At Legal Week's 2012 Corporate Counsel Forum Africa, a panel of senior South Africa-based in-house lawyers discussed ways to manage the risks associated with setting up shop in new African jurisdictions. John Malpas rounds up the discussion

How do you understand, evaluate and analyse the risks of setting up a business in a new African territory? 

Lyndon Pinnock, group legal adviser, TWP Projects: We are developing a risk assessment template, in conjunction with our external attorneys that can be used by all the relevant departments at TWP to assess the risk of doing business in African countries (see box). This template will highlight specific issues that need to be borne in mind when pricing for, and ultimately executing, projects in the relevant country. It will be updated at least annually for each country.

Jonathan Maphosa (pictured), manager and legal adviser – markets legal, Absa Capital: Due to the fact that we already have a presence throughout Africa through our affiliation with Barclays Bank, our legal due diligence is product-driven. Typically, we will follow a set process which seeks in-country counsel's opinion among others and conduct an internal new product approval due diligence with an in-depth evaluation into all legal risks linked to a particular product to be traded.  

Lennon Phillip, general legal counsel (Sub-Saharan Africa), 3M: Anti-bribery issues are a key concern of 3M and we take careful note of the Transparency International rating of jurisdictions we are looking at. Our ability to manage trade compliance is also critical. The question we ask is whether we have appropriate and robust processes to manage these types of risk. We usually engage the services of an external US-based law firm working with a local partner to advise us on our processes.

David Kniss, general counsel Africa, Siemens: It is not only about entering into entirely new territories. Often it is a change in business model or a Siemens division extending its footprint, which brings the need for a thorough assessment. 

For us, knowing about the regulatory, other legal and compliance environment is part of legal market intelligence. We continuously improve our know-how in this respect using either existing in-house resources – Siemens' legal department in Africa or Europe – or engaging with external law firms where needed.

Assuming the decision is made to set up shop in a new country, what factors determine how to structure the entity?

Maphosa: Due to the nature of our investment banking business, each set-up is unique. It will depend on the legal landscape and type of trade under scope. Regulatory – and, where applicable, registration requirements – legislation and legal precedent of that specific jurisdiction, tax considerations, compliance issues, operations, economics and business needs will all influence the decision-making process.

Phillip: Ideally, we will not get involved in situations that require us to enter a joint venture (JV). That is not to say that JVs are totally off the table. It is just that we have very few JVs around the world. The strength of the supply chain will be critical. In other words, we will need to determine whether we can service our customers appropriately. And, of course, tax is also a crucial factor.

Kniss: The chosen set-up will be entirely dependent on the individual country and its political and legal environment. However, in our processes those aspects will already have been evaluated as part of the business decision to even enter a specific market. 

Pinnock: It is important to check for local indigenisation requirements that may force you to have a local partner, which can be a very good thing. You need to know your company's strategy well as it will differ depending whether you are there for one or two short-term projects, or whether you see that country as a long-term growth opportunity for the business.

For a short-term arrangement, you would only open a branch and use labour brokers wherever possible. If the commitment is for the long term, you would create a permanent structure and employ permanent staff. As TWP is a South African-based entity, we have to be extra mindful of exchange control issues when funding and supporting any offshore entity. 

For international entities entering South Africa, the choice must be made whether to hold the entity directly from offshore, or to interpose a South African holding company. It is absolutely critical that thorough due diligence be done on any JV partner, and its directors/officers and be mindful of the fact that politics and business are often closely connected.

Are there any emerging risks? 

Pinnock (pictured): Competition law is gaining traction and there have been recent developments in Namibia, Botswana, Kenya and Zambia, as well as in the Common Market for Eastern and Southern Africa (COMESA) territories. Reputational risk has probably increased tenfold with the advent of social media which is becoming increasingly accessible throughout Africa as telecoms improve. In the mining industry, we are seeing an increasing focus on environmental and social issues around mining.

Maphosa: The rising influence of international regulation in the banking and financial markets realm, such as Basel III, the European Market Infrastructure Regulation, the Dodd-Frank Act, the Volcker Rules, the Foreign Account Tax Compliance Act and jurisdictional currency flow restrictions, just to mention a few. You also need to be mindful of constant regulatory change and the risks that come with that change. These risks could be political or relate to the enforceability of judgments and currency exposure.

How do you source legal advice in new jurisdictions?

Pinnock: When I worked for a company with operations in Angola, I identified a local person in our Angolan office with a law degree. Jointly, we identified an external law firm that we were both comfortable with and arranged for a mentorship relationship whereby a partner in the law firm took our Angolan employee under his wing and involved him in all of the legal work for our Angolan operation.

I used to choose law firms based on their name and size, but now I generally brief individual lawyers, rather than the firms they work for. I think the legal market is developing at pace. There are established legal African networks in place from large South African law firms such as Werksmans and Bowman Gilfillan. 

With the arrival of large international law firms into South Africa, the standard of advice and service levels should improve and I think we will see some concerted efforts from these big players to create their own networks throughout Africa.

Maphosa: We are fortunate enough to have some form of internal legal presence in all the countries where we are active. For external advice, we maintain a panel of law firms and have a detailed evaluation mechanism to garner feedback on their performance. However, product-specific expertise may sometimes outweigh previous negative engagement experiences we have had with external counsel. We also seek advice from our in-country legal teams as to which external counsel to use.

Phillip: 3M is conservative when it comes to appointing in-house lawyers, although we have just appointed a legal counsel in Nigeria. For the rest of the countries in which we operate outside South Africa, we seek to appoint someone as a legal liaison who receives technical support from an external law firm. This person will typically be the finance manager. If the subsidiary grows, then placing a full-time legal resource can be revisited.

Kniss: We are represented with legal counsel in most of our active subsidiaries. In some instances, we collaborate with our legal colleagues in Europe. For example, in the case of Angola we have strong support from Siemens' legal department in Portugal. The choice, governance and instruction of external counsel even in countries where we don't have our own in-house legal counsel will always be performed by a member of the legal team responsible for the respective region.

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TWP's RISK ASSESSMENT TEMPLATE

• Tax issues (in particular withholding taxes, social security taxes, indirect taxes and taxes on dividends)

• Onerous laws to watch out for (for example, where criminal sanctions would be applicable to individuals, or hefty fines imposed for non-compliance)

• The functioning of the local judicial system, and whether arbitration awards are practically enforceable (in particular, cognisance must be taken of whether the local courts/tribunals have a history of favouring 'home town' parties in awards)

• Foreign exchange controls and the ease of repatriating profits (some countries have minor restrictions on repatriating profits, but in reality often experience a shortage of hard currency and therefore physical repatriation of, for instance, US dollars may be problematic)

• HR issues (such as the number of expatriates allowed on any project, the process to obtain work permits and the timing involved)

• Insurance issues (some countries insist on local insurance policies being taken out in-country)