Over the past few years, Zambian Private Equity activity has remained steady and the country has emerged as an attractive private equity destination. According to the African Venture Capital Association 2018 Annual African Private Equity Data Tracker, during the period 2013 to 2018, Zambia claimed 8% share of the PE deals by value in Southern Africa and 12% share of the private equity deals by volume, second only to South Africa which attracted the highest share of private equity deals in Southern Africa both by value and volume. Target sectors continue to be financial services and consumer goods. Investment in the non-traditional sectors such as tourism, agribusiness continues to grow and to consolidate the Zambian Governments economic diversification drive. Although over dependence on the cyclical copper industry presents challenges of currency and commodity price volatility, Zambia has sought to enhance its economic development through economic diversification under the Seventh National Development Plan launched in 2017. Under the Plan, Zambia aims to achieve economic diversification through value addition and industrialization anchored by agriculture and tourism.
The most significant factors driving growth and interest in Zambia as a Private Equity investment destination are, political stability, steady economic growth, favorable demographics comprising of a growing population, increasing urbanization and a growing consumer middle class. The ease of doing business has also played an important role. In the World Bank’s Ease of Doing Business 2019 report, Zambia ranked 87 globally, 8 in Africa, 6 Sub-Saharan Africa and 4 in the SADC region.
Regulatory
At the core of this progress is the favorable legal and regulatory framework. Zambian law does not impose any barriers to private equity operations or impose any restrictions on private equity investments. There are no exchange controls, local content requirements, and ownership restrictions. More recently, barriers limiting access to local capital from pension funds have been lifted. The National Pension Scheme Investment Regulations, 2017 now allows the National Pension Scheme Authority to invest in non-listed equities and, green field investments and socially and economically targeted investments within prescribed allowable limits. Access to domestic capital could further increase private equity activity, particularly in sectors such as infrastructure and energy where the needs of the country are still high, and opportunities abound.
A private equity transaction is subject to merger approval if the combined turnover or value of the assets of the parties meets the prescribed thresh- old. Zambian Completion law through the merger approval process does not currently distinguish PE investors from ordinary investors and PE investors are subject to the same rigorous approval process and disclosures. The law may need to recognize that PE investors are primarily interested in the financial reward of the merger and not monopolistic conduct, to encourage more private equity activity.
If the target operates in a heavily regulated sector such as financial services the transaction will also be subject to the approval of the regulator in the sector. Similarly, if the target is a public company listed on the Lusaka stock exchange, in addition to the disclosure obligations under the Lusaka Stock Exchange Listing Rules and the Merger and Takeover Rules during the course of the transaction, the approval of the Securities Exchange Commission will need to be sought.
Governance
Corporate governance is a key determinant of investment efficiency. Shareholders’ ability to sue and hold directors accountable are essential checks and balances particularly if an investor to take a minority position.
There have been significant developments in improving governance rights. The new Companies Act which came into force in 2018 has enhanced the extent of director liability and protection of minority interests, by prescribing codified statutory rules in terms of the duties of directors and greater transparency.
Directors of a Zambian incorporated company are subject to statutory fiduciary duties the breach of which may lead to personal liability or disqualification from being a future director. Directors have a duty to act in such a manner as to promote the success of the company for the benefit of the shareholders collectively. Thus, directors must at all times be mindful of the risk of being found liable for fraudulent trading or breach of fiduciary duties. An equity investor must be mindful that this equally applies to shadow or alternate directors or any person on whose instructions substantive directors are accustomed to act.
The Companies Act recognizes both situational and transaction conflict of interest and requires directors to disclose any direct or direct interest in any matter or contract with a company. A director that has an interest in any contract with the company cannot form part of the quorum or vote at a meeting considering the issue.
Private equity investors need to pay particular attention to the target company’s compliance history and status at the due diligence stage of a transaction as the more recent legislation being enacted extends personal liability to the directors and any officer of the company that consents to or has knowledge of the breach. Directors appointed by a private equity investor may be held liable for breaches of an investee company and subject to imprisonment or a fine on conviction for non – compliance. The ongoing compliance status of the portfolio company is also important to avoid liability.
The new Companies Act provides for more robust minority rights. A minority shareholder is able to sue the company or a director for any breach of duty owed by the company or a director to a shareholder, without having to sue through the company by way of a derivative action. Greater protection helps foster trust and confidence and, in turn, spurs greater access to finance for entrepreneurs.
Structuring
The investment is commonly structured as a direct or indirect holding of a controlling interest in the target company. If a controlling stake is not avail- able, the structuring considerations are commonly around achieving ‘control’. The legal agreements are structured to provide sufficient minority protection rights on the legal as well as the operational side. The equity investor will require veto rights in respect of key issues such as the appointment of directors and the key management team, issuance of shares and changes to the capital structure.
Typically veto rights will not only be limited to those corporate actions requiring consent of the majority shareholder under the Companies Act (such as amendment of the articles, disposals, changing the name and nature of the business, increase or decreasing the share capital) but also other matters such as the power to borrow, ability to form a quorum or make any decisions at board and shareholder meetings, affirmative vote on key financial and commercial matters.
Control investments and minority interests Control investments have been the preferred investment mechanism because of the ease of exit even though control can be achieved through structuring the governance rights in the transaction documents. Buyers or larger private equity firms are willing to pay a premium for a controlling stake. However, because of the reluctance by entrepreneurs to surrender control, sometimes, a minority interest becomes the only option. Over time, the enhanced minority shareholders protections under the legislation will encourage equity investors to consider minority interest positions. This, however, does not take away the attractiveness of a control- ling stake when it comes to attracting buyers at the exit.
Exits
The ultimate objective of a private equity investment is to achieve an exit. Buyouts are the most common exit mechanism. The option of an exit through an IPO on the Lusaka Stock Exchange is available. If this option is considered, PE investors must be deliberate about preparing the company for an IPO and ensuring that the interests of all stakeholders are aligned. There has only been one PE investment exiting through a public listing in 2016.
Rescue Buyouts
The developments in the Corporate Insolvency framework present an opportunity for private equity investors. The new Corporate Insolvency legislation contains a business rescue mechanism that allows the rehabilitation of a financially distressed company if there are reasonable prospects of doing so, which was not possible in the past.
About the writer: – Sharon Sakuwaha is a partner at Corpus Legal Practitioners specializing in mergers and acquisitions, private equity and project development.
This article was published in the May 2019 INTO AFRICA MAGAZINE a publication from capital markets in Africa.
