Volume 10, Issue No.1, September 2012

inside this issue:

:

:

1

Why we believe in Africa

This is the time for Africa! With most of the world still reeling from the shocks of the economic crisis, the Eurozone crisis and the property down-turn in the East, many see Africa as the one largely unaffected continent, and the new place to invest in. Over the last couple of years, there has been a steady increase of investment in Africa in varied sectors including real estate, oil and gas, mining, microfinance amongst others. As one soft drink giant puts it, “there are a billion reasons to believe in Africa”.

With all the cards decked in favour of Africa, Africa must step up to the challenge and fully exploit this golden opportunity to ensure that whatever the outcome, it is ultimately of benefit to Africa and its people. Otherwise, Africa stands the risk of remaining a mere spectator in the unfolding golden age of a continent that has hitherto been viewed as the “dark continent”.

A key element in ensuring that the economic changes that are taking place in the world at large and Africa in particular are of benefit to Africa is the legal and regulatory systems. It goes without say that the law needs to move in tandem with developments, either to encourage the steady interest, or to regulate matters of concern arising out of the developments. Similarly, the need for legal practitioners and other transaction advisors to offer advice and service that is alive to the present needs becomes ever-more key.

In this edition of Legal Notes, we give some key facts about recent key investments in Africa. We seek the views of Mr. John Miles, the Chairman of ALN - who has over 25 years experience in and out of Africa - and get his take on

investing in Africa. We also give you an insight into the growing Chinese interest in Africa, and the advantages and concerns that have come out of it, as seen through the experience in Zambia. Mauritius – a renowned preferred investment gateways in Africa – offers you a peek into the new law on Foundations that has been implemented to improve on trusts law.

Kenya, which is undergoing a real estate and infrastructure boom, provides tips on the factors that should be taken into account in contracts for infrastructure development. Uganda offers their analysis of the new mortgage regulations and their effect on the banking and real estate industry. From South Africa, we learn more about the competition regulations, and the lessons to be learnt from the Walmart-Massmart merger. And it doesn’t stop there…

As always, we hope that this edition will be an interesting and insightful read.

Kind regards,Anne Kiunuhe, Editor

Anne Kiunuhe, ak@africalegalnetwork.com

Editor’s Note

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Table of Contents

Undertaking infrastructure projects in Kenya: Get the contract right! 3 Silk Road or Dragon Path? The impact of Chinese investment in Zambia 6

ALN Trend Watch: Africa’s Growth Story 9

Private Foundations in Mauritius: Alternative or Complementary to Trusts? 11

Public interest considerations in merger control: Lessons from Wal-Mart’s expansion in South Africa 15

Taking Securities in Uganda: New Regulations on Mortgages 18

Security Documentation in Kenya: Should Guarantees be prepared by a qualified advocate? 20

Controlling Big Brother in the Workplace: IT Monitoring Laws in Zambia 23

Guest Corner: Investing in Africa - A five minute take from ALN’s Chairman 25

Editorial TeamAnne Kiunuhe I ak@africalegalnetwork.comElizabeth Karanja I ewk@africalegalnetwork.comWangui Kaniaru I wk@africalegalnetwork.comDelphi Jarrett I dmj@africalegalnetwork.com

This Newsletter is intended to inform readers of legal issues in various African jurisdictions. The contents of this Newsletter are intended to be of general use only and should not be relied upon without seeking specific advice on any matter. If you would like to subscribe to Legal Notes or any other ALN publication, visit www.africalegalnetwork.com.

For further information on Legal Notes, contact: legalnotes@africalegalnetwork.com

33

Anjarwalla & Khanna is the largest

corporate law firm in Eastern Africa. The

firm is ranked first in Kenya by various

legal guides, including Chambers Global,

IFLR 1000, Legal 500, PLC Which Lawyer

and Euromoney Guide to the World’s

Leading Project Finance Lawyers.

Introduction

Kenya has seen a significant rise in infrastructure developments in the recent past, especially in the fields of real estate development, energy and transportation infrastructure. This has been caused by various factors including a demand for housing by the rising population, infrastructure demands caused by growing investor interest in the country and the Government’s Vision 2030 development blue print, whose aim is to achieve industrialization by the year 2030.

Putting together an infrastructure project, be it skyscrapers, roads, power projects or a real estate development involves amalgamating several constituent elements. An integral ingredient to any project is the construction contract which sets out the terms and conditions pertaining to the carrying out of the main building works in respect of the project. A well drafted contract that is clear on the terms could have a significant effect on the cost, timing and completion of the project.

What should a project contract provide for?

The key concerns for most developers of a project are as follows:

• ensuring that works are completed in accordance with the construction programme for the project;• ensuring that the works are completed within budget;• where projects are to be financed, ensuring that the risk allocations in the various project contracts will be

acceptable to potential lenders and financiers; and • ensuring that the works are fit for purposes.

Undertaking infrastructure projects in Kenya:Get the contract right!

Aleem Tharani I Anjarwalla & Khanna I at@africalegalnetwork.com

KENYA

4

In our experience, and especially where a particular project is being financed, lenders to a project will require that a project contract entered into for the construction of the relevant piece of infrastructure is “bankable”. In general terms, a bankable contract is a contract with a risk allocation between the contractor and the developer that meets the lenders credit approval risk allocation criteria. In assessing bankability, lenders will look at a range of factors and assess a contract as a whole. However, generally speaking, lenders will require that the project contract meets, at the very least, the following criteria:

• a fixed completion date;• a fixed completion price;• no or limited design risk;• liquidated damages for both delay and

performance;• security from the contractor and/or its parent

company;• large caps on liability; and• restrictions on the ability of the contractor to claim

extensions of time and additional costs.

The JBC Contract

In Kenya, so far as real estate development is concerned, the contract generally utilized is the Agreement and Conditions of Contract for Building works April 1999 Edition, which is published by the Joint Building Council, Kenya (The JBC Contract).

The JBC Contract does not, in our view, satisfactorily protect the interest of medium to large-scale developers and further does not meet the bankability requirements identified above due to, among others, the following reasons:

Delegation of developer’s power – the JBC Contract empowers a developer’s architect to issue instructions requiring the variation of works (which in effect allows the architect to issue instructions to vary

a contract to which it is not a party). The architect and contractor may therefore vary the scope of the building works without the prior approval of the developer and this encourages collusion between the contractor and the architect;

Approval and permits – under the JBC Contract, the developer assumes the risk of procuring all permits and approval for the proposed development failing which such permits are procured by the contractor and any costs and expenses incurred by the contractor are added to the contract price;

Contract Price Variation - The JBC Contract fails to identify specific performance milestones to be completed within certain time periods and which would warrant the payment of monies for the completion of such milestones. Additionally, the contract price under the JBC Contract can be increased, in amongst other ways, where: (a) the contractor is affected by the exchange rates; (b) “duties” on materials and goods are varied; and (c) the architect receives a written application from the contractor relating to a direct loss and/or expense suffered by the contractor;

Extension of Time - The JBC Contract provisions are widely drafted and provide that the contractor can apply for an extension due to the contractor’s inability for reasons beyond its control and which it could not have reasonably foreseen as at the date of the JBC Contract, to obtain delivery upon the works of such goods or materials as are essential to the proper carrying out of the works;

Qualitative Standards – Under the JBC Contract, the contractor may use materials, goods and workmanship set out in the bill of quantities (BoQ) only in so far as “the same are procurable”. It is therefore open to the contractor to carry out the works using materials, goods and workmanship that are not in accordance with the BoQ without any corresponding decrease in the contract price.

5

The Turnkey Engineering, Procurement and Construction (EPC) Contract

EPC Contracts are the most common form of contract used to undertake construction works by the private sector on large scale and complex infrastructure projects and address the bankability concerns identified above. In general terms, under an EPC Contract a contractor is obliged to deliver a complete facility to a developer who need only ‘turn a key’ to start operating the facility, hence EPC Contracts are sometimes called turnkey construction contracts. In addition to delivering a complete facility, the contractor must deliver that facility for a fixed price by a specified date. Failure to comply with any requirements will usually result in the contractor incurring monetary liabilities.

Risk allocations under an EPC Contract differ fundamentally from risk allocations under the JBC Contract.

In theory, a suitably drafted EPC Contract should deliver all of the bankability requirements listed above in one integrated package. This is one of the major reasons why they are the predominant form of construction contract used on large scale project financed infrastructure projects.

In comparison to the JBC Contract, an EPC Contract ensures that:• the contractor is responsible for all design,

engineering, procurement, construction, commissioning and testing activities;

• the contract price is a fixed sum and therefore the risk of cost overruns and the benefit of any cost savings are to the contractor’s account. The contractor’s only recourse to claim additional money is limited to circumstances where the developer has delayed the contractor;

• a fixed date or a fixed period for completion of the works is provided failing which liquidated

damages are payable to the developer by the contractor; and

• the contractor provides a suitable performance security from a creditworthy financial institution to secure the payment of contractor’s payment obligations under the contract (for instance in respect of liquidated damages).

Although we have sought to generally highlight the various advantages of using an EPC Contract above, it is worthwhile noting that under an EPC Contract:• the contractor will have to factor into its price the

cost of absorbing the above risks and this will in all cases result in a higher contract price quotation from the contractor; and

• the EPC Contract will contain more restrictive employer rights but this is counter-balanced by the imposition of greater obligations on the contractor.

Conclusion

The momentum that Kenya is on in relation to infrastructure development is only set to increase and with it, is a growing need for developers and lenders to consider the construction contracts that are entered into. In the end, the devil is always in the detail and in the case of infrastructure development, the detail could have a significant bearing on time, costs and risks associated with a project.

6

Founded in 1958, Musa Dudhia & Co.

is one of the most established law firms

in Zambia and thrives on the diversity of

its partners’ expertise. Musa Dudhia &

Co. is consistently ranked as a leading

law firm in Zambia by international legal

directories such as Chambers Global and

PLC Which Lawyer.

Introduction

There is no doubt that China is investing big in Africa. Top of China’s investment list is construction - the sector accounts for three-quarters of recent private Chinese investment on the continent. The bulk of China’s outward Foreign Direct Investment (FDI) is spent on service provision, which increased by an annual average of 150% from US$40 million in 1994 to US$821 million in 2007 alone. And thanks to privatisation, liberal economic policies, government efforts and increased investment in the mining sector - in turn due to recovery in commodity prices driven by demand from China and India - China’s investment in Africa only looks set to grow.

That this money is gladly received for development projects has been in Zambia, as in much of Africa, somewhat controversial. For the most part this is due to claims that human and environmental concerns are overlooked in the implementation of Chinese funded projects – as recently outlined in a Human Rights Watch report entitled “‘You’ll Be Fired If You Refuse’: Labour Abuses in Zambia’s Chinese State-owned Copper Mines.” The report pointed to serious safety blunders, with some workers complaining of handling acid and inhaling noxious fumes and dust for days on end. They were threatened with dismissal if they refused to work in dangerous conditions, the report said.

In Zambia, since coming to power in September 2011, the Patriotic Front government has made its view clear on Chinese investment: It is welcomed, as long as the law is upheld. When he was elected, President Michael Sata held a lunch for Chinese business people in Zambia. He said that previous governments had not done enough to make clear what obligations Chinese investors should meet. “When you give the Chinese a project without specifications, don’t blame the Chinese,” he reportedly said, “Blame yourself.”

Silk Road or Dragon Path? The impact of Chinese investment in Zambia

Arshad Dudhia I Musa Dudhia & Company I aadudhia@musadudhia.co.zm

ZAMBIA

7

does China receive so much attention in its investment interests?

The model of Chinese investment

Historically, Western FDI came to Zambia from privately owned corporations focused on profit maximization. At first, Chinese investment in Zambia was carried out largely by state-owned enterprises or joint ventures. From 1990 onwards, wholly owned enterprises established via mergers and acquisitions, directed at development markets in particular, replaced jointly owned ones.

In Zambia, Chinese investments are primarily resource seeking and to a small extent market seeking – and once businesses are fully operational, firms may use Zambia’s central location to sell to surrounding countries. For example, the China Henan International Cooperation GroupCo Ltd, a market-oriented road construction firm, gained a dominant role in the road construction market in Zambia by winning all major road construction contracts between 2004 and 2005 through low bid prices. Chinese owned firms have long-term rather than short-term profit driven motives – as indicated by their acquisition of Zambia’s Chambishi and Luanshya mines in the wake of the financial crisis. And China’s FDI is traditionally also driven by broader objectives - like better access to minerals or closer collaboration with private and public enterprises and government bodies.

Increasingly though, Chinese FDI is marked with aid, mostly in infrastructure development. In Zambia, while projects such as construction of the National Malaria Centre and The Central Statistical Offices were aid-funded, these were constructed using Chinese companies, supported by Chinese state institutions.

The positives and negatives

It is true that China’s demand for raw materials may undo Africa’s efforts at economic diversification. African

At that same lunch, China’s ambassador to Zambia, Zhou Yuxiao, promised that China could give Zambia loans and grants for farming, health, education and other projects. He added that total trade between the two countries was US$2.8 billion in 2010 and that China’s total trade investment in Zambia now stands at around US$5 billion. Chinese FDI to Zambia exceeded US$1 billion as of December 2010, creating jobs and spurring development.

Facts & Figures

• Chinese investments in Africa rose from US$681

million in 2000 to US$9.3 billion in 2010

• Of the US$9.3 billion invested by China in

2010, 42.3% was in the services sector, 29.2%

was in the mining sector, 22.0% was in the

manufacturing sector and 3.1% was in the

agricultural sector.

• In 2009, China surpassed the United States as

Africa’s largest trade partner.

• Sino-African trade reached US$126.9 billion in

2010, while the trade volume between China

and Africa rose 30% year-on-year in 2011,

signalling a new record high.

• Bilateral trade between China and Africa is

predicted to reach US$300 billion by 2015.

• China’s top five African trading partners are

Angola, South Africa, Sudan, Nigeria and Egypt.

Investment from the Chinese has penetrated almost every sector of the economy: textiles; infrastructure; construction; manufacturing; agriculture, and of course mining - both extractive and processing. By far the largest investments have been in the mining sector. It is important to note that the mining sector is still dominated by British and American transnational companies rather than Chinese companies. So why

8

countries could be left devoid of raw materials, facing limited opportunities for sustained development. The increased flow of cheap goods and services also presents another challenge arising from the influx of Chinese investment interest.

As well as the TAZARA railway project, the other major infrastructure project built in the late 1970s by the Chinese government was the Mulungushi textile factory. Also facilitated by an interest-free loan from the Chinese Government, it ran well for a while. Then, years of limited investment in machinery took its toll, leading to constant breakdowns.

In a bid to help the Zambian Government keep the textile factory afloat, the Chinese offered to run it as a joint facility. The Qingdao Textile Corporation then acquired a 66 per cent stake in the firm. There was a temporary respite and locally employed small scale farmers revived their cotton farming activities. But the company soon ran into trouble again – this time it could not compete with imported fabric from low cost production countries - such as China. Unable to cover its operating costs, the factory was closed in 2007. Most cotton was from then on exported in raw form, further forcing Zambia to rely on primary products. The negative effects of the Chinese imports further enhanced resentment of Chinese firms. There is a danger that resource seeking investment could perpetuate the raw material dependency of the country.

Chinese investment has undoubtedly encouraged

financial inflows in Zambia, improved capacity utilization, increased outputs and generated employment opportunities. The growth of copper production has been impressive, and has in turn led to corresponding improvements in exports and earnings. To the extent that such developments facilitate attainment of the broader development agenda, the investments are invaluable.

Historically, Zambia and China have enjoyed good relations. For instance, China lent assistance in building the Zambia-Tanzania railway to by-pass trade routes opposed to black majority rule when neighbouring countries were under white minority rule. Other donors refused. Zambia in turn co-sponsored the United National General Assembly resolution in 1971 to restore China’s seat on the Security Council.

Today, the Zambia-China relationship has come to focus more on business and trade than ideology. In 2006, the Forum on China-Africa Cooperation published “China’s African policy,” which includes the Chinese government’s support for “competent Chinese enterprises to cooperate with African nations in various ways on… the principle of mutual benefit and common development, to develop and exploit rationally their resources, with a view to helping African countries to translate their advantages in resources to competitive strength, and realize sustainable development.”

It might be financially beneficial in the short term. The bottom line is, is it sustainable in the long term?

9

ALN TREND WATCH

AFRICA’S GROWTH STORY

Africa’s impressive growth over the past decade is set to continue

• The Continent’s collective GDP currently stands at USD 2 trillion and is expected

to grow to over USD 15 trillion in 2060.

• Africa’s economic output over the past decade has increased by 300%.

• There are 7 African countries amongst the 10 fastest growing economies in

the world 2010-2015: Congo, Ethiopia, Ghana, Mozambique, Nigeria, Tanzania,

and Zambia.

• Africa’s middle class is set to grow from 355 million (34% of the population) in

2010 to 1.1billion (42% of the population) in 2060.

Africa’s changing regulatory environment is making it easier to do business on the continent

• 17 African countries lie ahead of India on the World Bank’s 2012 Doing Business

Index.

• In 2011, 78% of governments in sub-Saharan Africa changed their economy’s

regulatory environment to make it easier to do business.

• An Economist survey showed that more than 1 in 2 institutional investors see

Africa as the most attractive region to invest in over the next decade, with 1 in

3 expecting to put at least 5% of their portfolios into the continent by 2016.

10

ALN TREND WATCH

AFRICA’S GROWTH STORY

0

200

400

600

800

1000

2007 2008

YearN

umbe

r of F

DI P

roje

cts

in A

fric

a2009 2010 2011

FDI projects in Africa have grown at a compound rate of almost 20% since 2007

Capital Value of FDI Projects in Africa (proportion, 2003-11)

New FDI Projects in Africa (proportion, 2003-11)

SERVICES

MANUFACTURING

INFRASTRUCTURE

EXTRACTION

OTHER

29.9%

4.0%

27.6%

38.3%

SERVICES

MANUFACTURING

INFRASTRUCTURE

EXTRACTION

OTHER

29.9%

4.0%

27.6%

38.3%

SERVICES

MANUFACTURING

INFRASTRUCTURE RELATED

EXTRACTION

OTHER

50.9%

9.9%

13.0%

24.6%

As more investors realise the abundance of opportunities in Africa, Foreign Direct Investment is growing rapidly across a range of sectors

• Intra-African FDI has grown at a compound rate of

42% since 2007

• FDI projects in Africa have grown at a compound

rate of almost 20% since 2007

Sources: The Economist, Ernst & Young 2012 Africa Attractiveness Survey, fDi Intelligence, Africa Development Bank’s ‘Africa in 50 Years’ Time’, World Bank’s 2012 Doing Business Index

11

BLC Chambers is a leading Mauritian firm

with a robust offshore practice and a

strong team of legal advisors. Chambers

Global, IFLR 1000 and PLC Which Lawyer?

all recognise BLC Chambers as a top tier

law firm in Mauritius. BLC works closely

with AXIS Fiduciary Ltd, a specialist

service provider with expertise in offshore

companies, trusts and fund administration.

Introduction

On 5th June 2012, the Mauritius Parliament passed the Foundations Act aimed at allowing for the setting-up of private foundations in Mauritius. Mauritius is already known for being the prime gateway for the structuring of investments into India and Africa. The enactment of a Foundations Act is aimed at promoting Mauritius as a platform for wealth management services, succession and estate planning. Private foundations, which derived from foundations of the civil law, are expanding in popularity across the globe. The foundation specially appeals to high net worth individuals from Civil Law Jurisdictions who find it to be an ideal structure for succession planning and private wealth management. This article looks at the characteristics of private foundations and considers whether they may replace the “trust” in the context of private wealth management with a particular focus on the Foundations Act.

Background

Traditionally, “trusts” have been the preferred planning tool in the context of wealth management planning for high net worth families. Trusts have a very long history – indeed the trust idea originates from the medieval times. Personal trust law developed in England at the time of the Crusades, during the 12th and 13th centuries. At the time, land ownership in England was based on the feudal system. When a landowner left England to fight in the Crusades, he needed someone to run his estate in his absence, often to pay and receive feudal dues. To achieve this, he would convey ownership of his lands to a “trusted” acquaintance, on the understanding that the ownership would be conveyed back on his return. However, Crusaders would often return to find the legal owners’ had turned “untrustworthy” and would refuse to hand over the property. Unfortunately for the Crusader, English common law did not recognize his claim. As far as the King’s courts were concerned, the land belonged to the acquaintance, who

Private foundations in Mauritius: Alternative or complementary to trusts?

Assad Abdullatiff I Axis Fiduciary Ltd I assad.abdulalatiff@axis.mu

MAURITIUS

12

was under no obligation to return it. The Crusader had no legal claim. The disgruntled Crusader would then petition the king, who would refer the matter to his Lord Chancellor who was regarded as the keeper of the king’s conscience. The Lord Chancellor could do what was “just” and “equitable”, and had the power to decide a case according to his conscience. At this time, the principle of equity was born. The Lord Chancellor would consider it “unconscionable” that the legal owner could go back on his word and deny the claims of the Crusader (the “true” owner).

Therefore, he would find in favor of the returning Crusader. The legal owner would hold the land for the benefit of the original owner, and would be compelled to convey it back to him when requested. The Crusader was the “beneficiary” and the acquaintance the “trustee”. The term “use of land” was coined, and in time developed into what we now know as a trust.

What began as a means to circumvent feudal rigidities has become one of the most useful and flexible tools for practitioners and exported itself in a number of jurisdictions worldwide, including Mauritius.

Foundations on the other hand are a new-comer to the world of financial services but are being increasingly considered by practitioners in the context of private wealth management and/or for charitable

giving. The private foundation finds its origin in 1926, when Liechtenstein created the Family Foundation by the Law of Persons and Companies. Today there are a number of jurisdictions which have a law on private foundations namely Panama, Bahamas, Malta, Nevis, Anguilla, Isle of Man, and Seychelles, amongst others.

Trusts v Foundations

Defining CharacteristicsAlthough there are a number of similarities between trusts and foundations, there are also many differences. The Foundation arguably has all the advantages of a trust but very differently to a trust, it is a legal entity in its own right and can therefore own assets directly. A trust is an equitable obligation binding a person (the ‘trustee’) to use or apply property over which he has been given control for the benefit of persons or purposes set out in the trust document. A person, commonly known as the ‘settlor’, usually creates the trust by transferring assets to the trustee to be held on the terms of a trust document. A trust is thus not an entity but a relationship which gives rise to fiduciary obligations. On the other hand, a foundation is the dedication of property to an entity to be used for the benefit of people of for a specific purpose. As a British solicitor once said, “the Foundation is dressed like a corporation, yet has the soul of a trust”. FormationThere are strict legal requirements for the creation of trusts. A trust will not be valid in the absence of any of the “three certainties”, formal requirements not being complied with and if the assets to be held on trust are not transferred to (or under the control of) the trustees. Trusts generally do not have to be registered and are formalised via a trust deed or declaration of trust. On the other hand, it is easier to create a foundation which simply requires its constitution document (usually referred to as the ‘Articles’ or ‘Charter’) to be filed and registered. This act of registration creates, in law, an entity with specific juridical personality, enjoying aspects of corporate ability.

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GovernanceA trust is governed by the trustee who is the legal owner of the assets held in trust and has to manage them “en bon père de famille” (good paterfamilias). One of the defining characteristics of trustees is that they are personally responsible for liabilities incurred by the trust, or for making good any loss to the trust. Liability of trustees can only be excluded to some extent – case law has held that irreducible core of duties cannot be excluded. When it comes to a foundation, the latter is managed by the Council which carries out the objectives and purposes of the foundation. Similar to trustees, the standard of care of the Council is normally that of good paterfamilias. However, liability of Council can generally be excluded and members of Council would be more akin to that of company directors so that personal liability should be the exception as opposed to the norm.

Potential Uses of Private Foundations

Foundations have some of the attractions of a trust vehicle and can thus potentially be used for purposes that trusts are used for, namely: accumulation and preservation of wealth; succession and estate planning; asset protection; tax planning; as SPVs in off balance sheet transactions; corporate finance/asset financing; and securitisation.

However, compared to the trust which is a common law concept, the foundation vehicle will appeal to clients based in civil law territories where they are less familiar with the trust concept.

Because the foundation is an independent legal person, assets may be directly held by a foundation unlike a trust where the assets are held by the trustee on trust. This means that foundations may be more appropriate to hold assets which are “wasting” or subject to volatility in value. Given the trustee’s duty to diversify, act prudently, and in the best (financial) interests of the beneficiaries, trustees are often nervous about holding such assets. Foundations may

become the preferred vehicle for such assets. It is also a much more effective financial planning tool for those clients who want to maintain more personal control of the assets. Frequently trust deeds will be drafted with an express reservation of powers in the hands of the settlor of the trust (or a third party of his choice), the most common power to be reserved being that of investment. However, case-law has shown the danger of settlor reserved powers, often leading to sham arguments and other problems. Most importantly, the performance by a settlor of a reserved power does not disengage the trustee from its fiduciary duties. The attraction to using a foundation as opposed to a trust where the power to direct investments is to be reserved is that the overriding duty to monitor the performance of the investment to which a trustee is subject is not one to which the Council of a foundation will be subject.

The Mauritius Foundations Act 2012

A number of high net worth individuals already use a Mauritius “Trust” for estate, succession planning and family office services. The first Trust Act (which was an updated and improved version of the English Trustee Act 1925) was enacted in 1989. In 1992, the Offshore Trusts Act was enacted to specifically provide for many of the desirable features prevailing in other offshore jurisdictions. In 2001, a new modern and

14

forward looking Trust Act was enacted. However, as explained above, whilst the ‘trust’ appeals to clients from common law jurisdictions, it is less attractive to those clients from Civil Law jurisdictions where the ‘trust’ concept is largely unknown. Also, a ‘trust’ does not have corporate personality which means that very often, an underlying SPV has to be resorted to when the intention is to hold property in some civil law jurisdictions which do not recognize a trust.

The Foundations Act was introduced as a bill in Parliament on 29 May 2012 and passed on 05 June 2012. The following are the salient features of a Mauritius Foundation under the Foundations Act: (a) it can be set-up intervivos (by charter) or by will;(b) it can be set-up to benefit persons, class of persons or to carry out a purpose which may be charitable, non-charitable or both;(c) it would have to be managed by a Foundation Council which should comprise of at least one member ordinarily resident in Mauritius;(d) It would require a secretary in Mauritius which would need to be a licensed by the Financial Services Commission;(e) It would need to have a registered office in Mauritius; (f) When registered it would have separate legal personality;(g) It would need to keep proper books of

accounts and keep its records in Mauritius at its registered office;(h) It would not be subject to being set aside by a Mauritius Court and a Mauritius Court would not recognise the validity of any claim against the property of a Foundation pursuant to the law of another jurisdiction or the order of a court of another jurisdiction; (i) Where the founder and all the beneficiaries are non resident (or if set-up for a purpose, that purpose is being carried out of Mauritius) it would be exempt from tax in Mauritius.

Conclusion

The trust concept has been around for centuries and comes as a tried and tested product with nearly a thousand years experience of case law. On the other hand, foundations are a relative newcomer to the scene. However, the foundation benefits from legal personality and can hold assets directly as opposed to trusts. Trusts would probably continue to be preferred by clients from common law jurisdictions but foundations would certainly be preferred by those from civil law jurisdictions.

Suffice to say, the Foundations Act offers one of the most versatile and dynamic foundations available from any jurisdiction and further promotes Mauritius as a platform for wealth management services, succession and estate planning.

1515

Webber Wentzel is one of the leading

corporate law firms on the African

continent. The firm was once again

named South African Law Firm of the

Year by Who’s Who Legal 2012. This is

the fourth time that Webber Wentzel has

received this prestigious accolade.

Introduction

Wal-Mart Stores Inc’s decision to invest in South African retailer Massmart Holdings Limited, has been seen as a vote of confidence in the country and in Africa in general. This is the largest foreign acquisition by Wal-Mart since its 1999 acquisition of Asda and one of the largest investments by a US corporation into Africa to date. There has been significant interest in the transaction in South Africa, with the SA Government and trade unions actively opposing the transaction before SA’s competition authorities.

The Approval

In order to be consummated, the transaction required approval from SA’s competition authorities. The SA Competition Act mandates the competition authorities, in considering approval, to among others, assess the effect of a merger on certain public interest considerations, such as its effect on employment. SA’s Competition Commission had recommended that the Competition Tribunal approve the transaction unconditionally. After hearing evidence from the merging parties and the opponents to the merger, the Competition Tribunal approved the merger in May 2011, subject to conditions that were tendered voluntarily by the merging parties. These conditions addressed public interest concerns that had been raised by the Government and trade unions in relation to employment and procurement issues.

Public interest considerations in merger control:Lessons from Wal-Mart’s expansion in South Africa

Desmond Rudman I Webber Wentzel I desmond.rudman@webberwentzel.com

SOUTH AFRICA

16

The Challenge

The Government and trade unions challenged the Competition Tribunal’s ruling before the Competition Appeal Court. The Government took the Competition Tribunal’s decision on judicial review, arguing that the process the Competition Tribunal had adopted in dealing with the matter resulted in the Government not enjoying a fair hearing, while the trade unions launched an appeal against the decision. The trade unions contended that the Competition Tribunal had erred in approving the merger subject to conditions and argued that the Court should prohibit the merger or impose more extensive conditions on the parties.

The Decision

On 9 March 2012, the Court dismissed the review application, but partly upheld the appeal by the South African Commercial, Catering and Allied Workers Union (SACCAWU). Although the Court found that there was insufficient evidence to conclude that the merger’s effect on small and medium sized enterprises (SMMEs) and employment was sufficient to prohibit the merger, it partly upheld the appeal as it found that there were legitimate concerns which justified the imposition of conditions.The Court endorsed the employment related conditions imposed by the Competition Tribunal, but extended them and ordered that a study be conducted by three experts appointed by SACCAWU, the merging parties and the Government to assist the court in framing a supplier-development condition.

The Court considered the argument made by the opponents to the merger that since the competition assessment requires the authorities to consider whether or not the merger “substantially prevents or lessens competition”, this precluded consideration of any pro-competitive gains resulting from the merger. Accordingly, if there was any public interest harm arising from the merger, the pro-competitive gains could not be weighed up against this harm.However, the Court appears not to have accepted

this argument and rather adopted an interpretation of the Act which mandates the authorities to weigh up the competition effects of the merger (positive, negative or neutral) against the public interest harm (positive or negative). A merger can be prohibited on public interest grounds only when the merger would lead to “substantial” public interest harm.

However, where the public interest harm is not sufficient to justify prohibition of the merger, it nevertheless needs to be measured to determine whether or not conditions should be imposed and, if so, the extent of the conditions. Evidence of public interest harm and competition effects is therefore crucial.

In this case the Court found that it was uncontested that prices will be reduced to the benefit of consumers as a result of the merger and that it did not appear to be disputed either that there was the potential for South African SMME suppliers to gain benefit from the

17

presence of Wal-Mart and its unique access to global value supply chains.

These positive factors would need to be weighed up against any losses which would be experienced by SMMEs, as well as the consequences for employment. The Court concluded that in dealing with a standard that seeks to weigh up the competition assessment against the public interest assessment, it is highly unlikely that the prohibition of the merger could have been justified.

However, the Court pointed out that in such circumstances the public interest harm was not irrelevant. The Court recognised the concerns identified by the Competition Tribunal regarding the effect of the merger on SMMEs and employment,

particularly in light of the development of global supply chains viewed within the context of broader globalisation. The Court therefore concurred with the Tribunal that conditions were required.The Lessons

The judgment is important as it gives an indication of the Court’s interpretation of the legal test in SA’s Competition Act to be applied by the competition authorities when assessing and deciding on a notifiable merger - The authorities first need to examine the effect of the transaction on competition and thereafter its effect on specified public interest factors. The case serves to show that public interest considerations cannot be ignored in mergers and acquisitions, even where a transaction promises pro-competitive gains and investors will need to keep this in mind.

Watchlist: Recent Developments in Regional Competition laws in Africa

The African continent has several regional blocs such as the East Africa Community ( EAC),the Common Market for Eastern and Southern African Countries (COMESA), the Economic Community of West African States (ECOWAS), the Southern African Development Community (SADC) and the Community if Sahel-Saharan States (CEN-SAD).

With cross-border mergers and acquisitions being on the rise, here is a snapshot of what to expect in regional competition regulation:

COMESA Competition Regulations, 2004 – These are competition regulations that will apply in respect of cross-border transactions affecting the COMESA countries, being Burundi, Comoros, D.R. Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Seychelles, Madagascar, Malawi, Mauritius, Rwanda, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. The Regulations were approved by COMESA in 2004, but are yet to be operationalised. The operationalisation instruments and guidelines are being finalised and processes are being put in place, such as staff recruitment. It is expected that the Regulations will come into force very soon.

EAC Competition Act, 2006 - The EAC Competition Act (which would apply to the EAC countries –being Kenya, Uganda, Tanzania, Rwanda and Burundi) was enacted in 2011 and the EAC Competition Regulations, 2010 has been approved. However, the EAC Competition Authority and staff are yet to be appointed and the regulations are not operational.

SADC – At present there are no regional competition laws in place. Competition in this region continues to be regulated at the national level.

1818

MMAKS Advocates is one of the largest

firms in Uganda with a well developed

client base of high profile local and

international entities. Leading legal

directories such as Chambers Global, IFLR

1000 and PLC Which Lawyer? all regard

MMAKS Advocates as a Tier 1 law firm

within Uganda.

Introduction

The Mortgage Regulations, 2012 (the “Regulations”) have recently come into force in Uganda and introduce some changes to the creation, registration and enforcement of mortgages. These are expected to have a significant impact on the banking industry.

Mortgages over matrimonial property

Amongst other things, the Regulations require a mortgagee to take steps to inquire into the marital status of a mortgagor. The mortgagor must state by way of statutory declaration whether he or she is married or not. Where the mortgagor is married, his or her spouse is also required to make a statutory declaration to that effect.

The mortgagor and spouse are additionally required to attach a certified copy of their marriage certificate or other evidence of marriage to the declaration. Where the property being mortgaged is a matrimonial home, the consent of the mortgagor’s spouse must be obtained in order for the mortgage to be valid.

Mortgagee’s Right to Tack

The English law concept of right to tack has been introduced in legislation. This right relates to the ranking of various mortgagees and a mortgagee who has a right to tack is able to make further advances to the mortgagor and rank prior to a subsequent mortgagee on the same property.

Taking security in Uganda:New developments in Uganda’s Mortgage Regulations

Rachel Musoke I MMAKS Advocates I musoke@mmaks.co.ug

UGANDA

19

The Regulations require a mortgage deed to specifically be labelled “Mortgage with right to tack”. This is unlikely to have much effect in practice as the title deed would be held by the first mortgagee who would therefore have to consent to the creation of the subsequent mortgagee’s security, on specific terms, including the right to advance further monies and secure them using the same property prior to the subsequent mortgagee.

Provisions relating to Realisation of a Mortgage

The Regulations require that the address to be used by the mortgagee when serving notice to the mortgagor is the address that the mortgagor gave at the time of entering into the mortgage. Where no address was given, the mortgagee is to publish notice to the mortgagor in a newspaper of wide circulation in the area where the property is situated.

A mortgagee is required, before selling mortgaged property upon default, to value the property to ascertain the current market value and the forced sale value of the property. The valuation should not be made more than six (6) months before the date of sale and should contain the current pictures of the property, including the front view of the property, the side view of the property and detailed description of the property.

The Regulations also have a significant effect on the right to exercise the statutory power of sale. The Regulations provide that on the application of the mortgagor, spouse, agent of the mortgagor or any other interested person, the Court may, for reasonable cause, adjourn a sale by public auction to a specified date and time upon payment of a security deposit of 30% of the forced sale value of the mortgaged property or outstanding amount, whichever is higher. The Court will however decide whether or not a spouse who seeks to stop the sale should make the 30% payment. This discretion is very troubling as there is no guidance on how this wide power is to be exercised.

This may create avenues for corruption. Where the adjournment is for more than 14 days a fresh public notice is to be given unless the mortgagor consents to waive this requirement. A sale by private treaty may only be conducted with the written consent of the mortgagor, which consent cannot be retrospective. In practice, this consent is given by the mortgagor in the deed at the onset.

Forms of Documents

The Regulations provide for various forms such as the spousal consent form, release of mortgage form, transfer of mortgage form, notice of default form and notice of appointment of receiver.

Conclusion

The creation of mortgages is an essential part of the banking industry in Uganda and plays a vital role in the financial sector as it is the creation of securities, such as mortgages which forms the backdrop of financing transactions. The changes introduced by the Regulations, especially in relation to creation of mortgages over matrimonial property and the court’s powers to adjourn or stop the exercise of the statutory power of sale by financiers have a resounding effect on the industry. The new Regulations create additional obligations of diligence on the part of financiers to ensure that that there are no factors which could invalidate their security or act as a fetter to enforcement and banks and financial institutions should take note of the new developments.

20

Anjarwalla & Khanna was for the second

year running nominated for the award of

“Law Firm of the Year” in the Middle East

and Africa in the British Legal Awards.

A&K was the only firm from East and

Central Africa to be nominated for this

award.

Introduction

Under the Advocates Act (Cap.16, Laws of Kenya) (the “Advocates Act”) certain documents relating to land are required to be “drawn by” a qualified person. It is generally accepted that documents creating a disposition in land, such as transfers, conveyances, leases, charges and mortgages should be drawn by a qualified advocate. The practice has been to indicate in the document the advocate or the firm of advocates which has drawn the documents. A question has in the past arisen on whether the requirement for the documents to be drawn by a qualified advocate would extend to guarantees.

The Statutory Requirement

A qualified advocate is not simply someone who has studied the law and practices law. The Advocates Act defines a “qualified person” as a lawyer who has been admitted to the Roll of Advocates as an Advocate of the High Court of Kenya and who holds a valid and current practising certificate.

Under the Advocates Act, an unqualified person may not directly or indirectly take instructions or draw and/or prepare any document or instrument relating to any of the following matters:

1. the conveyancing of property (e.g. by way of sale, transfer, lease or charge);2. the formation of any public or private limited liability company;3. the formation or dissolution of a partnership;4. the filing or opposing of a grant of probate or letters of administration;

Security documentation in Kenya: Should guarantees be prepared by a qualified advocate?

Fidel Mbaya I Anjarwalla & Khanna I fmm@africalegalnetwork.com

KENYA

21

5. any matter for which a fee is prescribed by any order made by the Chief Justice ( the existing Advocates Remuneration Order is an order made to provide for the remuneration of Advocates with respect to prescribed fees in specific matters); or

6. relating to any other legal proceedings.

The case law

In the Court of Appeal case of National Bank of Kenya v Wilson Ndolo Ayah Civil Appeal No.119 of 2002 (“NBK v Ndolo Ayah”) it was held, among other things, that a Legal Charge over land and a Guarantee created/issued in favour of a commercial lender to secure certain obligations of a borrower had not been drawn and prepared by a “qualified person” and, as such, the Legal Charge and the Guarantee were invalid and unenforceable. In respect of the Guarantee, while there was no evidence

on the document of the person who had drawn and prepared the Guarantee the borrower testified that the document had been drawn and prepared by the same Advocate who drew and prepared the Legal Charge. The Advocate was not deemed to be a “qualified person” for the purposes of the Advocates Act as the Advocate in question did not at the time hold a valid and current practising certificate.

What does this mean for guarantees?

It is arguable that the Ruling in NBK v Ndolo Ayah has created a gap in the law as guarantees are not listed in the Advocates Act as documents that are required to be drawn and prepared by qualified persons. Guarantees are unlike legal charges, which are documents that are created to convey a security interest in property in favour of a lender by way of a fixed legal charge and, per se, are required to be drawn and prepared by qualified

22

persons. Likewise, while the existing Advocates Remuneration Order provides for the remuneration of qualified persons with respect to the drawing and preparation of legal charges over property, the same Advocates Remuneration Order does not provide for remuneration of qualified persons with respect to the drawing and preparation of guarantees.

In Kenya, it is common practice for local lenders to draw and prepare their guarantees “in-house” in the lender’s standard form or template rather than procure that their guarantees be drawn and prepared by qualified persons. In these cases, lenders need to be aware that the Ruling in NBK v Ndolo Ayah, being a ruling of the Court of Appeal, is ultimately binding on courts subordinate to the Court of Appeal. In this regard, an “in-house” prepared guarantee presented as evidence in a subordinate court may be challenged on the grounds that it falls foul of “in-house” prepared guarantee presented as evidence in a subordinate court may be challenged on the grounds that it falls

foul of the Ruling in NBK v Ndolo Ayah and such an “in-house” guarantee may be set aside on similar grounds unless there is evidence on the document that proves that the “in house” prepared guarantee was drawn and prepared by a qualified person (being an advocate or a firm of advocates).

Conclusion

The position has for a long time been settled that financiers should ensure that charges and mortgages are prepared by a qualified advocate. With regard to guarantees, unless and until the law in this area is clarified by way of either a decision of a superior court or fresh legislation, it would be prudent for both local and international lenders to take greater cognisance of the effect of the Ruling in NBK v Ndolo Ayah and take steps to mitigate the risks to their security by ensuring that guarantees issued in their favour are drawn and prepared by qualified persons as prescribed by the Advocates Act.

23

International directories recognise Musa

Dudhia & Co. as the law firm of choice

for major clients seeking skilled domestic

representation. The firm’s extensive

client base includes public and private

companies, investment and retail banks,

international financial institutions and

private equity providers.

Introduction

Recently enacted laws in Zambia have drastically curtailed the rights of employers to monitor employees’ use of IT systems and even imposed severe criminal sanctions on employers. It is usual for employers in Zambia, and in fact, in various jurisdictions, to monitor the use of the employer’s IT equipment and systems by employees, especially during working hours, including interception of email communication by employees.This may be for various reasons such as:

(a) monitoring employee productivity;(b) managing HR risks which may arise, for example, in the use of systems and equipment to send obscene or unsavory messages which may be deemed as harassment;(c) managing criminal risks such as logging on sites that may constitute criminal conduct;(d) alleviating virus and system corruption risks; and (e) managing reputational risks to the organization due to the employee’s conduct.

However, this needs to be exercised with caution, as in doing so, an employer may be contravening the provisions of the Electronic Communications and Transactions Act No 21 of 2005 (the “ECT Act”). The ECT Act is the principal statute regulating electronic transactions in Zambia. The ECT Act prohibits anyone from using of electronic, mechanical or other devices to intercept communications of electronic communications whether directly or through third parties. “Access” is defined as the right to use or open the whole or any part of a computer or electronic communication

Controlling Big Brother in the Workplace:IT Monitoring Laws in Zambia

Chanda Musonda I Musa Dudhia & Company I cmusonda@musadudhia.co.zm

ZAMBIA

24

system, or to see, open, use, get or enter information in a computer or electronic communication system, with authorization from the owner or operator. The term “intercept” means accessing or acquiring the contents of a communication through an electronic, mechanical or other device. The ECT Act is couched in such a wide manner that it does not exclude the employee/employer relationship from its applicability. As such, an employer who inter-cepts the email of an employee in a work environment runs the risk of breaching the ECT Act. Therefore, the monitoring of emails or internet use of the employees by the employer may be considered to be a form of in-terception and as such prohibited under the ECT Act.

What happens should the employer attempt to con-duct investigations on an employee for possible misconduct or disciplinary proceedings or perhaps, possible criminal investigations? The ECT Act is an impediment to any investigations that the employer may wish to investigate in respect of an employee as consent of the offending employee must be sought. Indeed, this would defeat the purpose of the inves-tigations. Furthermore, the ECT Act does not contain any exceptions in respect of investigations to be con-ducted by employers. The only exception to the pro-hibition of interception is law enforcement agencies and even such law enforcement agencies may only intercept by obtaining an interceptions order from the Court.

The absurdity in relation to the employee/employer relationship is to be found in the penalty for breach of the above provision which prohibits interception. Under the ECT Act, a person who contravenes the prohibition on interception commits an offence and is liable, upon conviction, to imprisonment for a period of twenty-five years. It is difficult to comprehend the circumstances and the justification for the imprison-ment of an employer for intercepting an employee’s email communication. If the offending person is a cor-poration, every person who is a director or concerned with management of the body corporate or knowingly authorised or permitted the act shall be deemed to have committed the same offence for the purposes of the Criminal Procedure Code.

In conclusion, therefore, the ECT Act pauses potential problems for the employer in electronic communica-tions and particularly in regulating employees in the work environment. The ECT Act is a fairly recent stat-ute and has not been tested in the Courts of Law in Zambia and as such there are no Court precedents on this subject. It is our opinion that the drafters of the ECT Act drew the Act too widely with little regard to electronic communications in the labour sector, which sector increasingly depends on electronic communica-tions in the modern world.

Accordingly, in order for employers not to fall foul to the provisions of the ECT Act, we suggest that employ-ers obtain prior written consent from employees under which employees give authorization for the employer to have access and intercept the electronic system of the employee.

25

Investing in Africa:A five minute take by ALN’s Chairman

Describe Africa in one sentence.Africa is a complex continent in which the private sector is playing an increasing role in the development of the economy.

What major changes have you seen in Africa since 2006 when you relocated?There has been an emergence of private sector companies which are not South African; foreign companies investing in multiple jurisdictions at the same time; and strengthening of the banking sector in Africa. In the recent past, there has been an increased interest to invest in fast moving consumer goods; packaging; cement; road transport; and telecoms.

There is keen interest in foreign direct investment in Africa. Why do you think this is so?The major reasons that immediately come to mind are the relative lack of good investment opportunities elsewhere; strong returns on investments; and increased security and transparency in various countries.

Guest Column What would you say are the key challenges or major impediments to development in Africa?Some of the key challenges are: vulnerability to external shocks (such as the price of oil and the strength/weakness of the dollar); poor infrastructure; and bureaucracy and venal politicians.

What key factors that are unique to Africa would a potential investor need to consider?An investor would need to bear in mind that every country on the Continent can become politically destabilised; all governments are looking to increase their tax revenue, particularly in relation to land and mining; and each country has its own differences and idiosyncrasies.

Are law and policy in Africa up to the task, or are they being left behind with the speed with which Africa is developing?In the mature economies such as Botswana, South Africa and Mauritius, this is not a problem but in the potentially larger economies of Egypt, Nigeria and Ethiopia, this will be a major issue as more often than not, the law is not catching up with development. There needs to be legislation with actual teeth, supported by competent regulators and effective court oversight.

Where do you see Africa fifteen years from now?With the onset of time, investors will become more selective so countries with prudent pro-foreign investor policies (such as zero nationalisation programmes and muted indigenisation policies) will prosper but others will fail. One can expect Nigeria, Ethiopia, Kenya and Egypt to do well, and South Africa to decline in relative terms.

John Miles I Chairman ALN I jmm@africalegalnetwork.com

John Miles is the Chairman of ALN and leads J. Miles Arbitration, Investigation & Consultancy, specializing in international arbitration, investigation and legal consultancy work out of Africa. John advised on a wide breadth of Africa-related energy, natural resources, trade and dispute resolution matters over a 20 year period in London.During this period he also ran an office in Cairo. John has varied experience advising investors, multilateral finance institutions, governments and global multinationals.

26

ALN at a glance

About ALN

ALN is the leading independent multilateral grouping of premier law firms in Africa. With 580 lawyers on the ground, ALN’s unmatched footprint in Africa will help you connect with the right lawyers in the right locations. All our member firms are recognised as leading law firms by international legal directories including Chambers Global, Legal 500, IFLR 1000 and PLC Which Lawyer? ALN member firms are on the ground in Botswana, Burundi, Ethiopia, Kenya, Malawi, Mauritius, South Africa, Tanzania, Uganda and Zambia. In addition to having detailed knowledge of their domestic legal landscapes, extensive business connections and strong regulatory relationships, ALN firms maintain close relationships with leading law firms in other African jurisdictions, providing clients with first-class legal advice within and outside the network. ALN also has affiliate law firms in Dubai, UAE and Lisbon, Portugal.

Look out!: New Developments in ALN

ALN now has a new affiliated entity, J. Miles Arbitration, Investigation & Consultancy (J. Miles & Co). J. Miles & Co is led by John Miles, who is the current Chairman of ALN and who was previously a partner at Denton Wilde Sapte (as it then was) and Hunton & Williams. The team of J .Miles & Co has experience in international arbitrations under the London Court of International Arbitration (LCIA), International Chamber of Commerce (ICC) and ad hoc arbitrations, and has also been involved in investigation and advisory work for governments and corporate clients in Africa and across the world.

J. Miles & Co is affiliated to ALN and Anjarwalla & Khanna (A&K), and through these affiliations, is well poised to offer seamless services in the case of overlap or a need to engage the services of law firms within ALN countries. This has become a critical service factor for clients who are interested in quality, cost-effective and efficient legal services.

For more information on ALN, its member firms and affiliates, contact us on alnsecretariat@africalegalnetwork.com or visit www.africalegalnetwork.com