La Tribune Afrique : “The embryonic legal framework of private equity in the OHADA area” by Neil Robertson and Astrid Dessi Foulon
The recent creation of private equity associations in West Africa (A2IC in Ivory Coast, project in Senegal) and the African Club of the French Association of Capital Investors (AFIC), testify to the interest and the potential of private equity in Sub-Saharan Francophone Africa. Therefore, it seems essential to question the ability of OHADA law to meet the needs of risk capital, given its primary mission to ensure legal certainty of investments.
The banking sector currently cannot cope in Africa with the growing financing needs of the continent’s micro, small and medium-sized enterprises (MSMEs). This is due to two reasons, among others: a low rate of banking (between 5% and 15%) and a proliferation of the informal sector combined with a complicated business environment. In this context, risk capital appears as an alternative way of financing such African companies.
Private Equity Investment in Sub-Saharan Africa
The private equity business in Africa emerged in the late 1980s in South Africa and Morocco in the early 1990s. In French-speaking sub-Saharan Africa, it is even more recent and relies on institutional investors (AfDB, CDC Group, BEI …) and private investors (Helios, ECP, I & P…), interested in the high growth rates of some African economies favoring the emergence of urban middle classes, and by a renewed attractiveness of markets seen as pre-emergent.
Although multisectoral, private equity practice in most countries remains limited to development capital for established SMEs or large enterprises. The risks are deemed to be higher than the gains.
As a result, a new form of private equity, the “Impact Investment”, has been created to finance social enterprise projects “SDG oriented” (named after the Sustainable Development Goals of the 2030 Agenda of the United Nations) in areas such as health, education or the environment, seeking social and/or environmental impact in addition to a return on investment. Again, despite the willingness of major impact investors (foundations and diversified financial institutions -DFI-) to increase their investments in the sub-Saharan region, the impact investment is marginally focuses on English-speaking sub-Saharan African countries.
A legal framework encouraged by currency unions
To overcome this reluctance, it is necessary that the member countries of the OHADA create a legal and fiscal incentive for private equity in all its forms.
The West African Economic and Monetary Union (UEMOA) composed only of OHADA member countries adopted, in 2006, a uniform law on closed-end investment companies and enacted in 2011 a directive for preferential tax treatment, exempting these companies from taxes, duties and levies when they are formed and dissolved or for their capital change operations. The aim of this uniform law is to promote closed-end investment companies that have a major impact on the creation, development or recovery of small and medium-sized enterprises and non-listed companies.
To date, only Benin, Senegal, Togo, Burkina Faso and Mali have transposed into domestic law the provisions of the UEMOA uniform law and/or the directive. In the other UEMOA member states, such as Côte d’Ivoire, the regulations applicable to risk capital arise from the UEMOA uniform law on banking regulations or the Uniform Act relating to the law of commercial companies and the Economic Interest Grouping (AUSDGIE).
In view to developing private equity in the OHADA space, it now appears necessary for the member states of the organization to develop homogeneous common provisions on structures and private equity activity in order to encourage this new trade for which local expertise is scarce.
Why not adopt a uniform act on risk capital and its legal structures, while avoiding the proliferation of investment vehicles that are observed elsewhere in the French-speaking world, particularly in France?
This uniform act on risk capital, direct and compulsory, will provide investors, like the uniform acts of the OHADA Treaty, with the confidence of capital investors and will seek to supplement the shortcomings of the UEMOA Uniform Law. This would include the provision of management and control procedures specific to private equity firms and their incorporation as a simplified joint-stock company, now provided for by AUSDGIE and favored for the flexibility of its functioning.
Supervision of equity investments by OHADA law
Pending the transposition of uniform laws on closed-end investment companies or a uniform act on risk capital, the legal terms of investment transactions are relatively regulated by AUSDGIE in its new version.
Indeed, the AUSDGIE in its form revised on 30 January 2014, presents a real opportunity for investors and contributes to the development of private equity in the OHADA zone.
Remember that any investment by the private equity investor is preceded by the collection of information on the target company as part of the acquisition or due diligence audit, to better understand the target, limit investment risk and negotiate collateral. This crucial step will be facilitated, at least for the legal and financial due diligence, thanks to the computerization of the RCCM which will allow gathering sincere and secure information. This innovation is ongoing and has been implemented to date in some OHADA countries, such as Mali, Burkina Faso, Guinea Bissau and Congo.
With regard to equity participation, this can be achieved by holding securities offering immediate or deferred access to the capital of the financed company.
Inspired by the French model that abandoned priority shares in 2004, OHADA has introduced the option of issuing preferred shares alongside ordinary shares, which can be put in place when the company is formed, which is encouraging for venture capital, or in existence during a capital increase. In addition, rights of any kind attached to preferred shares may be statutorily adjusted (double voting rights or priority dividend rights); shares that can be issued with or without voting rights, single or double, on a permanent or temporary basis.
The revised AUSGIE also provides for the issuance by corporations of securities giving term access to capital, in whatever form, that may be used to reward the risk taken by the capital-investor by giving it right to subsequently acquire securities. Furthermore, and in addition to free shares also introduced by the reform of the AUSGIE, the capital-investor will have the leisure to use composite securities to incite the managers of the financed company. These may be shares with common or preferred stock warrants (ABSA) for the investor or stock warrants (BSA) for the managers. This is a major improvement for investors that allows them to attract qualified professionals in the financed company when employee profit sharing is not sufficiently anchored in the culture of African companies.
Finally, the capital-investors in the OHADA space will find in the simplified joint stock company the opportunity to freely develop, for example, the functioning of the financed company, to frame important decisions that cannot be taken without their agreement, thus protecting itself from any abuse of the majority and the risks of mismanagement. If for other reasons they opt for another form of company, their relations with the historical partners or the entrepreneur may be arranged under a shareholders’ agreement whose validity is enshrined in Article 2.1 of the AUSGIE. This agreement shall not, however, deviate from the mandatory provisions of AUSGIE.