CATALYST // EXPLORING OPPORTUNITIES – M&A l BACK BUT DIFFERENT

Rarely have events accelerated so rapidly or so radically as they have in the course of the Covid-19 pandemic. We expect the crisis to operate as a catalyst for change and, as a result, there will be opportunities for those with capital to invest or a desire to expand. In this briefing we look at how M&A has changed in light of the pandemic and some of the issues that those looking to undertake M&A in the coming months should consider.

In this briefing we look at:

  • current M&A activity levels;
  • what has changed on M&A transactions because of the pandemic;
  • considerations for public M&A transactions;
  • some of the particular features of a distressed M&A transaction; and
  • the potential impact of foreign direct investment controls and merger control on transactions.

For further information on how we expect the pandemic to operate as a catalyst for change, please see our Catalyst hub, and our Exploring opportunities: Investments and Acquisitions guide which looks at some of the structures and issues for those looking to explore opportunities emerging from the crisis.

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MINISTER CREECY CALLS FOR CONSULTATION ON IDENTIFICATION OF GEOGRAPHICAL AREAS OF IMPORTANCE FOR ENERGY DISTRIBUTION

Authors: Justine Sweet and Mandy Hattingh

The Ministry of Environment, Forestry and Fisheries appears to be taking proactive measures to expedite the regulatory processes which underpin the development of energy related infrastructure. On 17 July 2020, Minister Creecy, the Minister of Environment, Forestry and Fisheries (the “Minister”), published various notices commencing public consultations on the intention to identify geographical areas important for the development of:

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EVENT: DIGITAL TRANSFORMATION IN AFRICA

Author: Jenna Cavanagh

 

In collaboration with G3, HSF is hosting a breakfast roundtable discussion on ‘Digital transformation in Africa’ on 12 March in our London office. The discussion will be led by Rohan Isaacs, Martin Kavanagh and Charlie Morgan along with Darcie Allen from G3 and will centre around the opportunities arising from digitalisation in Africa and the practical, regulatory and legal risks that investors need to navigate them.


For more information or to register for the event, please contact Jenna Cavanagh or your usual Herbert Smith Freehills:

Jenna Cavanagh
Jenna Cavanagh
Senior Business Development Executive, London
+44 20 7466 2301

THE 2020 MSGBC SUMMIT – TIME TO TAKE STOCK

Authors: Paul Morton and Bertrand Montembault 

Herbert Smith Freehills is a sponsor of the MSGBC Basin Summit and Local Content Forum taking place in Dakar on 28-30 January 2020. Paris-based Partner Bertrand Montembault will be joining a panel discussion on the business and regulatory environment for operations in the MSGBC Basin, and the event will also be attended by Johannesburg-based Of Counsel Paul Morton. Further details of the event, which is being hosted by the Oil & Gas Council, can be found here. The following article was first published on the Oil & Gas Council website on 21 January 2020.

Herbert Smith Freehills is pleased to participate once again in the annual MSGBC Summit. Now in its fourth year, the event and the region are now firmly established on the African oil and gas agenda. Ahead of the gathering in Dakar this year, we wanted to share some observations from across the continent and the oil and gas sector globally.

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THE BRULPADDA DISCOVERY AND SOUTH AFRICA’S OPPORTUNITY TO CREATE A SUITABLE REGULATORY FRAMEWORK FOR THE UPSTREAM SECTOR

Authors: Peter Leon, Paul Morton and Patrick Leyden

With the momentum of Total’s discovery earlier in the year and the promise of an emerging player in the oil and gas sector, 2019 may be South Africa’s best opportunity to set the legal framework for a successful and productive domestic oil and gas industry.

On 7 February 2019, Total announced a major discovery of gas condensate offshore South Africa, on the Brulpadda prospect on Block 11B/12B in the Outeniqua Basin,1 which is reported to contain around 1 billion barrels of oil equivalent.2 Total described the discovery as ‘opening a new world-class gas and oil play’ and the announcement has certainly generated a lot of interest in the South African press. The upstream industry has also taken note and South Africa now features heavily in conversations about exploration on the African continent. Although there has been much speculation on the potential contribution to the South African economy, it is clear that reserves of this magnitude have the potential to transform the energy mix in the country and contribute significantly to public revenues.

Total and its partners plan to continue their assessment of the Brulpadda discovery through further seismic surveys and a number of further exploration wells later in 2019. In the meantime, the discovery has put the spotlight on the regulatory regime governing the upstream sector in South Africa. Oil and gas is covered by the same legislation in South Africa as mining, namely the Mineral and Petroleum Resources Development Act of 2002 (the “MPRDA”). The MPRDA is a regular feature in the South African news, most recently during the course of 2018 with the proposed Mining Charter III and the abandonment of the ill-fated MPRDA amendment bill. However, given the historical dominance of the mining sector in South Africa, oil and gas regulation has never been the centre of attention. That is now likely to change.

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ZAMBIA LURED BY THE SIREN SONG OF RESOURCE NATIONALISM

Author: Peter Leon

The government should take note of historical lessons

Zambia, the world’s seventh-largest copper producer, is the latest leading African mining jurisdiction to succumb to the siren song of resource nationalism. In recent years this trend has seen international miners and their host governments in Tanzania and the Democratic Republic of Congo clash over swingeing tax changes and other regulatory imposts.

The government’s current court application, through its state-owned proxy ZCCM Investments Holdings, to liquidate Konkola Copper Mines, a business controlled by Vedanta Resources, has been greeted with alarm and marks the culmination of a three-year clampdown on private, and especially foreign, influence in the mining sector.

In 2017, the Zambia Revenue Authority (ZRA) initiated a mining industry tax audit, claiming it was losing $3bn annually through “illicit financial flows”, mostly in the mining sector. In 2018, the ZRA slapped Canada’s First Quantum with a $7.9bn tax bill, which remains unresolved. In September, the government announced a series of fiscal reforms: introducing a new 5 per cent import duty on concentrates; increasing royalties by 1.5 per cent and making them no longer tax-deductible; while replacing value added tax with a non-refundable sales tax.

The latter is significant, as mining companies were owed $600m in VAT refunds at the end of 2018. Then in January, the ZRA declared it would not pay, claiming that its (unpublished) audit showed mining companies owing more than this in unpaid taxes, penalties and interest.

So why is the government doing this? And why now?

Typically, resource nationalism manifests in response to certain cycles. Most fundamental is the investment cycle. Countries that are rich in natural resources, but lack the capital, operational and technological resources to extract them profitably, adopt liberal legal frameworks and fiscal incentives to entice foreign investors (who may otherwise invest elsewhere, if it promises a better return on their capital outlay).

Once investments are made (and capital sunk), the government may flex its legislative muscle to claim a greater share of the returns than the original laws or licence terms allowed.

Whether a government does this depends on one or both of the following immediate factors. Commodity cycles drive resource nationalism in countries that are highly dependent on raw mineral exports: during a period of price depression, the state receives less revenue from royalties and export duties, but a subsequent surge in prices presents an opportunity to feed the fiscal deficit by extracting higher rents from mining companies.

Electoral cycles also drive resource nationalism in countries that have regular elections with relatively close margins, as incumbent governments often seek to increase their support by exploiting the populist appeal of resource nationalism.

Zambia is no exception, but is in fact a stark exemplar of both price driven and populist resource nationalism.

The country’s finances are extremely sensitive to the price of copper, which accounted for 80 per cent of export earnings in 2016, when copper’s price per tonne reached a 10-year low of $4,800 a tonne, down from its 2010 peak of $8,800. That year, Zambia boasted annual GDP growth over 10 per cent and a fiscal deficit of 3.3 per cent.

But by the end of 2018, after four consecutive years of sub-4 per cent economic growth, the deficit had ballooned to 7.5 per cent of GDP, and Zambia had accumulated over $10bn in external debt (73 per cent of GDP), despite having had most of its debts extinguished under the IMF’s “heavily indebted poor countries” scheme in 2005.

On top of this acute fiscal strain, the government also faces intense electoral pressure. President Edgar Lungu won the 2016 election with just over 50 per cent of the popular vote, only 2 per cent more than his rival Hakainde Hichilema.

After losing a critical by-election in the Copper belt region in April, and facing another general election in 2021, the Lungu administration now claims that the country’s mines were “sold [to foreigners] for a song [in the early 2000s] because Hichilema and his cartel misled then President Mwanawasa”.

It is also true that resource nationalism tends to be contagious. First Quantum’s hefty ZRA tax adjustment resembles those visited on Glencore in the DRC and Acacia in Tanzania during 2017. Both countries, which share borders with Zambia, overhauled their mining codes over the past two years, claiming that the existing regimes unfairly benefited foreign investors at the state’s expense. This created a precedent, as much as popular expectation, for Zambia to follow suit.

While the government’s escalating confrontations with mining companies are driven by tangible short-term fiscal and political gain, the long-term consequences of such measures are likely to be dire.

Zambia should know better about the dangers of nationalisation. The country’s 1970s nationalisations brought economic ruin and IMF structural adjustment, prompting precisely the mining regime liberalisation the government now resents so intensely. If the country continues on its current path it will place the whole economy at risk.

This article was first published on Financial Times: https://on.ft.com/2ImtqER

For more information, please contact Peter Leon or your usual Herbert Smith Freehills contact.

Peter Leon
Peter Leon
Co-Chair of Africa Practice Group, Johannesburg
+27 10 500 2620

MINES AND ENERGY MERGER: TOO MUCH ON GWEDE MANTASHE’S PLATE? – LEYDEN

Author: Patrick Leyden

In a move that is likely to be welcomed by the mining industry, President Ramaphosa has appointed Gwede Mantashe as the Minister of Minerals and Energy (which now combines the Ministries of Mineral Resources and Energy).

During his short erstwhile tenure as Minister of Mineral Resources, Mantashe made significant progress in addressing several fundamental issues that have hampered investment into the South Africa mining industry over the last five years. His decisive action in addressing corruption and maladministration within his Department as well as taking steps to promote regulatory certainty were positively received by both domestic and international investors alike. As a result, South Africa gained twenty seven places under the Policy Perception Index and also made considerable gains under the overall Investment Attractiveness Index in the Fraser Institute’s most recent Mining Investment Survey.

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Stéphane Brabant, co-Chair of the Africa Practice interview with Business Africa Magazine

Business Africa Magazine has published an interview with Stéphane Brabant, who is the co-Chair of the firm’s Africa Practice and a business and human rights specialist, which discusses concerns over respect for the Rule of Law in certain African jurisdictions. 

Translated extracts. The original full interview published in French by Business Africa on 19/04/2019 is available here

Stéphane Brabant, Partner and Co-Chair of Africa Practice Group
HERBERT SMITH FREEHILLS

In collaboration with

Me Syvain SOUOP, Avocat d’Affaires – Souop Law & Finance – Member of the Youandé (Cameroon) Bar Association

As a lawyer and legal practitioner with a focus on Africa, how do you see the practice of law on the continent?
We need to look at things in an African context. When independence came, the first heads of State were focused on building nation-States. The extremely diverse ethnic makeup of these new countries encouraged the development of strong central powers. Unfortunately, in certain countries those powers were misused and the law was not always followed.

Today, we see that the way in which power is exercised in some African countries is still not consistent with what, for the sake of simplicity, I will refer to as the “rule of law”. As understood in the Anglo-Saxon tradition, this means the entire body of laws enforceable over all individuals and entities in a given society. According to Franklin Nyamsi, the rule of law is “Africa’s greatest challenge in the 21st century”.

In your view, what are the main reasons for this?
Some countries lack objective, transparent oversight of the executive and judicial branches. Is this because of solidarity between certain groups of people? Systemic corruption? The reliance of some Governments on the military, or on a harsh security apparatus? The influence of foreign powers or interests? In each case different factors may combine to prevent public institutions from playing their roles fully and effectively.

Yet the number of counterexamples is rising as many countries take steps to resolve these issues. However it will take time and political determination to overcome certain practices. Like elsewhere in the world, this change must begin at the top. Only then can the principles of good governance legitimately be imposed on everyone, spreading to the private sector which sadly has often been “contaminated”.
Along with certain African intellectuals, it could also be reasoned that there needs to be a more coherent relationship between the institutional structures in certain African States and the realities of their cultural environments.

Don’t individuals also bear responsibility?
For political leaders to overstep the powers entrusted to them is almost “human”, but for the sake of the people who elect them, there must be a penalty for doing so. Montesquieu wrote in The Spirit of the Laws that “Experience in all ages has proved that every man who possesses power is inclined to abuse it; he goes on exercising it until he comes up against the limits. Who may say? Virtue itself needs limits”.

The problem is precisely that where there is no rule of law, there is, by definition, no assessment, admissibility or accountability, much less a penalty. In certain countries in Africa, local and foreign investors alike run into situations where the rule of law – and therefore governance – is either lacking or very weak. In such cases, either they ultimately choose not to invest or to withdraw, or they limit the risks as much as possible by protecting themselves through increasingly costly and complicated contractual structures.

On similar lines, isn’t the growth of arbitration also a sign that State legal systems are failing?
Not necessarily. The mechanism of international arbitration is different; selecting the appropriate arbitrators makes it possible to debate a company’s business and argue its disputes on a more international footing, one that is better suited to foreign investments.

It is true, however, that the more unstable a national legal system is, the greater the tendency to opt for arbitration. Certain countries have followed the example of the 17 OHADA Member States, and encouraged the use of arbitration to resolve contract disputes in the interests of greater legal certainty. But arbitration cannot resolve every issue, and many disputes involving criminal or employment law, for example, are exclusively within the jurisdiction of local courts. A State that follows the rule of law therefore remains a key condition for investors seeking legal stability and certainty.

In mining, petroleum or infrastructure projects requiring significant long-term investment, investors generally prefer arbitration for their disputes with host States. It is also worth noting that banks also insist on this type of dispute resolution as a condition to the financing of projects in Africa.

In the end, the most important factor is to develop trust in the national system. To do this, political will is all that really matters, but unfortunately political will is often expressed in words rather than in actions. Everybody ends up disappointed, in particular investors, entrepreneurs and local populations.

Another path worth exploring is structured, voluntary mediation. Here it is worth pausing to congratulate OHADA for having adopted specific laws on mediation, which came into force in 2018.

What political solutions might be found? Legal reform? Better staff training in the judicial branch?
Despite what some say, African laws are generally very well structured, although certain texts can be difficult to access (although this is less and less the case). We need not have concerns about the law itself, or about the capabilities – especially the technical skills — of those who work in the legal system even though, like everywhere, there is always room for improvement (for example tax audits in some countries in Africa lead to extravagant tax adjustments at confiscatory rates). Sadly, what usually tips the scales against justice in certain jurisdictions is corruption.

Again, changing this state of affairs requires political will more than anything else. In parallel, as some have suggested and following the examples of other countries, consideration could be given to granting better status to judges and, probably, other parts of the civil service.

Generally speaking and like elsewhere globally, it is important to cultivate and maintain awareness of the harmful effects of corruption and the need for a sense of civic responsibility, starting at school.

I readily admit that certain investors could demonstrate more civic responsibility themselves through more balanced contractual arrangements, and by refraining from using tax workarounds and respecting the rights of all stakeholders in a project, especially the local population. As well as raising awareness, corrupt behaviour needs to be tackled more assertively through clear, universally applicable anti-corruption legislation.

There are some promising signs of change, especially among certain African entrepreneurs and politicians, offering legitimate hopes for the future. As the University of African Knowledge (Université des Connaissances Africaines) has repeated time and again, social innovations on the ground are slowly bringing the rule of law into alignment with local dynamics in Africa. This entrepreneurial trend, the effects of which have become increasingly noticeable in recent years (in local investment, property investment, and the growth in financial services and microfinance), has prompted the holders of executive power to cooperate with economic stakeholders to improve the business environment. African Governments have realised that in doing so they generate a virtuous and unstoppable circle of development that will ultimately lead to the emergence of the entire continent for the mutual benefit of all. It should be noted that creating this type of economic development cycle is a long, multidimensional learning process and the benefits are spread over the long term, generating far more prosperity for the population as a whole, than for the individual through short-term individual arrangements.

For more information, please contact Stéphane Brabant or your usual Herbert Smith Freehills contact.

Stéphane Brabant
Stéphane Brabant
Co-chair of Africa Group, Paris
+33 1 53 57 78 32

PRIVATE PROSECUTION FOR ENVIRONMENTAL OFFENCES: UZANI ENVIRONMENTAL ADVOCACY CC V BP SOUTHERN AFRICA (PTY) LTD

Authors: Dr Matthew Burnell and Jonathan Ripley-Evans

Prosecutions of environmental law transgressions are steadily increasing. In 2014, South Africa saw its first director sentenced (albeit by way of a suspended sentence) to imprisonment without the option of a fine1. Five years later, South Africa has now also seen the first successful private prosecution in the matter of Uzani Environmental Advocacy CC v BP Southern Africa (Pty) Ltd2. This judgment may encourage other environmentalists to use criminal prosecution as an additional tool to enforce the Constitutional right to an environment not harmful to health or wellbeing.

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TANZANIA’S NEW INTEGRITY PLEDGE FOR MINING COMPANIES: DOES IT MEET INTERNATIONAL BEST PRACTICE?

Authors: Peter Leon, Olivier Binyingo, Paul Morton and Ernst Müller  

Since July 2017, the Government of Tanzania has introduced significant regulatory reforms to the mining industry (as well as the nascent upstream oil and gas industry). See our previous notes on these reforms here, here and here.

Among the first of these changes was the enactment of important amendments to the Mining Act, 2010 (“the Act”),1 including (among other things):

  • establishing a new Mining Commission to regulate the industry;2
  • requiring mining companies to divest between 16 and 50 per cent of their equity to the Government;3 and
  • introducing a chapter on “local content, corporate social responsibility, and integrity pledge”,4 and mandating the Minister for Minerals (“the Minister”) to issue regulations setting out the “principles and procedures” relating to each of these.5

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