Foreign Business Investment Strategies in South Africa

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's Foreign Investment

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.

Sector-Specific Regulations

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.

Additional Points

• South Africa's location at the southern tip of Africa makes it a gateway to markets within and beyond the continent.
• The country has a young and growing population, providing a large and growing workforce and consumer market.
• South Africa has a well-developed financial sector and infrastructure.
• The country is committed to sustainable development and renewable energy.

Challenges

Despite its many advantages, South Africa also faces some challenges that could deter foreign investment, such as:

• High levels of crime and corruption
• A skills shortage in certain sectors
• Regulatory uncertainty and red tape

Corporate Legal Entities in South Africa

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

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

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

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.

• Offshore operations

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.

• Which corporate legal entity is right for you?

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.

Methods of Acquiring Private Companies

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:

• Schemes of arrangement: This is a formal process by which a company can make a proposal to its shareholders to acquire another company. The proposal must be approved by a majority of shareholders, and the court must also approve the scheme.

• Tender offers: This is a process by which a company makes a direct offer to the shareholders of another company to purchase their shares at a specified price. The offer must be open to all shareholders of the target company, and the buyer must acquire sufficient shares to gain control of the target company.

• Sale of assets: This is a process by which a company sells all or part of its assets to another company. This can be done on a standalone basis or as part of a larger acquisition transaction.

• Mergers and amalgamations: As mentioned above, mergers and amalgamations can also be used to acquire public companies.

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:

• Standstill agreements: These agreements prevent the buyer and the seller from taking certain actions, such as acquiring additional shares in the target company or disposing of any assets, during the negotiation period.

• Exclusivity agreements: These agreements prevent the seller from negotiating with other potential buyers during the negotiation period.

• Non-solicitation provisions: These provisions prevent the buyer from soliciting votes from the shareholders of the target company during the negotiation period.

• Matching rights: These rights give the seller the right to match any offer that the buyer receives from a third party during the negotiation period.

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.

Oversight by Regulators

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.

• The Companies and Intellectual Property Commission (CIPC) is the government agency responsible for administering the Companies Act and other legislation related to companies and intellectual property.

• The Companies Tribunal is a judicial body that hears and determines disputes arising from the Companies Act.

• The Takeover Regulation Panel (TRP) is a self-regulatory body that oversees takeovers and related transactions involving public companies.

• The Johannesburg Stock Exchange (JSE) is the primary stock exchange in South Africa.

• The Registrar of Securities Services (RSS) is a government agency responsible for registering securities and overseeing the activities of central securities depositories.

• The Financial Services Board (FSB) is a government agency responsible for regulating the financial services industry in South Africa.

• The Competition Commission and Competition Tribunal are responsible for enforcing competition law in South Africa.

• The Financial Surveillance Department of the South African Reserve Bank (SARB) is responsible for overseeing exchange control aspects related to cross-border transactions.

Exchange Control Regulations in South Africa

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:

• The introduction of a single discretionary allowance of R11 million per annum for South African residents to transfer funds abroad.
• The relaxation of the rules on the investment in foreign assets by South African residents.
• The introduction of a number of new exchange control exemptions for businesses and individuals.

Economic Transformation in South Africa

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.

• B-BBEE Scoring for Companies

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.

• Commercial Imperative for B-BBEE Ratings

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.

Regulation of Competition and Antitrust

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’s Labour Laws

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.

• South Africa's labour laws are designed to protect workers' rights, promote social justice, and stimulate economic growth.

• The Basic Conditions of Employment Act sets out minimum standards for working conditions, such as wages, hours of work, and leave entitlements.

• The Labor Relations Act regulates the relationship between employers and employees, including collective bargaining and industrial action.

• The Employment Equity Act promotes the equitable representation of designated groups (black people, women, people with disabilities, and the youth) in the workplace.

• South Africa has a strong labour union movement, and strikes and other forms of industrial action are not uncommon.

• Non-compliance with labour laws can result in severe penalties.

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:

• Develop a clear understanding of the labour laws that apply to your business.
• Consult with your employees and their representatives to understand their needs and concerns.
• Develop and implement policies and procedures that comply with labour laws.
• Provide training to your employees on their rights and responsibilities under labour law.
• Establish a grievance procedure for resolving workplace disputes.
• Be prepared to negotiate with labour unions in good faith.

FAQS

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.