Determining factors for onshore and offshore M&A in Africa

Mergers and Acquisitions (M&A) represent the acquisition of either part or whole of a business or asset(s) of a company for a specified purpose and usually involve the acquisition of equity or asset(s) of another business or entity. It can be implemented in various ways, including purchasing and absorbing another company, merging two or more companies into a single new entity, acquiring some or all of its major assets, hostile takeover, statutory takeover, etc.

Among multiple factors that ought to be considered during the structuring of an M&A deal is whether the acquisition will be onshore or offshore. Several factors influence the decision of whether to undertake the M&A deal onshore or offshore and some of those factors are as follows:

Tax planning

Usually, this is the key driving factor that determines whether the M&A deal will be done onshore or offshore. Tax advisers would consider several factors including tax havens, bilateral treaties, including any tax treaties that would benefit the acquirer and ease the tax burden during the acquisition and in the long-term following the completion of the deal. A tax haven is an area or a country that offers very low tax rates or no tax liability for non-domiciled investors and may provide assured secrecy or confidentiality of the persons, operations, or transactions behind such entities. Most companies registered in the tax havens are special purpose vehicle companies (SPVs) or special purpose acquisition companies (SPACs) hence such companies rarely have tangible or substantial assets in the tax haven jurisdiction. Recent developments where most countries, including African countries, have amended their tax laws with the effect of imposing tax liability locally/onshore (domestic effect) even if such acquisitions or restructurings occur offshore, whether in tax havens or otherwise. Due to this development, which is becoming more common and strictly enforced in multiple African jurisdictions, the appetite for tax havens solely for tax planning purposes may have reduced over the years but it is still worth considering any other benefits that may exist in terms of tax planning during a deal structuring.

Regulatory hoops

Another factor taken into account when considering whether the M&A deal should be done onshore or offshore is the regulatory hoops to jump through to completion. Onshore legislation may impose regulatory approvals and consents which are necessary before the M&A deal is completed, especially for companies that operate in sensitive sectors like telecommunication, extractives, energy, and utility sectors. To overcome or avoid dealing with onshore regulatory approvals, the deal may be structured in a manner where the merger or the acquisition is occurring off-shore leading to an indirect change of control or ownership of the business or asset onshore. Dealmakers must obtain regulatory advice on the affected jurisdictions to ensure that the local legislation does not imply or outright capture offshore acquisitions on an equal footing as onshore acquisitions and mergers, particularly anti-trust legislation. Whilst some local legislations may not expressly require approval for offshore mergers or acquisitions, there could be wording relating to ‘ability to influence local operations or ability to appoint or remove directors or senior officials’ which means that, the acquirer may be required to seek approval locally because following the offshore acquisition, the acquirer will influence the decisions of the local entity, including the ability to appoint or remove directors or senior officials or control the management or finances of the local entity.

Group acquisition

Offshore acquisition may be preferred by the acquirer because it is an acquisition of equity or assets occurring across several jurisdictions. Instead of implementing the acquisition in each jurisdiction, it becomes easier and streamlines the process by selecting an offshore entity that will acquire at the group level. This process will involve the coordination of multiple advisers, including legal advisers at local and international levels to ensure that there is regulatory compliance across all jurisdictions before completion.

Protection from liability

The acquirer may consider protecting its overall assets from liability by shielding its global operations from local entity operations. One way of doing this is to establish an SPV or SPAC offshore which then acquires shares or assets locally i.e. onshore. In such a structure, the immediate shareholder or asset acquirer is an entity without assets or substantial turnover and any liability that arises in the local entity usually ends at the immediate shareholder level. The principle of Salomon v A Salomon and Co Ltd is applicable to allow separation between the entity and its shareholders, and even if the veil is pierced, still the ultimate parent company is protected because behind the veil(s) there can be a layer of SPVs. However, in most jurisdictions, the corporate veil does not offer protection in cases of fraud, criminal activities, and tax evasion.

Protection of equity

The acquirer may have restrictions, either self or legally imposed based on the laws of the jurisdiction(s) in which the acquirer operates e.g. if it’s a listed company that prevents it from pledging or encumbering its shares or shares it holds in a third-party entity(ies). The acquisition in the M&A deal and/or the ongoing operations of the local entity may require loans from third parties. In return for the financial support, the lenders may require the shareholders to pledge their shares held in the borrowing local entity. If the acquiring entity is restricted from pledging its shares or shares it holds in other entities, one way of structuring the deal is to allow an SPV to acquire shares in the onshore entity and if there is a pledge of shares, then it will be the SPV pledging its shares in the local entity in favour of the third-party financier, which leaves the acquirer free from the share pledging obligation.

How can we help?

We provide tax, regulatory, and structural advisory support to dealmakers and clients seeking to undertake single or multiple acquisitions across different jurisdictions. We have local and international lawyers with expertise in doing cross-border transactions. In addition, we work closely with financial and investment advisers in advising and implementing acquisitions across all sectors and in all jurisdictions. If you have any questions, please contact Amalia Lui.