Private Equity 2021 Comparisons

Last Updated September 14, 2021

Contributed By AZTAN Law Firm

Law and Practice

Authors



AZTAN Law Firm was officially registered in 1993 by founding partners with diverse specialisations. The firm adopted the Western model of professional partnership with flexible, scalable and expandable features. This was the first time that a legal professional partnership had been registered under a "business name" in Sudan. As more partners joined the firm, they enriched its legal knowledge and professional capabilities in important specialised areas of law, namely, oil and gas, mining, and intellectual property laws. During the last decade, AZTAN has delivered its services across the borders of Sudan by establishing branches in the Republic of South Sudan, Kenya and Tanzania. In 2014, AZTAN entered into a partnership with M/S Al-Gahrib Advocates & Legal Consultants in Dubai, enabling the firm to serve its clients in the Middle East, India, Hong Kong, Singapore and elsewhere. AZTAN has also developed an internship programme for young law graduates and is committed to the continuous education and career development of all its team members.

Introduction

In 1993 the American government added Sudan to its list of State Sponsors of Terrorism, and in 1997 the American government imposed economic and financial sanctions on Sudan. Then, in about 2003, the United Nations imposed sanctions on Sudan because of the Dar Fur crisis. Since 1993, Sudan has been totally outside the international business community and its economy has been severely affected by the aforesaid sanctions. Laws and practices in international business have witnessed rapid development and change in the last three decades. Such development and change were not witnessed in Sudan, however. One of the major adverse impacts of sanctions was the absence of business laws. Sudan does not have, to date, a commercial transactions law. It was only in 2015 that the obsolete Companies Ordinance 1925 was replaced by the Companies Act 2015. As a result, there have been very few landmark private equity M&A in Sudan, known to the public on account of the size of the sale. There have been, on the other hand, hundreds of small to medium-sized private equity M&A transactions which were done in a very simple way, as a simple agreement for the “sale and purchase” of shares registered with the regulator, ie, the Commercial Registrar General at the Ministry of Justice. 

The adverse impact of sanctions has also affected public companies. There have been very few public M&A transactions (not more than 12 deals since 1989, the biggest being for USD1.33 billion). 

The above introduction is very important as it explains why there are no answers in a considerable number of sections in this chapter, including, for instance, mandatory offers, minimum thresholds, third-party funding, private M&A deals, and hostile takeovers. However, the law firm that supplied the information for this chapter has handled at least five major M&A transactions (in the period 2016–2021), and was able to base its answers on experience gained in the aforesaid transactions.

The Present

Following Sudan's peaceful revolution of December 2018, the civilian government was determined to create an attractive investment environment by implementing economic reforms, enacting the Investment Encouragement Act that offers a bundle of benefits to local and foreign investors. As a result, a number of M&A transactions in private equity have been completed (some of them were already in the pipeline). 

Unfortunately, Sudan like many other countries, is still suffering from the negative impact on its economy of the COVID-19 pandemic. However, the lifting of American sanctions against Sudan, the removal of its name from the list of countries sponsoring terrorism, and its return to the international banking system and to international trade, will encourage both local and foreign investors to invest and expand their activities in the country.

Despite the negative impact of the COVID-19 pandemic on economic activities in Sudan, some sectors, such as mining, agriculture, banking, livestock and crops, have remained attractive to investors in 2021. It is noteworthy that mining and agriculture are the most attractive sectors in terms of foreign investment.

For many reasons, private equity M&A transactions and deals have been practised in Sudan for a long period without being regulated by law. Until 2009, there was only one government authority with which M&A transactions could be registered, which is the Commercial Registrar General at the Ministry of Justice (CRG). All M&A small-scale deals were manifested in the form of a transfer of shares under the Companies Ordinance 1925, which then had to be approved and registered with the CRG. In 2009, the Legislature issued the Regulating Competition and Controlling Monopoly Act 2009 (RCCMA). The latter act provides for a council whose consent must be secured before concluding any M&A transaction. However, the aforesaid act remained dormant until 2016. It was activated upon enactment and promulgation of the Companies Act 2015, which abolished and replaced the Companies Ordinance 1925. The Companies Act 2015 regulates merger deals in Chapter 4. As of now, any M&A transaction must meet the requirements under the Companies Act and the RCCMA, in addition to gaining the consent of the Dismantling Committee referred to hereunder. State-owned entities are also subject to the same laws. 

Merger transactions are regulated by ten provisions in Chapter 4 of the Companies Act 2015. Under these provisions, the terms and conditions of an M&A transaction must be submitted to the CRG which should publish the same in the official Gazette. The same terms and conditions must also be published by the merging companies in the daily newspapers for three consecutive days. The consent of the council under the RCCMA must also be secured. 

A significant change that has taken place in regard to M&A transactions is the requirement for the prior approval of the Committee for Dismantling of the Regime of 30th June 1989 and the Public Funds Recovery (the “Dismantling Committee”) established under the Dismantling of the Regime of 30th June 1989 and Removing Empowerment Act 2019. 

A recent positive development is the promulgation of the new investment law. It aims to encourage investment through concessions and incentives granted to private equity, which include:

  • customs exemptions on machinery, equipment and raw materials;
  • tax holiday for up to five years; 
  • granting land at encouraging prices;
  • the foreign investor is not required to have a Sudanese partner;
  • the foreign investor can repatriate its capital; and
  • the foreign investor can transfer the dividends of the investment outside the country. 

As mentioned, there are three key regulators whose consent must be secured, viz, the CRG, the Council established under the RCCMA, as well as the Dismantling Committee (see 2.1 Impact on Funds and Transactions). 

It could be said that the Investment Encouragement Act 2021 has eliminated most of the concerns of foreign investors, as it confers full protection on foreign investments without any discrimination between domestic and foreign investments.

There are only two restrictions on foreign investments, namely:

  • entities with an element of foreign shareholding are not allowed to engage in internal/local trade; and
  • these entities cannot be registered in the Register of Importers and Exporters.

However, where the foreign investment was established under the Investment Encouragement Act 2021, both restrictions will be lifted where the foreign investment relates to the investor's export of its own products produced in Sudan and where it engages in internal/local trade of the same product. For foreign investors, it is worth mentioning that registration of the FDI with the Central Bank of Sudan is a prerequisite for repatriation of dividends and capital.

Undertaking comprehensive due diligence is a common practice of purchasers. A major part of the due diligence is conducted at the CRG level. The register of entities at the CRG is a public record which any person can check and peruse for any entity registered with the CRG, against payment of nominal fees. 

The CRG keeps files for all corporate entities registered in Sudan. There are certain standard forms prepared by the CRG, known as “C” Forms. The most important one is Form C 7 which contains information concerning the details of the directors, managers, company secretary, share capital, shareholders and any transfer of shares. The company’s file will be considered adequate and valid upon filing a Form C 7. Any transaction pertaining to a Sudanese corporate entity, including matters relating to its shares, the mortgage of its moveable and/or immoveable assets, floating charges, restructure of its board of directors, its authorised signatories, changes to its voting mechanism, its quorum for ordinary and extraordinary meetings and its ranking of shares, should be recorded in the company’s public file. Perusing the public file of an entity, in particular Form C 7, constitutes the backbone of any due diligence. Such perusal is done physically by reviewing the documents kept by the CRG. However, in most transactions, the other documents related to M&A transactions are uploaded in the virtual data room. 

In practice, due diligence also includes the entity’s liabilities and obligations vis-à-vis employees, the tax chamber, the Zakat chamber and the social insurance fund.

Vendor due diligence is not a common feature of transactions for private equity sellers. The buyers' advisers typically do not rely on vendor due diligence reports, but conduct their own due diligence.

Most (possibly, all) of the normal and simple acquisitions of private equity are typically carried out by a sale-and-purchase contract under the Civil Transactions Act 1984. The M&A contract could also be governed by a foreign law because the latter act permits such an agreement. No private M&A deal conducted under tender or by auction appears to have taken place in Sudan. However, this is quite possible with respect to companies owned by the government.

In global M&A deals, private equity comprises funds and investors that:

  • either invest directly in a private company; or
  • conclude a buyout of a public company, in which case, the latter company will be de-listed.

Institutional and retail investors arrange for capital for private equity, and the capital can be used to fund expansion of the business of the company. Usually, the fund in a private equity comprises limited partners who hold 99% of the shares in the fund, and limited liability partners, who hold 1% of the shares.

The above practice is not that common in Sudan. Most deals are concluded directly between the seller and the buyer without a third-party funder. In Sudan, this is the case even with respect to the public joint-stock deals of the 12 major public M&A deals referred to in 1.1 M&A Transactions and Deals.

As mentioned in 5.2 Structure of the Buyer, financing private equity transactions is not a common practice in Sudan. However, despite lack of records and statistics, one transaction in which a private equity fund acquired a minority stake was uncovered. 

Looking at the major M&A transactions in Sudan, and most of the other transactions handled by other lawyers in Sudan, it appears that deals involving a consortium of private equity sponsors are not common in Sudan. 

In Sudan, the locked box is, in its simplest form, a fixed-price deal, where the price of the purchase cannot be adjusted post-closing. Generally, in Sudan, the parties agree on a fixed-price consideration structure. In this respect, and due to the devaluation of the local currency, transactions are usually concluded in foreign currencies to ensure stability in the transaction. Where a dispute arises between the parties, and the deal is governed by Sudanese law, then a court of law or an arbitral tribunal may interfere under the hardship principle provided for in the Civil Transactions Act 1984, to adjust the price or other hard obligations of the parties. 

Earn-outs or common deferred consideration are not a feature of private equity considerations in Sudan because they contradict sharia principles (Islamic law). 

Interpreting the law (in the absence of guiding precedents), the involvement of a private equity fund as a seller or buyer should not affect the consideration mechanism as it is entirely based on the terms of agreement between the parties. Likewise, it should also not affect the level of protection that a private equity seller or buyer provides in relation to the consideration mechanism. Everything depends on the agreement of the parties.

In global practice, the target is prohibited under the locked-box mechanism, from taking value out of the business. During such period only specifically agreed payments, and payments made by the target in the ordinary course of business, are allowed. This should also be the case in Sudan. However, it is important to note that the locked-box term is used in Sudan to denote a fixed price. 

In all cases, interest is not allowed in Sudan as it is contrary to sharia. The Civil Procedures Act prohibits courts from enforcing any award of interest.

In Sudan, the parties generally agree on a dispute resolution mechanism for the agreement in toto. In private equity transactions, the parties usually refer the matter to arbitration proceedings.

The level of conditionality in private equity transactions in Sudan varies from one transaction to another, depending on the nature of the transaction. Representations and warranties can be seen in most, if not all, M&A deals. With the exception of the council under the RCCMA, the CRG and the Dismantling Committee, no third-party’s consent is required. 

Material adverse change could be invoked if a dispute arises between the parties and it is referred to the court, in which eventuality the court may, depending on the nature of the material adverse change, interfere and apply the hardship principle to soften the material adverse change.

The essence of a "hell or high-water" contract is that it obliges the purchaser to pay the price to the seller, regardless of any difficulties the purchaser may encounter. This is not a common practice in Sudan. If an event under the hardship doctrine arises, the purchaser may approach the court under the aforesaid doctrine.

While break fees in favour of the seller are not that common in Sudan, if agreed upon, they are legal and do not violate any law. A break fee is considered to be part of the terms of the contract, and the contract is considered to be the law of the parties (as provided for in the Civil Transactions Act 1984).

Usually, the acquisition agreement provides the circumstances under which the seller or buyer may terminate the agreement. The most common reasons for termination are:

  • failure to satisfy a regulatory prerequisite of the three official authorities referred to in 2.1 Impact on Funds and Transactions;
  • occurrence of a force majeure event;
  • failure to perform a material obligation; and/or
  • obliteration of the subject matter of the agreement.

In addition to the above, the parties may agree to amicably terminate the agreement.

The typical risk allocation in Sudan includes conducting a review of the target’s constitutional documents at the CRG, the status of encumbrances on moveable and immoveable assets, employment, regulatory compliance, tax and Zakat compliance and litigation. As stated in 5.3 Funding Structure of Private Equity Transactions, a funded private equity is not common in Sudan.

The buyer’s due diligence does not include litigation, as court files cannot be checked except by parties included in these files. Thus, a seller warranty on its litigations is one of the most important warranties. The seller must also warrant third-party consents (the Council, the Dismantling Committee and the CRG). In addition, the seller must warrant absence of material adverse effect.

Members of management do not provide warranties in Sudan. However, they may do so if they are themselves shareholders.

There are no limitations on liability for the above warranties, as long as they are part of the contract, because the contract is the law of the parties, unless the terms of the warranties violate public policy. Full disclosure of the data room will not absolve the seller from warranties if information uploaded in the data room turns out to be inaccurate.

In practice, the private equity seller does not provide further protections. Nevertheless, the parties may agree to cover certain risks elaborated on in the agreement between the parties. The parties are also free to provide, in their agreement, for warranty and indemnity insurance (W&I), despite the fact that it is not a common practice in Sudan. There appears to be no W&I insurance in such cases in Sudan, even in public M&A.

In private equity transactions, litigation was the dominant means of dispute resolution. However, this trend has gradually changed in the past ten years and arbitration has become the preferred means of dispute resolution. Nowadays, most of the private equity transaction agreements contain references to ADR.

The common areas for dispute are default in payment of the consideration, breach of warranties and indemnities, and failure to secure regulatory consent.

Public-to-private transactions are not common in private equity transactions in Sudan. With the exception of entities owned by the government and sold to privates, there do not appear to be any public-to-privates.

Private entities are required to file quarterly tax returns with the tax chamber, Zakat returns with the Zakat Chamber, monthly reports to the Social Insurance Fund, and annual financial statements to the CRG.

There is no mandatory offer threshold in private equity transactions in Sudan.

There have been a few instances of share consideration, however, the most common form of consideration is cash.

As long as the conditions of a transaction do not contradict public policy, the regulator (be it the CRG or the Council) will not interfere with the same. 

As explained earlier, none of the few M&A transactions that have taken place in Sudan have been done on a bidding basis.

This is not applicable in Sudan. No private equity M&A deal has been concluded using a bidding mechanism.

This is not applicable in Sudan.

This is not applicable in Sudan.

Equity incentivisation of the management team is not a common feature of private equity transactions in Sudan. However, it is common practice in family businesses in Sudan for some family members to be shareholders and members of the company's management at the same time.

There is no such practice in Sudan.

There are no typical vesting or leaver provisions for manager shareholders in Sudan. These are usually stipulated by the constitution of the company, subject to the agreement of the parties.

If the manager shareholder is a "good leaver" (ie, their employment has ended for a legitimate reason such as death, sickness, reaching the age of retirement, etc) they are usually only entitled to retain the shares that have become vested on them at the time of leaving the company. On the other hand, if the manager shareholder is a "bad leaver"(ie, their employment is terminated for a legal cause), all their allocated shares will usually be forfeited.

Manager shareholders are obliged to observe the restrictive covenants they agreed to (such as non-competition and confidentiality). The court will respect the restrictive covenants as long as they are in compliance with the applicable laws.

Unlike the abolished Companies Ordinance 1925, the Companies Act 2015 introduced provisions for the protection of the minority. However, there are no provisions designated to manager shareholders in particular. The protection is for minority shareholders regardless of their involvement in the management. The shareholders may provide, in the memorandum and articles of association or in their shareholders' agreement, for protection of minority shareholders. Such protection provisions may include: 

  • the minority shareholders are to be represented on the board of directors; 
  • the capital of the company may not be increased or decreased without the written consent of the minority shareholders;
  • in the event that the majority decides to sell the company, the minority shareholders retain the right either to be among the sellers or to continue with the new buyers;
  • any sale, lease, transfer, mortgage pledge or other disposition of material assets of the company, or any substantial part thereof, must be with the consent of the minority shareholders;
  • any resolution to voluntarily wind up the company may not be issued without the consent of the minority shareholders;
  • the consolidation, amalgamation or merger of the company with any other company, association, partnership, business name or any other legal entity, must be with the consent of the minority shareholders;
  • any resolution altering the classification of the shares of the company or the rights pertaining to such shares, must be with the consent of the minority shareholders;
  • any resolution altering the memorandum and articles of association of the company must be with the consent of the minority shareholders; and
  • the annual budget and the dividend and reserve policy of the company must be approved by the minority shareholders.

In Sudan, the shareholder of a private equity fund with control over the target is usually reflected in a shareholder agreement rather than the constitutional documents of the entity. In the shareholders' agreement, the aforesaid shareholder would provide for reserved matters, take a certain number of seats on the board of directors, etc.

Under the Companies Act 2015, liability of shareholders is limited to the extent of the unpaid part of their contribution in the company’s capital. Such limitation of liability is undisputed and has been well established by precedents in the Supreme Court.

According to the Companies Act 2015, the corporate veil of a company can be lifted if, inter alia, the number of shareholders has been decreased to less than two shareholders.

This is not regulated by a specific law; thus, it is a matter for the parties’ agreement to be reflected in their shareholders' instrument or in the memorandum and articles of association.

The funding of private equity deals is very rare in Sudan, and likewise, exit terms are rare within such deals. Very occasionally, a major acquisition transaction will provide for drag-along and tag-along rights.

Drag-along rights are not regulated by law. It is for the parties to agree on the same and such agreement will be enforceable. However, this practice is very rare in Sudan.

Tag-along rights are also not regulated by law. It is for the parties to agree on the tag-along right and such agreement will be enforceable. However, this practice is very rare in Sudan.

Most of the public joint-stock companies in Sudan are commercial banks. There appears to have been only one private equity fund which made an initial public offering and which was, thereafter, converted into a public company. 

AZTAN Law Firm

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Law and Practice in Sudan

Authors



AZTAN Law Firm was officially registered in 1993 by founding partners with diverse specialisations. The firm adopted the Western model of professional partnership with flexible, scalable and expandable features. This was the first time that a legal professional partnership had been registered under a "business name" in Sudan. As more partners joined the firm, they enriched its legal knowledge and professional capabilities in important specialised areas of law, namely, oil and gas, mining, and intellectual property laws. During the last decade, AZTAN has delivered its services across the borders of Sudan by establishing branches in the Republic of South Sudan, Kenya and Tanzania. In 2014, AZTAN entered into a partnership with M/S Al-Gahrib Advocates & Legal Consultants in Dubai, enabling the firm to serve its clients in the Middle East, India, Hong Kong, Singapore and elsewhere. AZTAN has also developed an internship programme for young law graduates and is committed to the continuous education and career development of all its team members.