Specific contractual provisions in M&A transactions in Africa

Driven by the continent’s growing appeal and the emergence of strong regional players, the M&A market in Africa is booming. In this context, the legal structuring of transactions plays a decisive role in their success.

While certain clauses are standard in M&A transactions, regardless of the geographic region in which they are implemented, they do however need to be adapted to account for the specificities of the regulatory, administrative and economic context particular to an African setting.

1.     Conditions precedent: a realistic timeline and specific conditions

When drafting clauses regarding the conditions precedent to which the final completion of an M&A transaction in Africa will be subject, two key factors must be taken into account: (i) the often lengthy duration of administrative and regulatory procedures, and (ii) the risk associated with political interference (even in the absence of any investment control regulations), particularly in strategic sectors (e.g., energy, telecommunications, finance or agri-food).

Hence, one should seek to avoid:

• setting an overly “ambitious” deadline for the satisfaction of conditions precedent in order to maintain momentum in the transaction;
• drafting the condition precedent relating to regulatory approvals in overly general terms –as is sometimes customary in M&A transactions in other regions– by referring to all approvals that would be or would become necessary prior to the closing date, without identifying them precisely.

Such clauses may give rise to excessive uncertainty and provide the counterparty with “loopholes” in case of difficulties – notably, by giving it a legal basis to terminate the transaction in the event of delays in obtaining the required approvals or transaction politicization.

A recommended best practice in this respect is to identify the legally required approvals in advance, draft conditions precedent that are strictly limited to those approvals and set a realistic timeline (taking into account both statutory deadlines and local practices) for obtaining them.

2.     Financial covenants: hedge against currency risk

When an M&A transaction in Africa involves parties located in regions that do not share the same currency, the purchase price and any other amount that one party may owe to the other may be exposed to currency risk on account of the volatility of certain local currencies.

To limit this exposure, it is recommended to make it a habit to clearly and systematically define in the documentation a conversion method (link to the relevant regulator’s website) and a reference conversion date, for calculating both the price and other financial items referenced in said documentation (materiality thresholds for interim-period commitments; financial limitations applicable to the indemnification mechanism; determination of the amount of damages indemnification, etc.).

3.     Closing process: taking local constraints into account

Constraints linked to international payments, foreign exchange regulations, and foreign currency availability can have a significant impact on the closing process. The time it takes to mobilize, receive or repatriate funds is often longer than what is typically seen between countries within the SEPA zone.

In light of these specific characteristics, in order to avoid deadlock situations, special attention must be paid to the organization of closing procedures, and mechanisms that may differ from those used for M&A transactions in other regions have to be put in place.

4.     Representations and warranties: adapting to local practice

The standard set of representations and warranties may need to be adapted to the African context, and these provisions must be drafted with care.

In particular, representations regarding:

• the required licenses, permits and authorizations that will enable the target company to conduct its business: completeness, renewal (which can sometimes be a lengthy process) and absence of questioning, particularly in the event of a change in control of the target company (ambiguity of applicable regulations, political interference);
• compliance;
• environmental matters.

5.     Force majeure, renegotiation, and performance of agreements

In contexts of political, legal or social instability, clauses addressing unforeseen events are essential. However, clauses drafted in overly broad terms may undermine the transaction by opening the door to opportunistic renegotiations.

To ensure the legal certainty of the agreement, it is recommended to carefully draft the provisions regarding force majeure, unforeseeable events or material adverse change (MAC), taking into account the environment in which the target company operates.