South Africa: southern comfort

There has been a surge in international law firms opening offices in the South African cities of Johannesburg, Cape Town and Durban. UK-based firms Dentons and Clyde & Co are the most recent arrivals, following in the footsteps of Norton Rose Fulbright, Linklaters, Hogan Lovells and others. Many more global outfits are looking at how they can enter the continent’s most sophisticated legal market.

Rob Otty, Norton Rose Fulbright’s South Africa managing partner, explains the lure: ‘There is a huge amount of investment coming into South Africa from various parts of the global economy, and the country remains a significant gateway into the African sub-continent.’ Last year, South Africa was the continent’s top recipient of foreign direct investment (FDI), which more than doubled to over $10bn, according to the United Nations Conference on Trade and Development.

This was nearly one-fifth of the estimated US$56.3bn FDI that flows into Africa.

Eversheds South Africa managing partner Peter van Niekerk says: ‘The opportunities in South Africa for international business extend far beyond its role as the gateway into the rest of Africa.’ The World Economic Forum gives South Africa top marks among African nations in the latest Global Competitiveness Index. According to the forum, South Africa ranks first in Africa for: strength of auditing and reporting standards; efficacy of corporate boards; and the protection of minority shareholders’ interests.

South Africa has a relatively stable democracy and a diversified economy. While the mining sector continues to attract FDI and remains a major employer, Africa’s second-largest economy also has strong capital markets and a robust services sector. It is also home to Africa’s biggest lender, Standard Bank Group, and the continent’s biggest insurers.

The World Bank recently downgraded its forecast for growth this year in South Africa from 2.7% to 2%, compared with 5.8% in the rest of sub-Saharan Africa, because of a ‘tight monetary policy combined with labour strikes and weak electricity supply’. Nevertheless, lawyers remain sanguine about future prospects.

‘While the South African economy is currently very sluggish, there is potentially a big upside in the country that everyone recognises,’ Otty says. ‘If we had some policy certainty from the government, it is quite conceivable that within the short- to medium-term, the economy could also be growing at 5%-6% a year.’

Despite investor concerns around a new mining and petroleum bill, there is optimism among lawyers about the development of shale gas in the Karoo region in central South Africa (the fifth-largest reserves in the world) and exploration for oil and gas in the Orange Basin off the north-west coast. South Africa’s substantial hydrocarbon reserves are also attracting major oil and gas companies, including Shell, Anadarko, Chevron and ExxonMobil.

Entry strategies

Lucy Hicks, international policy adviser at the Law Society, notes that the majority of the top-50 UK law firms are working in South Africa to some extent. But she adds: ‘As with many other jurisdictions, they don’t necessarily need a presence [on the ground] to be established in the country so have chosen not to until now.’ But that is changing.

‘From an international law firm perspective, there is no doubt that there has been a fundamental shift in a very short space of time,’ Otty says. He points to the increasing number of global law firms that have set up a base in the country over the past two years or so – either alone or, more frequently, through tie-ups with South African counterparts. ‘Clients who are looking at coming into Africa are increasingly saying: “We want to know that you have a credible presence on the continent.”.’

Baker & McKenzie opened an office in Johannesburg in May 2012 with the entire Johannesburg team of the now defunct Dewey & LeBoeuf. This was part of a wider African expansion. In the same year Baker & McKenzie entered Casablanca, adding to its North African presence in Cairo.

Partner Morné van der Merwe says: ‘There is clearly an intention on the part of the firm to focus more on Africa, and that is driven by client demand all over the globe. Clients are becoming more interested in developments on the African continent, and Johannesburg is strategically a very good place to position yourself, especially if you want to [access] southern African markets.’

Baker & McKenzie’s Johannesburg office opened two years ago with 14 lawyers. This has grown to 50, including 10 partners, who are ‘serving very high-level domestic and international clients,’ van der Merwe adds. Among them are Anglo American, Glencore Xstrata, Forbes Coal Group and Wesizwe in the mining sector, and in other industries, South Africa’s petrochemical group Sasol, Rand Merchant Bank, US consumer group Danaher Group, and Google.

Most other foreign firms prefer tie-ups with local players. In 2012, Linklaters formed an ‘exclusive’ alliance with South African firm Webber Wentzel, one of the country’s ‘big five’ law firms, with 430 lawyers in Johannesburg and Cape Town. The association involves exclusive referrals and a common integrated approach to marketing, HR, and IT.

Linklaters partner and head of African projects group Andrew Jones says: ‘Webber Wentzel is very much part of our family, as most Linklaters’ offices are. But in legal terms we are two separate firms with an alliance arrangement, which is a contract.’

Eversheds, which re-entered South Africa at the end of 2013 through an alliance with Mahons Attorneys (following the end of a previous alliance with Routledge Modise in 2012), has structured the relationship as ‘a simple licensing agreement’ that includes Mahons’ use of the Eversheds name within South Africa and Mauritius, Van Niekerk says. Despite the common brand, the two firms maintain separate banking accounts and profits.

NRF merged in June 2011 with big five firm Deneys Reitz, which now trades as Norton Rose Fulbright Africa. NRF used the Swiss ‘verein’ structure, whereby the two combined firms work on a fully integrated basis but do not share revenues or pool profits. ‘We operate as a single business, but we are not financially combined,’ Otty says.

The reason for these types of tie-up is that South Africa’s current regulations forbid foreign law firms to enter into fee-sharing arrangements or form partnerships with South African lawyers (see box, right). But there are other benefits to keeping profits separate, particularly in emerging economies where local currency rates can fluctuate significantly compared with the more stable rates in Europe, the UK or the US.

Jones says: ‘The rand is very volatile and can sometimes fluctuate by as much as 10%-15%. So, if you are trying to share profits in a way that treats all foreign operations equally, the currency volatility makes it very difficult. Our alliance with Webber Wentzel sidesteps this hurdle quite neatly because everyone keeps their own currency.’

So, why team up with local firms? Jones explains: ‘South Africa has a very complex and sophisticated legal system, and that is a key reason for us doing a deal with a full-service law firm as established as Webber Wentzel. Building up your own office by recruiting a few people is really, really hard in South Africa, more so than in any other country, and you really do need a full service law firm. It is like setting up in London. If you want to do a proper job in South Africa you need a lot of really good specialist lawyers.’

Employment and procurement are among the complex areas of South African law. So is Black Economic Empowerment (BEE), a government programme designed to strengthen the involvement of black people in the economy. Since its introduction in 2003, BEE has generated a steady stream of new legislation, charters and codes of practice.

‘A uniquely South African challenge for international law firms operating in South Africa is BEE compliance,’ Van Niekerk says. ‘International firms operating within South Africa will need to have a thorough understanding of BEE legislation, including its rationale and objectives, and how to best apply the legislation and regulations within their clients’ businesses.’

A second advantage of alliances with South African firms is a more rapid expansion elsewhere in sub-Saharan Africa.

Webber Wentzel is an associate of the Africa Legal Network, the largest alliance of African law firms in countries such as Botswana, Burundi, Kenya, Nigeria and Zambia. DLA Piper and big five Cliffe Dekker Hofmeyr, which formed an alliance in 2005 named DLA Cliffe Dekker Hofmeyr, have established DLA Piper Africa Group, a network of independent law firms in 13 African countries, including Rwanda, Ghana and Tanzania.

With the Mahons tie-up, Eversheds is now in Johannesburg and Cape Town, as well as Mauritius. Van Niekerk says: ‘Mauritius’ favourable tax structures and incentives make it very beneficial for global companies to establish holding companies there, especially for their African subsidiaries. Eversheds Mauritius, together with Eversheds South Africa’s tax team, is well suited to provide these clients with the required expertise and advice.’ Eversheds also has a foothold in Durban through a separate alliance with Knight Turner, which is to rebrand as Eversheds KZN.

Fortunately for foreign law firms seeking partners, there are as many benefits in alliances for local outfits as for them.

Chris Ewing, chairman of DLA Piper Africa, says: ‘Most of the major South African firms have realised that globalisation is inevitable and are strengthening their ties with firms, mainly from the UK.’ In particular it is the lure of the African continent at large that is in their sights.

Van der Merwe, who spent 14 years at South Africa’s Werksmans before joining Baker & McKenzie, says that a big part of the focus of the firm’s Johannesburg office is serving the rest of Africa.

This often involves working on English law-based contracts and other documents – in contrast to South Africa’s legal system, which is based on Roman-Dutch law. ‘A big part of the reason that, historically, South African law firms have not been so successful at making inroads into the rest of Africa is because South African law is not applicable there.’

One firm that has succeeded in accessing the huge market to the north without a foreign partner is big five Bowman Gilfillan (BG). In addition to about 360 lawyers in Cape Town and Johannesburg, the firm also has offices in Kenya, Uganda, Tanzania, Botswana and Madagascar as part of its Africa Group.

Managing partner Jonathan Lang, a qualified English solicitor and a former Allen & Overy partner, says: ‘Certainly, to the extent that there is a need for English contract law advice, we are well positioned. We have a number of English lawyers in the firm.’

But Lang argues that putting down roots ‘on the ground’ across Africa is more important. ‘For us, it is more to do with the relationships we have with financial institutions, corporates and the public sector in Africa, and our ability to serve them,’ he says. ‘We are in six countries at the moment and our medium-term plan is to be in eight to 12, and there isn’t actually anybody else at the moment who is in that position.’

As rivals have been sealing alliances with global law firms, BG has been giving ‘a lot of consideration’ to this too, Lang adds. ‘It might be something that could change in the future, but for the time being we think that, on balance, remaining independent is the best thing for our business.’

Where the work is

So, what are the opportunities for international law firms in South Africa?

Power, including green energy infrastructure projects (worth £28bn of projected spend, according to UK Trade & Investment), have kept international law firms and their South African counterparts very busy. South Africa, which relies primarily on coal to provide electricity to nearly 52m people, has suffered from crippling power shortages in recent years.

But significant projects are under way to tackle the blackouts. BG has been advising Eskom, the state-owned utility, on all aspects of the Medupi and Kusile coal-fired power stations – the largest in Africa – currently under construction at a cost of $10bn and $12bn respectively.

South Africa is also heavily promoting green energy. In 2010 the government launched the Renewable Energy Independent Power Producer Programme (REIPPP) that has so far attracted R150bn (£8.2bn) in FDI.

Baker & McKenzie’s Johannesburg team has advised on 18 of the 47 projects awarded ‘preferred bidder’ status in the first and second bidding rounds of REIPPP, and is currently advising on several projects in the third round, according to van der Merwe.

Linklaters has acted as international counsel to the South African government on REIPPP, and for the lenders, including the Development Bank of Southern Africa and the European Investment Bank, on the project financing of Khi Solar One, a 50 megawatt (MW) superheated steam solar tower in the Northern Cape province, costing more than $1bn.

The big push on renewables extends beyond South Africa. The country serves as a base to advise clients on all aspects of the procurement, development and financing of projects across

sub-Saharan Africa, including Namibia, Kenya, Nigeria, Rwanda and Uganda. For example, Baker & McKenzie’s Johannesburg office recently acted for United Africa Group’s Diaz Wind on a $150m wind project near Lüderitz in Namibia.

Firms such as NRF continue to advise clients such as Rio Tinto, BHP Billiton and Anglo American in South Africa’s mining sector, with its huge reserves of platinum, coal, gold and iron ore. However, there is now great excitement about the prospects in hydrocarbons.

‘South Africa has traditionally been more about mining, which in relative terms is in decline. But the oil and gas sector is definitely a big growth area,’ says Lang. A number of BG’s clients, including US ExxonMobil, are looking into offshore exploration in South Africa. How much foreign investors will commit, though, remains unclear.

Referring to recent changes to the country’s Mining and Petroleum Resource Development Act (MPRDA), Lang says the continued uncertainty around the MPRDA is ‘an inhibitor to more progress.’

The talk of a ‘free carried interest’ is ‘creating a degree of uncertainty which is not conducive to long-term investment’, Lang says. Under amendments to the MPRDA, passed by parliament in March, the state will get a 20% stake in all new oil and gas exploration and production ventures, and also the right to acquire a ‘free carried interest’ in exploration and production rights. The percentage of participating interest is not clear.

But as Africa’s economic progress leads to diversification, South Africa-based law firms have been increasingly busy in other sectors. ‘The traditional resource-based African market will continue to grow and probably continue to lead the charge,’ says Otty. However, he expects services industries such as consumer and retail, banking and telecommunications to play an ever-increasing role in the future economy.

In financial services and banking, there have been some big-ticket M&A deals. Webber Wentzel, in alliance with Linklaters, has advised South Africa’s biggest retail bank Absa on the $2.1bn acquisition of the African operations of parent Barclays plc. Meanwhile, BG represented France’s BNP Paribas in the $253m acquisition of South Africa’s consumer finance company RCS Group.

Spurred by a growing middle class, the insurance sector is also expanding and attracting specialists such as Clyde & Co, which is to open offices in Johannesburg and Cape Town.

Otty says: ‘At the moment, insurance is a big sector in South Africa and a huge one on the continent. All the South African insurers are expanding into the rest of Africa.’ NRF represents major South African insurers such as Sanlam Life Insurance, Mutual & Federal Insurance Company, and Santam.

Private equity business is also growing. ‘There has been a considerable amount of private equity work in our corporate practice group,’ says Ewing. ‘More and more of the international private equity players are interested in investment in South Africa, so this is going to be a huge growth area in years to come.’

Most recently, DLA Cliffe Dekker Hofmeyr represented UK-based private equity firm SilverStreet Capital, an agricultural investment specialist, in relation to a undisclosed acquisition in Zambia.

As part of a cross-border team in 2013, the law firm alliance also advised Australia’s ASX-listed recruitment portal Seek on a $20m investment for a 25% stake in online classifieds group One Africa Media. Seek made the acquisition in partnership with US-based private equity group Tiger Global.

But if business opportunities attract an increasing number of firms, this in turn means more competition for clients and experienced lawyers. As Lang notes: ‘South Africa has an enormous skills gap, and attracting and retaining skilled lawyers is a challenge.’

‘I think we will increasingly feel the effects of globalisation, particularly from international law firms entering our market, increasing the pressure on talent and competing with us domestically,’ he adds. ‘We have actually been surprised to find that we have been undercut on projects by global firms in places in Africa, which is something that you would not expect.’  

For now, though, no one disputes that the opportunities far outweigh the challenges in a country that is as important for the home market as it is a base for continental expansion. As Otty says: ‘Africa really is a fascinating and optimistic place to be at the moment.’

Marialuisa Taddia is a freelance journalist