Businesses looking to expand and take advantage of new markets often downplay calculating and managing risks associated with the means to expand and the regulatory frameworks of a foreign jurisdiction.
In this article, we go through examples, such as the case of a company’s inability to strategically navigate the complexities of moving into a foreign market; and therefore, having to deal with prolonged delays due to regulatory obstacles and its impact on resources and plans of the company.
Businesses in Africa must evaluate expansion modes and stay ahead of regulatory compliance requirements to tap from the loosening of exports and border restrictions under the African Continental Free Trade Area (AfCFTA).
To successfully expand into new markets, a company should consider these 7 key steps.
For the past decade, the significant barriers to multinational expansion by African businesses across the region have been regulatory compliance and inefficient expansion methods. Over the past decade, regulatory compliance has been among the major barriers for African businesses seeking to transition into multinational corporations. This issue arises due to two key questions that these businesses fail to address before initiating the expansion process.
Without answering these two pivotal questions, a business may suffer massive losses to its revenue, and fail in its expansion efforts:
- What are the means through which a business can expand?
- How does the business navigate the regulatory framework of foreign jurisdictions?
Becell LLC
Becell LLC[1], a manufacturing company operating in Nigeria, lost about US$3million between 2018 and 2021 when the subsidiary it sought to set up in a foreign country faced regulatory issues and delays, which affected its planned commencement date.
This unplanned delay led to other issues and the eventual winding up of the subsidiary. With hindsight, it wishes it had entered a partnership agreement with an existing business versed in those regulatory matters and the market to minimise the capital invested and risk it assumed.
The core of Becell’s woes stemmed from its subsidiary’s challenges during its incorporation into a foreign jurisdiction.
Regulatory obstacles and prolonged delays impacted the project launch date, ultimately leading to the subsidiary’s demise. In retrospect, the company realises that forming a strategic partnership with a local business with expertise in navigating the regulatory landscape and market conditions would have significantly reduced the capital it invested and mitigated the risk assumed.
A protracted land dispute over the lease it acquired over land for building its factories led to a lengthy delay to its planned date for the commencement of its operations. And this resulted in issues with the various agreements executed with contractors for the project.
The company partly blames its failure on a lack of foresight and due diligence. They may have failed to consider the regulatory framework required for its operations in the foreign country and the various potential modes of expansion it could have employed.
Lessons
African businesses must prioritise taking advantage of the loosening export controls and border restrictions under the African Continental Free Trade Area (AfCFTA) to expand in 2023. However, the need to assess and consider various expansion modes and regulatory compliance requirements cannot be overemphasised.
Beyond a certain point, a business has to expand and grow but not expand and shrink. That is the dilemma several businesses on the continent face as we begin 2023. Business owners and managers operating in the African market are considering whether to expand as the AfCFTA open the gates into various domestic markets. However, regulatory compliance in foreign jurisdictions within the African market is a major barrier and cost to business expansion. Compliance costs, such as permits, licenses, penalties and sanctions can affect operations and profits considerably. Similarly, inefficient planning can result in significant losses for a business, and even affect the domestic business market.
Seven simple steps on how a business owner or manager can expand across the African market in 2023 are as follows.
- Know your company
How?
The board of directors and management of the company will need to:
- Undertake a comprehensive assessment of the business, its domestic and target markets. Market researchers and financial consultants may be of assistance.
- Assess the current position, strengths, weaknesses, objectives and competitors of the business.
- Assess the potential market share that can be acquired in the domestic market and any other foreign market.
- Assess the cost-benefit analysis of expanding beyond the company’s domestic market and its impact on its current business position.
- Assess the resources, staff and capital available to evaluate and draw out an optimum and viable plan for expansion.
- Assess how the expansion is in accordance with or deviates from the business’ current objectives and strategic plans to make adjustments where necessary.
- Assess the regulatory impact of such expansion.
- Digital expansion
How?
- Digital expansion and multinational brand awareness have been made accessible by social media and online marketing.
- Depending on the nature of the company’s services or products, it may be advisable to begin expansion by marketing the products and services to the market audience in other foreign markets.
- A business can use suitable online influencers to set up a digital store in another jurisdiction.
These influencers can be contracted through independent contractor agreements in brand ambassadorial agreements or promotion agreements.
- Improved transportation across borders and harmonisation of various border and export controls under AfCFTA will facilitate the sale and delivery of goods across foreign markets.
- A suitable and efficient payment system should be employed for the transactions between the business and customers.
In Ghana, a business selling through an electronic medium to customers in Ghana must use a payment system that is sufficiently secure regarding the accepted technological standards in recent times and the type of transaction.[2] The business is liable for any damage caused to the consumer if the business fails to use a secure payment system.
- It is advisable to ascertain from a local counsel in the target market what regulatory barriers exist in marketing and transporting a particular product or service into that market.
In Ghana, a company selling goods or services to a customer in Ghana or conducting business electronically with persons in Ghana is required to comply with the requirements of the Electronic Transactions Act. [3]
The provision of certain mining, oil and gas, and energy services requires local incorporation or participation, and may not be suitable for an exclusive digital expansion.
The retail of goods which do not fall specifically in regulated industries, such as health, energy and natural resources, may be suitable for such digital expansion as far as export controls, such as payment of duties and standard requirements, are met.
Where the services to be rendered will require boots on the ground, it will be necessary to procure the relevant working permits and approvals for such persons.
It is also necessary that the foreign business clarifies whether those items are reserved for citizens only. Certain services are reserved exclusively for Ghanaian businesses in the mining industry under the Ghana Investment Promotion Centre Law.
Where the services to be rendered fall under what the law regards as a technology transfer agreement, the domestic entity must ensure that the agreement is registered with the Ghana Investment Promotion Centre.
- It is advisable to ascertain from a local counsel the import duties and tax implications of such digital expansion on the supply of goods and services into the foreign market.
The company must determine who bears the cost of shipping and the burden of such taxes and inform the customer. This would clarify the prices of products and services being sold electronically from foreign markets.
In Ghana, the customer will be required to pay import duty, Value Added Tax (VAT) and other fees and charges (Ghana Education Trust Fund Levy (GETFund Levy), National Health Insurance Levy, COVID-19 Health Recovery Levy, ECOWAS Levy, African Union Levy, Special Import Levy, and EXIM Levy) to clear and receive the goods. The rates may vary depending on whether goods or services are being procured electronically.
Where services are procured from foreign markets, the customer procuring the services will be required to withhold VAT on the payment to be made to the foreign entity.
Also, a non-resident business which provides telecommunication services or electronic commerce to persons for use or enjoyment in Ghana, other than through a value added tax registered agent, may be required to register for tax purposes under certain circumstances.[4]
- It will be necessary to seek legal advice on the impact of the AfCFTA on such duties and taxes in relation to the company’s products and services.
These fees and charges for shipping overseas will be affected upon the full implementation of the harmonisation of border controls and restrictions under the AfCFTA.
Pros
- Digital expansion is the most cost-efficient and effective mode of expansion for any business unless regulatory barriers exist in the host country’s market.
Cons
- Shipping costs and import taxes can cause increased prices of goods and services for foreign markets.
- Certain countries require local incorporation for businesses in certain industries.
- Temporary agents
How?
- Temporary sales agents and distributors can be an initial step toward establishing a presence in a foreign market.
- Temporary sales agents and distributors can be employed under short independent contractor agreements or through service contracts with local professional employer organisations. Those agents may be employed as sales representatives to assist in marketing the goods and services of the business. Independent contractor agreements may be preferable to employment agreements to minimise the regulatory requirements that may arise in an employment relationship and limit the extent to which they can act on behalf of the business.
- It is important to consult a local counsel in the host country to ensure that the business is not assuming any unintended liabilities or obligations depending on which arrangement the business opts for.
It will be necessary to consult a local counsel to advise and review the independent contractor agreement or employment agreement depending on the business’s options.
Several jurisdictions differentiate between the implications of an independent contractor agreement and an employment agreement. However, the extent may vary.
In Ghana, an employer may be held vicariously liable for the employee’s actions during employment, but this may not arise in an independent contractor agreement.
The Labour Act, 2003 (Act 651) and its accompanying regulations are the primary legislations governing employment relationships in Ghana. It applies to employees and employers (but not independent contractors). This law defines a ‘worker’ as a person employed under a contract of employment, whether on a continuous, part-time, temporary, or casual basis. On the other hand, an independent contractor agreement is governed by the common law principles of contract, the terms of the agreement, principal-agency law and the various case law as determined by the Ghanaian courts.
In some jurisdictions, the courts may overlook the express terms of the agreement between the parties and assess their conduct to determine whether the parties are in an employment agreement or an independent contractor agreement. However, the Ghanaian courts determine the existence of an employee-employer relationship based on the express or implied terms (conduct) under which the two persons are engaged or conducting their affairs.
Further, a person employed for 6 months is entitled to be treated as a permanent employee. Also, a person employed for more than 6 months must be offered a written employment agreement.
Pros
- Temporary sales and distribution agents can assist with coordinating sales and deliveries, marketing, and serving as local contact persons and facilitators.
- Temporary sales and distribution agents can provide valuable insight into the local market.
- Engaging temporary agents can give the business some time to scope the market and look for the right long-term partnership.
Cons
- Oversight over such temporary agents may be difficult.
- Temporary agents and distribution agents may not be the best model for long-term arrangements since they may lack the capacity, industry insight and expertise to handle regulatory issues that may arise.
- Partnerships
How?
- Businesses can consider commercial agreements, such as licensing agreements, franchises, distributorship agreements or joint venture agreements, allowing them to sell their goods or services through other local businesses in the target foreign markets.
It will be necessary to consult a local counsel to review the agreement. This ensures that all regulatory requirements for such engagements are complied with or addressed in the agreement.
Ghana has no general regulatory law on franchises and distributorship agreements. However, certain industries may have various regulatory requirements that must be addressed in the agreement.
- These licensing agreements mostly range between 2-5 years and may be renewable between the parties.
- It is necessary to undertake a due diligence audit of such partners to assist in making the final decision among the available options.
A local counsel may be required to undertake and conduct legal, due diligence of the potential partner company to ensure that all legal risks to the engagement are managed or mitigated. The necessity for this or otherwise will depend on the nature of the engagement.
- The business will need to assess the effectiveness and synergy of such partnerships by ascertaining the position and strengths of such partnerships in the foreign market. Consultants may be required to assist in making such decisions.
- Anti-competition, non-solicitation, confidentiality and intellectual property clauses in such agreements must be carefully reviewed from both a financial and legal perspective. Where there is the transfer of licenses, trade secrets, or business information, adequate legal risk audits must be done ahead of the agreement due to the potential damages the business may suffer in case of breach of clauses governing those matters.
A locally practising counsel should be contracted to review those clauses to ensure their enforceability. In some jurisdictions, certain clauses may be deemed anti-trade or anti-competitive, and be held unenforceable.
The Unfair Competition Act, 2008 (Act 589) of Ghana contains several relevant provisions. The courts have also laid out parameters that may be considered in enforcing such provisions.
Pros
- Licensing agreements, such as franchise and distributorship agreements, are very cost-efficient for a business and involve fewer logistical costs.
- The partners and agents in the foreign markets can handle the human resource costs and regulatory requirements of penetrating the foreign market.
- The franchise and distributorship agreement can be a source of income for the business regarding license fees or royalties that may be charged for using patents or trademarks.
Cons
- Local businesses in foreign markets can get access to customer information, intellectual property and business knowledge of the company.
- If the company intends to enter the market at a later period, it would have to think through the best partnership model that would not unduly affect any future plans.
- External company/branch office
How?
- A company can consider engaging permanent agents or establishing a local office in the foreign market. This may be established at the expiration of the partnership arrangement. It may also be adopted where a business intends to undertake a short-term project in the foreign market. It may be adopted as a precursor to establishing a limited liability company in the foreign market. Those agents may be used as sales representatives.
- The local office is mainly established through the registration of an external company serving as an extension of the company. Most countries require a few staff, including a local manager, to manage such external offices.
A local counsel may be required to confirm whether the particular business objective can be conducted through an external company or local office without setting up a limited liability company.
In Ghana, the law defines an external company as a body corporate formed in a foreign country which has an established place of business in Ghana (a branch, management, share, transfer, or registration office, factory, mine, or any other fixed place of business, but does not include an agency unless the agent has a general authority).
The law requires that an external company which establishes a place of business in the country must deliver to the Registrar for registration the address of the principal place of business in Ghana (including an electronic mail address, a digital address, the post office box number and the telephone contact) within one month of the establishment of the place of business.
- A company can, therefore, have a local presence which can help build relations with the market and the relevant regulators.
- When a business intends to use local managers from a foreign market, it will be necessary to conduct an integrity due diligence audit in making such decisions.
Pros
- The running of such an external office is cost-efficient compared to incorporating a limited liability entity in most countries due to fewer regulatory requirements.
- A local manager can help with access to experienced local talent for the business.
Cons
- External companies tend to face much scrutiny when dealing with regulatory agencies.
- Several preference margins are granted to various entities with local participation compared to external companies in certain jurisdictions.
- Loan or equity investment into a local company
How?
- A company can consider a loan or equity investment into a business in a foreign market to enter a foreign market.
- This may include entering agreements to purchase shares and/or for the grant of a loan facility.
A local counsel would be required to undertake a relevant legal, due diligence audit of the business entity. This due diligence will assess the various legal risks that may affect the engagement.
A local counsel may also be required to review and assist with negotiating the transaction documents used in the engagement. These transaction documents may include a share purchase agreement, shareholder agreements, loan facility agreements, security agreements, and shareholder agreements. This condition may vary and have other agreements based on the nature of the transaction.
- Finance consultants may be required to assess the feasibility and prospects of the foreign business and the entire engagement.
- Depending on the nature of the business, a technical consultant may be required to undertake technical due diligence.
- In negotiating the loan and equity transaction, the company can negotiate for its products and services to be procured by the target company to ensure that its products or services are sold in the foreign market.
Pros
- The company can directly benefit through dividends and interest payments from the investment.
- The company will benefit from income from sales or purchases of its products and services by the target company.
Cons
- The company may have to assume other risks associated with the target market’s business depending on the nature of the transaction.
- Where sufficient due diligence is not conducted, this can result in financial and reputational losses.
7. Setting up a permanent subsidiary business
How?
- A company may consider setting up a limited liability company in another market.
- This may require the incorporation of a company, setting up an office, staffing, tax requirements, equity investment, and sometimes minimum threshold requirements and regulatory approvals that come with operating a company in another jurisdiction.
A local counsel can assist you in incorporating and registering a business in a foreign market.
In addition to incorporating a company with the Office of the Registrar of Companies, a business in Ghana will be required to also comply with various environmental permits, operating permits, and permits from specific regulators, depending on the industry of operation.
- Where the business involves the acquisition of land or landed property, it would be essential to ensure the necessary due diligence is conducted in order to acquire a valid title.
Ghana has several forms of land ownership. Thus, it is imperative for any non-citizen seeking to establish a business involving land to seek the assistance of a local lawyer who can verify the land ownership from the Lands Commission to effectively negotiate the land documents and finalise the acquisition of the land. This will ensure a smooth and compliant process in acquiring land in Ghana.
Pros
- This business will gain access to and have a local presence in the foreign market.
- This can facilitate operations and delivery since there will be proximity to the customers in the foreign market.
Cons
- This may be costly and involve complying with various corporate, regulatory and tax requirements.
- Business practices and cultural norms may be a barrier.
Conclusion
African businesses should especially explore the unique opportunities offered by the AfCFTA to expand and enter new markets. Most importantly, they should consider the diverse means of expanding illustrated in this article while ensuring they comply will all required regulatory demands. It is vital for a business seeking to enter a new market to consider using the expert services of consultants and lawyers who work within the newfound market.
The writer is a a corporate and transactional lawyer with Benchmark Lawyers & Consultants, a transaction and project advisory law firm with expertise on advising multinational and Ghanaian businesses on undertaking infrastructural developments
M: +233 – 50 105 2553 / 55 805 1607
E: [email protected]/ [email protected]
[1] The actual name of the company has been replaced with a pseudonym.
[2] S 45, Electronic Transaction Act, 2008 (Act 772)
[3] Electronic Transactions Act, 2008 (Act 772).
[4] S 14 of the Value Added Tax Act, 2013 (Act 870).
