South Africa: Private Equity Comparative Guide
1 Legal framework
1.1 Which general legislative provisions have relevance in the private equity context in your jurisdiction?
Private equity funds are not regulated as a separate asset class in South Africa and the applicable legislation will depend on the structure used by the fund.
Generally, the following legislation will be relevant in the context of private equity in South Africa:
the Companies Act of 2008, including the Companies Regulations (‘Companies Act'), being the key piece of legislation regulating private and public companies in South Africa;
the Financial Advisory and Intermediary Services Act of 2002, which stipulates, among other things, that fund managers and administrators must obtain authorisation from the Financial Sector Conduct Authority to provide financial services;
the Competition Act of 1998, which regulates mergers of acquiring and target firms;
the Broad-Based Black Economic Empowerment Act of 2003 and the Codes of Good Practice issued pursuant to the act, regulating black economic empowerment (BEE);
the Income Tax Act of 1962, which regulates the tax consequences flowing from various structures;
the JSE Limited Listings Requirements, which regulate public listed companies;
the Financial Intelligence Centre Act of 2001, which regulates the verification of investors and their ultimate owners in South Africa, and other applicable anti-money laundering legislation; and
the Exchange Control Regulations,1961, which regulate, among other things, cross-border transactions and the flow of funds into and from South Africa, monitored by the Financial Surveillance Department of the South African Reserve Bank (SARB).
1.2 What specific factors in your jurisdiction have particular relevance for and appeal to the private equity market?
South Africa has a well-developed and well-regulated banking system. SARB is the central bank. South Africa also has a few large and stable banks and investment institutions (both foreign and domestic), as well as a number of smaller banks.
The Department of Mineral Resources and Energy released an integrated resources plan to try to solve the country's energy crisis through various sources, including renewable energy. This forecasts a move to renewable energy by 2030. There may thus be opportunities for private equity investment in the renewable energy space.
In South Africa, arbitration is a well-established mechanism for commercial dispute resolution. The International Arbitration Act incorporates the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration 1985 into South African law. We have seen a significant increase in the number of international arbitrations held in South Africa.
South Africa has exchange controls that regulate all flows of capital in and out of the country, which are administered by SARB and authorised dealers (commercial banks that have been appointed to act as agents of SARB in respect of certain transactions).
Amendments to the tax legislation have been made to prevent the activities of South African investment managers from creating a permanent establishment for domestic tax law purposes, and a dispensation has been introduced affording favourable tax treatment to investors in venture capital companies.
The need to comply with BEE is top of mind in South Africa and serves as a catalyst for private equity investment through black-empowered investors.
2 Regulatory framework
2.1 Which regulatory authorities have relevance in the private equity context in your jurisdiction? What powers do they have?
The functions of the Takeover Regulation Panel (TRP) include regulating ‘affected transactions' set out in Parts B and C of Chapter 5 of the Companies Act (‘Takeover Regulations') that involve ‘regulated companies' (as defined). When a particular transaction falls within the purview of the TRP, it may not be implemented unless the TRP has either:
issued a compliance certificate in respect of such affected transaction; or
exempted the affected transaction from compliance.
The Competition Commission and Competition Tribunal regulates competition between firms in the market and specifically in this context mergers and acquisitions, provided that certain statutory thresholds are met. Any transactions that meet such thresholds must be approved by the Competition Commission or the Competition Tribunal, depending on the categorisation.
Among other things, the Broad-Based Black Economic Empowerment (BEE) Commission assesses and monitors compliance, levels of transformation and the extent to which benefits of ‘major BEE transactions' flow to the black persons who are part of these transactions in compliance with the objectives of the BEE Act. Major BEE transactions must be registered with the BEE Commission.
The South African Reserve Bank (SARB) and its authorised dealers regulate all flows of capital in and out of the country.
The Financial Sector Conduct Authority regulates the provision of financial services through the issuance of different categories of licences.
2.2 What regulatory conditions typically apply to private equity transactions in your jurisdiction?
Private equity funds are not subject to specific regulations and there is no government agency that exercises regulatory oversight specifically over such funds.
Where the target is a ‘regulated company' (as defined), the Takeover Regulations will apply. If the proposed transaction constitutes an ‘affected transaction' (as defined), it may not be implemented unless the TRP has issued either:
a compliance certificate; or
an exemption for the affected transaction.
The approval of the TRP is typically a condition precedent.
Where the proposed transaction involves a change of control of the target and meets the threshold for an intermediate or large merger in terms of the Competition Act, the approval of the Competition Commission or the Competition Tribunal will be required prior to implementation. Such approval is typically a condition precedent.
Where the proposed transaction constitutes a ‘major BEE transaction' (as defined), it must be registered with the BEE Commission within 15 days of conclusion. The BEE Commission need not approve such transaction and it is not necessary to include this as a condition precedent.
Investments in the equity of South African companies by non-residents must be reported to an authorised dealer and share certificates evidencing such investment must be endorsed ‘non-resident'. Pre-approval is required for loan capital introduced by non-residents. Private equity funds that are members of the South African Venture Capital Association may apply to SARB for approval to invest offshore.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER