1 Legal framework
1.1 Which general legislative provisions have relevance in the private equity context in your jurisdiction?
The main legislative provision is the Companies Act 2001.
Other legislative provisions may apply depending on the sector targeted by the transaction – for example, the Banking Act 2004 would also apply with respect to banking business..
The Registration Duty Act 1804 will also be relevant to transactions which involve immovable property; and if such transactions involve non-citizens, the Non-citizens (Property Restriction) Act will also apply.
In the context of private equity funds, additional main legislative provisions include the Financial Services Act 2007, the Securities Act 2005 and the Limited Partnership Act 2011.
1.2 What specific factors in your jurisdiction have particular relevance for and appeal to the private equity market?
No restrictions on foreign investment: Except in certain limited sectors – such as television broadcasting, sugar and tourism – there are no restrictions on foreign investment in Mauritius.
No exchange control: No approval is necessary for the repatriation of profits, dividends or capital gains earned by a foreign investor in Mauritius.
Fiscal incentives (for both domestic and foreign investors): Income derived by a private equity fund – commonly referred to as a ‘closed-end fund' in Mauritius – is eligible for an 80% partial exemption, provided that substance conditions, which are broadly in line with Organisation for Economic Co-operation and Development Action 5, are satisfied.
A closed-end fund which is structured as a special purpose fund (SPF) is fully exempt from tax in Mauritius, provided that it meets relevant substance conditions. An SPF should, among other things, have a maximum of 50 investors (minimum investment of $100,000 per investor) and be managed by a collective investment scheme manager in Mauritius.
Other investment incentives: The repatriation of profits, dividends and capital is free from withholding tax.
Interest payments by a closed-end fund that holds a global business licence are also exempt from withholding tax if paid to a non-resident from the fund's foreign source income.
2 Regulatory framework
2.1 Which regulatory authorities have relevance in the private equity context in your jurisdiction? What powers do they have?
The main regulatory authorities which are of relevance in the private equity context in Mauritius include the following.
Registrar of Companies: The Registrar of Companies is responsible for:
- the incorporation and registration of companies, and the striking off of companies in case of non-compliance with the legal requirements;
- the registration of documents that must be filed under the Companies Act (including share transfer forms in case there is a transfer of shares and the register of shareholders);
- the provision of company information to the public; and
- the enforcement of compliance with the legal requirements.
Financial Services Commission (FSC): The FSC is the integrated regulator for the non-bank financial services sector and the global business sector in Mauritius.
The FSC is of relevance where a private equity transaction involves an entity which is licensed by the FSC. These may include:
- entities that hold a global business licence to carry out business outside of Mauritius;
- entities that hold an insurance licence to carry out insurance activities in the country; and
- entities that hold other types of licences which are issued by the FSC.
The FSC has wide powers of enforcement, including the suspension of licences and prosecution for breaches of relevant acts.
Competition Commission (CC): The CC is a statutory body established in 2009 to enforce the Competition Act 2007. This act established a competition regime in Mauritius, under which the CC can investigate possible anti-competitive behaviour by businesses. In its investigations, the CC has considerable powers to compel businesses and others involved to provide information. If it decides that a business's conduct is anti-competitive, it has strong powers to intervene and correct the situation. Where businesses are found to have deliberately agreed to fix prices or share markets, the CC can impose fines.
2.2 What regulatory conditions typically apply to private equity transactions in your jurisdiction?
There are no general regulatory conditions that typically apply to private equity transactions. However, the following specific conditions should be borne in mind when conducting private equity transactions in Mauritius:
- An authorisation from the Prime Minister's Office under the Non-citizens (Property Restriction) Act is required to enable foreign investors to invest in a company which holds immovable property in Mauritius; and
- Notification to the FSC is sometimes required where a buyer is acquiring 20% or more of the share capital of an entity that holds a global business licence issued by the FSC.
Other regulatory conditions may apply on a case-by-case basis, depending on the particular transaction at hand.
3 Structuring considerations
3.1 How are private equity transactions typically structured in your jurisdiction?
Private equity transactions are mainly structured either through holding companies in Mauritius or private equity funds holding assets in other jurisdictions. The majority of international private equity transactions either:
- outside the jurisdiction, and take place at the level of the portfolio company; or
- result in a change of shareholding at the level of the Mauritius company.
Holding companies are typically structured through a company structure, while private equity funds are structured through a company or limited partnership structure. In recent years, there has been a shift whereby private equity funds are increasingly structured through a limited partnership structure rather than a company structure.
3.2 What are the potential advantages and disadvantages of the available transaction structures?
With respect to companies, the Mauritius Companies Act is flexible, allowing for ease of operation while providing statutory protection for shareholders (including minority shareholders). Classes of shares may be issued giving different rights to different categories of investors. Directors have statutory duties, including a duty to act in good faith and in the best interests of the company. Certain matters also require the consent of the shareholders, thus offering a degree of protection set out in the law to investors.
In a limited partnership, the general partner can easily manage the structure under the terms set out in the partnership agreement. Unlike the Companies Act, which provides more extensive statutory protection, greater flexibility is afforded to the partners under the Limited Partnership Act to decide on the operation of the structure; and protections are negotiated and contractually embedded in the limited partnership agreement itself. This has the benefit of allowing the limited partnership to be managed much more flexibly through the general partner (with a delegation to the collective investment scheme manager). It is also relatively easy to accommodate the specific requirements of individual investors (compared to a company, where shareholders of the same class must be treated equally, making it cumbersome and inefficient to deal with different share classes in the structure). While in a company, certain decisions must be made by the board, in a limited partnership there is no such restriction: the general partner can make all decisions allowed under the limited partnership agreement. This facilitates quick and efficient decision making in the operation of the limited partnership. A limited partnership structure is also tax transparent (unless the partners, in the case of a limited partnership holding a global business licence, opt for it to be taxable in Mauritius).
A limited partnership structure is also more practical for returning capital or profits to investors, as the provisions of the Companies Act relating to solvency test, buyback/redemption of shares and requirements for accumulated profits do not apply.
3.3 What funding structures are typically used for private equity transactions in your jurisdiction? What restrictions and requirements apply in this regard?
Private equity transactions are typically funded by a mix of cash and loans. Private equity funds use subscription line financing at the fund level.
3.4 What are the potential advantages and disadvantages of the available funding structures?
From a tax perspective, the potential advantages and disadvantages of the funding structures are as follows:
- Foreign dividend income earned by a private equity fund is eligible for an 80% partial exemption provided that the substance conditions are met, thus reducing the maximum effective tax rate on such foreign dividend income to 3%.
- As an alternative, a private equity fund may seek credit for foreign tax income against its Mauritius tax liability on the foreign dividend income in the form of withholding tax, underlying tax and tax sparing. Generally, where the private equity fund owns a shareholding of 5% or more in its investee companies and the investee jurisdictions have a corporate tax rate in excess of 15%, no residual tax liability should arise in Mauritius.
- Interest income earned by a private equity fund is also eligible for an 80% partial exemption, provided that the substance conditions are satisfied.
- The provision of debt finance to investee companies where the private equity fund has also invested in equity will trigger arm's-length remuneration considerations. Accordingly, the private equity fund will be required to carry out adequate benchmarking exercises to ensure that its interest transactions are in line with the arm's-length principle. Where the private equity fund also raises capital from its investors in the form of debt, similar considerations will also apply on the financing side.
3.5 What specific issues should be borne in mind when structuring cross-border private equity transactions?
The transaction structure is important from both a corporate perspective and a tax perspective. Depending on the jurisdictions involved, any applicable tax treaties will need to be considered in order to advise on the optimal structure from a tax perspective.
The main considerations to be taken into account when structuring cross-border private equity transactions from a tax perspective are as follows:
- whether Mauritius has an effective tax treaty (DTA) in place with the investee jurisdiction;
- the terms of the DTA, including any applicable limitation of benefits clause, and whether the DTA is affected by the Organisation for Economic Co-operation and Development's Multilateral Instrument;
- withholding tax provisions in relation to dividends, interest and capital gains under the DTA, as compared to applicable tax rates under local jurisdictions; and
- the deductibility of interest expense in the books of the investee companies.
3.6 What specific issues should be borne in mind when a private equity transaction involves multiple investors?
The interests of investors should be aligned, and it should be agreed which decisions require the approval of which investors. This can be the subject of significant negotiations between investors – in particular, depending on the types of investors involved (eg, development finance institutions (DFIs) versus institutional investors; and different DFIs can also have different requirements).
Specific management decisions will include:
- investment prohibitions;
- portfolio limits;
- exit strategies;
- pre-emption rights; and
- dilutive rights;
These will typically be covered in a shareholders' agreement (for a corporate structure) or a limited partnership agreement (for a limited partnership structure).
4 Investment process
4.1 How does the investment process typically unfold? What are the key milestones?
Potential purchasers will express their interest and typically a non-binding indicative offer will be submitted subject to due diligence of the target.
In order to carry out legal and financial due diligence, the potential purchasers must be granted access to the documents of the target.
Access to the documents of the target must be granted by the target itself, and sometimes by the regulatory body (eg, if the target is a financial institution regulated by the Bank of Mauritius, the bank's approval will be required before access can be granted).
The potential purchasers will usually be bound by a non-disclosure agreement. Other documents may also be required as a condition of being granted access to the data room (eg, for financial institutions regulated by the Bank of Mauritius, a confidentiality undertaking must be filed pursuant to the Banking Act).
The potential purchasers are then provided with access to the documents, which are usually set out in an online data room. The potential purchasers will be given a timeframe within which to complete their due diligence and submit an offer.
In a competitive bid process, the offer must be made (albeit subject to due diligence) prior to having access to the data room.
Negotiations will follow and the transaction documents will be drafted and amended until execution of the documents.
4.2 What level of due diligence does the private equity firm typically conduct into the target?
The level of legal due diligence will depend on, among other things:
- the value of the transaction;
- the level of investment/acquisition (ie, percentage of control); and
- the nature of the business.
Legal due diligence may involve either a red-flag review of certain specific areas agreed between the private equity investor and its advisers or complete due diligence of the target. This may depend on the level of investment – for example, a complete buyout may warrant a higher level of due diligence. It is increasingly common to have a red-flag due diligence (especially when the target is known). Commercial, financial and tax diligence is also typically undertaken.
4.3 What disclosure requirements and restrictions may apply throughout the investment process, for both the private equity firm and the target?
See question 2.2. Notification to the Competition Commission and/or to the Common Market for Eastern & Southern Africa may also be required prior to the acquisition of the target.
4.4 What advisers and other stakeholders are involved in the investment process?
As well as legal advisers, we usually see a corporate finance firm involved to guide the parties through the process. Tax advisers are also usually engaged.
5 Investment terms
5.1 What closing mechanisms are typically used for private equity transactions in your jurisdiction (eg, locked box; closing accounts) and what factors influence the choice of mechanism?
We see both completion accounts and locked box mechanisms used; albeit increasingly the latter is the preferred option for private equity sellers, due to the certainty in pricing and timing of payment. Private equity funds can also distribute those proceeds to their investors without having to wait for completion accounts.
The disadvantage of a locked box for the buyer is that there is no opportunity post-completion to review the position of the target at its point of acquisition and adjust the price. However, this is usually mitigated with a tight definition of ‘leakages' to ensure that the right price is being paid for the target.
5.2 Are break fees permitted in your jurisdiction? If so, under what conditions will they generally be payable? What restrictions or other considerations should be addressed in formulating break fees?
There are no restrictions on break fees under Mauritius law.
5.3 How is risk typically allocated between the parties?
Private equity sellers will typically not give any warranties other than warranties as to title (to sell their shares) and capacity to enter into the transaction documents. The rationale behind this is that the private equity investor is a passive investor only, and is not involved in the day-to-day operations of the business. Private equity sales will also try to avoid any contingent liabilities..
A buyer may try to mitigate this risk by obtaining warranties from the management team relating to the business and carrying out more in-depth due diligence to identify any risks in the business.
5.4 What representations and warranties will typically be made and what are the consequences of breach? Is warranty and indemnity insurance commonly used?
Standard representation and warranties – including capacity and authority to enter into the transaction, accounts, employment, tax, insolvency and assets of the target – are usually provided.
6 Management considerations
6.1 How are management incentive schemes typically structured in your jurisdiction? What are the potential advantages and disadvantages of these different structures?
Management incentive schemes can take a variety of forms, including carry structures and employee share option plans.
The use of the limited partnership structure is common where the investors need a tax-transparent vehicle for the tax to benefit from flow-through treatment onshore.
6.2 What are the tax implications of these different structures? What strategies are available to mitigate tax exposure?
Limited partnership structures holding a global business licence may be either tax transparent or subject to tax in Mauritius.
Carry structures usually hold redeemable shares in private equity funds so that carried interest is paid out either by way of dividend or through redemption shares. In each case, no Mauritius tax implications are expected to arise.
Employee stock ownership plan schemes are often housed in trust and foundation structures which, depending on their residency, may not be subject to tax in Mauritius.
6.3 What rights are typically granted and what restrictions typically apply to manager shareholders?
The rights granted under these schemes are usually economic participation rights only, linked to investment or fund performance.
Typically, there will be a prohibition on all transfers of shares by managers other than pursuant to:
- very narrow permitted transfer rights;
- compulsory transfer provisions for leavers;
- drag-along rights; and
- if included, tag-along rights.
There will also be non-compete and non-solicitation restrictions..
6.4 What leaver provisions typically apply to manager shareholders and how are ‘good' and ‘bad' leavers typically defined?
There is no standard definition; usually, this is a matter of negotiation between the parties and is mainly guided by what is typical in the jurisdiction where the underlying manager is based.
In general, bad leaver provisions will cover matters such as voluntary resignation, not devoting enough time to the business, gross negligence and so on. A good leaver scenario will typically capture ill health or death.
7 Governance and oversight
7.1 What are the typical governance arrangements of private equity portfolio companies?
Governance provisions will be set out in the shareholders' agreement and the Constitution.
The private equity investor will typically request board or observer seats at the level of the target and/or its portfolio companies. Other governance provisions include:
- appointing well-recognised firm as auditors;
- complying with best practice governance principles; and
- establishing a procedure for dealing with conflicts (which can only be approved by an advisory committee made up of certain representatives of shareholders).
7.2 What considerations should a private equity firm take into account when putting forward nominees to the board of the portfolio company?
- what value the director can add (eg, by supplementing a missing skill or experience to the board); and
- which director has the experience (eg, in particular sector of activity) to perform portfolio monitoring.
7.3 Can the private equity firm and/or its nominated directors typically veto significant corporate decisions of the portfolio company?
Certain significant corporate decisions will require the approval of the private equity investor. The rationale is to ensure that:
- certain major governance decisions are not taken without the approval of the private equity investor; and
- the management and assets of the business are protected.
These are typically subject to heavy negotiation between the parties and will also depend on the size of the private equity investment in the portfolio company. The greater the investment, the more ‘control' the private equity investor will seek to impose on the taking of significant decisions.
7.4 What other tools and strategies are available to the private equity firm to monitor and influence the performance of the portfolio company?
Certain information rights over and above what shareholders would typically require will be requested by the private equity investor. For example, a contractual right to have access rights to the officers, employees and premises of the group allows the private equity investor to monitor performance of the investment and ensure compliance with applicable laws, regulations and corporate governance obligations.
8.1 What exit strategies are typically negotiated by private equity firms in your jurisdiction?
Trade sales, secondary buyouts and initial public offerings are the most common exit strategies, with trade sales being the more common exit route.
8.2 What specific legal and regulatory considerations (if any) must be borne in mind when pursuing each of these different strategies in your jurisdiction?
Sale/exit: Please see question 2.2. regarding the legal and regulatory considerations that must be borne in mind when pursuing a sale/exit.
Listing: The specific legal and regulatory considerations that must be borne in mind when pursuing a listing on the Stock Exchange of Mauritius depend on the types of securities that will be listed on the market.
However, applicants must comply with all the conditions laid down in:
- the Companies Act 2001;
- the Financial Services Act 2007;
- the Securities Act 2005; and
- regulations made under these enactments.
Applicants must also comply with the Listing Rules of the Stock Exchange of Mauritius and other Stock Exchange of Mauritius Rules.
9 Tax considerations
9.1 What are the key tax considerations for private equity transactions in your jurisdiction?
Foreign dividend income earned by a private equity fund is eligible for an 80% partial exemption, provided that substance conditions are met, thus reducing the maximum effective tax rate on such foreign dividend income to 3%.
As an alternative to the above, a private equity fund may seek credit for foreign taxes income against its Mauritius tax liability on the foreign dividend income in the form of withholding tax, underlying tax and tax sparing. Generally, where the fund owns a 5% or more shareholding in its investee companies and the investee jurisdictions have a corporate tax rate in excess of 15%, 5% or more in its investee companies and the investee jurisdictions have a corporate tax rate in excess of 15%, no residual tax liability should arise in Mauritius.
Interest income earned by a private equity fund is also eligible for an 80% partial exemption, provided that substance requirements are satisfied.
Profits or gains from the disposal of shares and securities are exempt from tax in Mauritius.
9.2 What indirect tax risks and opportunities can arise from private equity transactions in your jurisdiction?
Transfer pricing considerations are very important in ensuring that transactions are carried out at arm's length.
Underlying tax credits may be claimed in respect of multi-tier structures by a private equity fund in Mauritius. Accordingly, private equity funds structured in Mauritius may have multiple layers of special purpose vehicles in foreign jurisdictions, yet tax credits may be claimed for taxes paid by the underlying operating companies.
9.3 What preferred tax strategies are typically adopted in private equity transactions in your jurisdiction?
Generally, unless a private equity fund wishes to have access to benefits under a specific tax treaty, its strategy will be to be structured either as:
- a special purpose fund, which is exempt from tax; or
- a limited partnership, which is tax transparent.
10 Trends and predictions
10.1 How would you describe the current private equity landscape and prevailing trends in your jurisdiction? What are regarded as the key opportunities and main challenges for the coming 12 months?
The private equity landscape still looks very positive. Mauritius is a key jurisdiction through which private equity investments flow into Africa, whether by way of holding structures or (more commonly) through private equity funds.
The main challenge is for Mauritius to exit the grey list of the Financial Action Task Force (FATF) and the European Union, which will enable the flow of funds through Mauritius. An FATF site has taken place in September 2021 and a decision will be taken in October by the FATF.
10.2 Are any developments anticipated in the next 12 months, including any proposed legislative reforms in the legal or tax framework?
Special purpose acquisition company (SPAC): Mauritius has embraced the concept of the SPAC, which is the flavour of the day in the world markets. The SPAC is another way of raising capital introduced in the most recent budget of 2021. It will be listed on the stock exchange and the funds raised will be used to make acquisitions.
Variable capital company (VCC): A VCC bill is being drafted by the Attorney General's Office. VCCs are used by international investment funds and can be used for open or closed-ended investment funds and special funds such as hedge funds and venture capital funds. The VCC provides flexibility, as the capital of the fund is variable, and is therefore attractive to fund managers and administrators. The VCC, which may also be used for private equity business, should bring further benefits to the Mauritian jurisdiction.
Special purpose fund: The Financial Services Commission (FSC) published new rules in April 2021 to give more flexibility to the special purpose fund (SPF), which was first established in 2013. The SPF is still tax exempt and can be an open-ended or close-ended fund which operates under the aegis of the FSC. Previously, the SPF could only do businesses with those countries with which Mauritius had no Double Taxation Agreements; but this has now changed and the SPF may now deal with any country. The SPF was also previously restricted to investing mostly in securities that are exempt from taxation and this requirement has also been lifted.
The SPF must:
- have economic substance in Mauritius;
- be managed by a locally licensed manager; and
- be administered by a locally licensed administrator.
The SPF, manager and administrator will have to employ locally an adequate member of qualified persons to establish core income-generating activities. The entity may have a maximum of 50 investors each investing a minimum of $100,000. Such investors should have competency and significant experience of investment funds. It is therefore addressed to sophisticated investors and the FSC has wide discretionary powers to ascertain that the fund complies with the condition imposed.
11 Tips and traps
11.1 What are your tips to maximise the opportunities that private equity presents in your jurisdiction, for both investors and targets, and what potential issues or limitations would you highlight?
Mauritius remains a major player in the private equity space, with a significant private equity fund flow through Mauritius with respect to investments in Africa. It is important to stay aligned with the shifting expectations and demands of investors, to ensure that Mauritius remains a jurisdiction of choice for private equity funds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.