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Business Law – Legitimate Business

“With almost a fifth of multinationals now needing lawyers across the continent, Africa’s top law firms are gearing up for major activity”…..

Sarah Rundell takes the case……

Two of the UK’s biggest Law firms, renowned for their global presence and eye popping revenues, have just opened offices in Casablanca. Allan and Overy (A&O) and Norton Rose will up their ambition into Africa from Morocco, staking their future growth on the relatively stable North African country becoming a viable hub for international companies that are looking to build a presence in Africa.

It was only a matter of time before global law firms that have already expanded into other emerging economies like China and Brazil turned their gaze on Africa. Big corporate and other investors have been ramping up their presence on the continent for a while and law firms are obliged to follow where their clients lead. Until now, the UK’s top or ‘Magic Circle’ law firms have managed African deals from other offices and through close partnerships with local firms. But with a rapidly changing corporate landscape, it seems this is leaving clients with legal needs unmet. A recent survey by market research group Acritas found that 19% of multinationals currently need lawyers in Africa outside South Africa.

The energy, infrastructure and mining sectors throw up the most deals, with lawyers negotiating joint ventures, privatizations, exploration and project finance. English law is popular in Africa for cross-border transactions. “It is a neutral and a well-regarded legal system: says Tony Williams, a former Managing Partner of Clifford Chance, who now runs London-based Jomati Consultants.

Investors say they need lawyers for forensic analysis and de-risking strategies that cater to Africa’s political and economic uncertainties. Hazards could include large tax demands or a government unexpectedly unpicking a monopoly or promoting more competition with another round of licenses. Lawyers help investors factor risk into the pricing, benefit from bilateral investment treaties and meet compliance and regulatory requirements back home.

“If it is structured right you get the security. It is about going into a deal with your eyes wide open, knowing the risk and mitigating wherever possible;” says Rob Otty at Norton Rose South Africa, which recently advised development finance institutions on the structure and establishment of the Mauritius-based African Agriculture Fund. Governed by English law, the fund is targeting an anticipated first close of US $100 million with up to $500m in subsequent closings.

Law firms are also hunting fresh profits in Africa, which has proved resilient to the financial crisis and where “keenly priced assets” have kept the deals flowing. Anemic growth in established markets meant half of A&O’s revenue growth for the 2011 financial year came from newly established offices in emerging markets around the world and Africa is already a rich seam for the company. Big deals include advising 03b Networks on the financing of its project to design, build and operate eight MEO satellite constellations for communications overage over Africa.

The firm is also advising on the ongoing 300MW Lake Turkana Wind Project and worked with banks on Egyptian telecoms group Orascom’s $790m rights issue in 2010.

(“Firms who are looking to advise indigenous organizations as well as multinationals need to offer local law capabilities”)

“Morocco is the perfect match for our global network and our emerging markets strategy and offers a fantastic platform to build on our extensive Africa-focused work,” says A&O’s global managing partner Wim Dejonghe.

Deals are also coming from China as opaque investments of the past are’ replaced with increasingly formalized transactions. In China’s biggest investment deal in Africa, a consortium of state-run Chinese companies agreed to build infrastructure in the Democratic Republic of Congo in return for the right to develop mining interests worth $9 billion. The government to government transaction has faltered on criticism from the Congolese and international financial institutions. “We are currently advising Chinese investors in a mining transaction. They negotiated the initial agreement with the government and now they want to formalize it,” says Boris Mator; a partner at law firm Eversheds in Paris. “Chinese investors want to take into account the rule of law and things are starting to change:”

Rival firm Norton Rose now bases one of its African partners out of Beijing to advise Chinese clients on African investment. Indian corporate acquisitions are also providing a steady deal flow with the emphasis here on consumer facing businesses in retail and telecoms.

Africa’s law firms have also benefitted from the deal flow. The growth of Nigeria’s debt market on the back of local banks’ increasing ability to compete on margin and tenor with international lenders has left Lagos law firms advising on more deals than ever before. One of the biggest came when MTN Nigeria, part of Africa’s biggest mobile group MTN, swiftly responded to India’s Bharti threat. It signed loan agreements worth 2.15bn to fund expansion in the continent’s most highly prized market last June. The commercial bank tranche was backed by 15 local banks – the largest syndicated facility denominated in Nigerian naira to date.

Oil major Shell’s sell-off of its onshore assets has also kept Lagos lawyers busy. It is being bought up by consortiums of indigenous oil groups that have swooped in on other acquisitions, varying in size from between $200m to over a $lbn. Other capital market deals have come from the gradual recapitalization of banks that failed in 2009 as well as more corporate borrowing since the government’s debut $500m benchmark Eurobond, issued in January. Next up will be deals to finance distribution firms and power stations being offered up for sale by the Bureau of Public Enterprises, the government’s privatization agency; say lawyers.

Local law firms have also benefited from the arrival of international groups, which have formed partnerships with local companies via secondments or referrals of work. SNR Denton has associate offices and alliances in 21 countries across Africa where local lawyers are essential partners, providing due diligence and local expertise from assessing the veracity of a mining title to expertise on local tax laws. “We need consistent reporting from imputers,” says Scott Nelson at Africa’s biggest law firm, Johannesburg-based ENS, which relies on a strong network of local advisors to run on average three deals at a time across 20 or 30 African countries.

Local law also best serves expanding African corporates. “Although there is a preference for English law on international matters outside the US, many indigenous organizations opt for local law. Firms who are looking to advise indigenous organizations as well as multinationals need to offer local law capabilities, which they often do through associations with strong local practices,” says Lisa Hart, CEO of Acritas.

Yet the biggest deals remain out of reach of the local firms. “For a $lbn transaction you need 40 lawyers and African firms don’t have that kind of capacity. It means there will always be a drive to the South African or big European firms,” says ENS’s Nelson. Local firms also find it tough to expand outside national borders, often boxed in by local law societies. “For regulatory reasons we can’t go into other countries so we form associations with the top firms in other jurisdictions,” explains Paras Shah at Hamilton, Harrison and Mathews Advocates in Nairobi, which is currently advising on Kenya Airways’ $220m rights issues, anticipated at the end of this year as the airline, partly owned by Air France-KLM, seeks to fund the acquisition of a new fleet. Going forward, initiatives like OHADA, a group of 16 states working to harmonize business laws in Africa, will make cross border transactions easier.

International groups wanting to expand through mergers face the same challenges but are starting to make headway. Eversheds recently won a longstanding dispute to trade under its own brand name in South Africa when alliance firm Routledge Modise formally changed its name to Eversheds. Eversheds is also adding Morocco to its expanding international cooperation agreement and says the partnership will likely develop into a Casablanca office in the future.

Norton Rose has built its presence by bringing local firms under its umbrella using a Swiss Verein structure originally used by accountancy firms, which means offices in different jurisdictions can’t share profits. It is a quick way to establish a presence in a country without having to go through complicated negotiations that precede a full merger. (“Morocco is the perfect match for our global network and our emerging markets strategy and offers a fantastic platform to build on our extensive Africa-focused work”) The UK group recently merged with Deneys Reitz in the first full merger between South African and UK law firms.

It used to be that South Africa was the focal point of interest. Now lawyers are following investment from corporates and funds into the wider continent, calling on local firms’ expertise in the process. It seems African growth could mitigate lackluster markets back home for the foreseeable future.