While many developed economies struggle to recover from the global financial crisis, South Africa manages to maintain a stable economy and a generally encouraging investment environment despite its direct exposure to the European debt crisis. South Africa’s economic and business dynamic is a combination of sophisticated first world infrastructure and a promising emerging market economy. Ranked 52nd out of 144 countries in the World Economic Forum’s Global Competitiveness Report 2012/2013, and 3rd overall for financial market development, South Africa remains the highest-ranked and most competitive economy in Africa. South Africa has a wealth of natural resources (including coal, platinum, gold, iron ore, magnesium and uranium) and continues to attract foreign investors, most notably Indian, Chinese, Korean and American investors in the resource sector. In addition to this sector, investors are displaying a particular interest in the telecommunications, consumer-based, infrastructure and property sectors.
South Africa, a constitutional democracy since the mid-1990’s, continues to foster an environment in which to do business by constitutionally protecting individual rights to economic activity and to property, by remaining a politically stable environment and by maintaining an advanced and well developed financial sector. The Johannesburg Stock Exchange was ranked by the World Economic Forum as the best regulated securities exchange in the world in 2012. In addition, according to Doing Business 2012 (a World Bank and International Finance Corporation publication), South Africa is ranked 35th out of 183 countries for ease of doing business.
These conditions, supported by a progressive legal framework, black economic empowerment activity and investment incentives, make South Africa fertile ground for M&A activity. The biggest deal in 2012 was the merger of Barclays Group Africa with Absa Capital valued at R18.3 billion. Unlike former years where South Africa saw mega transnational M&A deals, M&A activity in 2012 was characterised by M&A activity between private companies and by cross-border transactions through inward investment into South Africa and investment from South Africa into the rest of Africa.
As the economic powerhouse of Africa and a member of the BRICS group of economies, South Africa is seen as the gateway for foreign companies into Africa. In addition to foreign companies seeking opportunities in Africa, local South African companies are increasingly expanding into the continent. According to Ernst & Young’s 2012 Africa Attractiveness survey, South African investment into the rest of the continent grew at a rate of 64.8% over the past four years. Described in the survey as “a critical but perhaps underappreciated element of the emerging African growth story”, inter-African trade through South Africa is expected to increase, thus presenting key opportunities to be exploited by investors.
Private equity funds continue to target sub-Saharan African countries as economies with opportunities for sustainable investment returns (as demonstrated by private equity deals in sub-Saharan Africa in 2012 being valued at USD1.16 billion, almost a 10% increase from 2011).
Excessive labour unrest in 2012 caused concern for potential foreign investors with the Marikana miners’ strike and the farm workers’ strike making international headlines. Government’s efforts to address the labour grievances, however, including through the establishment of a commission of inquiry and through formal discussions with companies and labour unions, have already gone a long way to improve social stability and investor confidence.
The Companies Act, which replaces previous company legislation, came into effect on 1 May 2011 and will become fully operative on the expiration of the transitional period, being 1 May 2013. The key objectives of the Companies Act are to simplify company law, increase flexibility, ensure corporate efficiency, enhance transparency and accountability, protect shareholder interests and reduce the costs of doing business in South Africa. The salient features of the Companies Act are the partial codification of directors’ liability, the promotion of employee activism, a reformed business rescue regime and the regulation of fundamental transactions, which transactions include schemes of arrangement and mergers and amalgamations.
Many South African companies have already amended their constitutional documents and shareholders’ agreements to ensure that they comply with the Companies Act prior to the 30 April 2013 deadline. Where companies fail to do so, they run the risk of certain provisions of the Companies Act overriding the negotiated provisions in their constitutional documents and shareholders’ agreements.
Financial Markets Bill
The Financial Markets Bill is expected to be promulgated in the next few months in response to the recent global financial crisis. It aims to increase confidence in the South African financial markets by providing greater regulation of transactions in unlisted securities and over the counter transactions.
Real Estate Investment Trust (REIT) legislation
With the introduction of the new REIT regime in April 2013, South Africa is set to become the 8th largest REIT market in the world. The new legislation will introduce certainty in respect of the taxation of South African listed property investment structures and the availability of tax deferral or roll-over relief for mergers and acquisitions thereby encouraging foreign investment into the South African property sector.