers and acquisitions to prevent adverse impacts on competition.
Enforcement by Competition Authorities
The Competition Commission and Competition Tribunal in South Africa enforce competition laws, with the power to investigate and penalise violations. Penalties may include fines, divestitures, and measures to maintain fair competition.
South Africa boasts a well-educated and skilled workforce, particularly in finance, engineering, and technology, making it an appealing destination for companies looking to establish a presence on the African continent. However, it is essential for foreign investors to have a firm grasp of the country's labour law landscape.
Advice for Foreign Investors
Foreign investors should carefully consider the implications of South Africa's labour laws when making investment decisions. It is important to seek legal advice and support to ensure compliance with labour laws and to avoid legal repercussions.
Here are some additional tips for foreign investors:
What are the primary incentives for foreign business investment in South Africa?
South Africa offers various incentives to attract foreign business investment, including tax breaks, incentives for small enterprises, strategic industrial projects, and exporters. The government provides support through the Department of Trade and Industry and Competition incentive schemes.
Are there restrictions on foreign ownership of businesses in South Africa?
South Africa generally has no overarching legislation limiting foreign ownership. However, certain strategic sectors like energy, mining, banking, telecommunications, and defence may have specific regulations affecting foreign ownership.
How is foreign investment protected in South Africa?
Foreign investors in South Africa benefit from the legal protection of property rights granted by the constitution. The Promotion and Protection of Investment Act also provides foreign investors with the same rights as domestic investors.
What is the significance of the African Continental Free Trade Area Protocol for foreign investors?
The African Continental Free Trade Area Protocol aims to increase intra-continental trade and promote and liberalise investment across Africa. It has generated interest from investors as it progresses, opening up opportunities for foreign businesses in South Africa.
What are the common methods of acquiring businesses in South Africa?
Common methods of acquisition in South Africa include the sale of shares, sale of business, amalgamation, merger, or issue of shares for private companies. For listed public companies, options include schemes of arrangement, tender offers, sale of assets, mergers, or amalgamations.
How are mergers and acquisitions regulated in South Africa?
Mergers and acquisitions in South Africa are regulated by the Competition Act. The Competition Commission and Tribunal oversee compliance and have the power to investigate and prosecute violations, potentially resulting in fines and penalties.