Private M&A

Private Mergers and Acquisition (M&A) transactions in Zambia are structured through agreements negotiated by the parties involved. The transactions follow a structured process that is in tandem with:

• the Competition and Consumer Protection Act and the attendant regulations; and
• sector-specific legislation.

Section 24 of the Competition and Consumer Protection Act outlines the different forms in which a private M&A transaction may take, which include the following:

• Share or asset acquisition: This involves an entity purchasing shares, leasing assets or acquiring an interest in another entity. While ownership changes, the target continues to exist, with all its liabilities, assets and obligations shifting to the acquiring entity.
• Amalgamation: This process involves two or more entities merging into a single entity. This process ultimately results in the dissolution of the initial entities which cease to exist independently, with their assets, liabilities and operations being integrated into the newly formed entity.
• Joint venture: This is an arrangement between two or more entities that work together on a common project. The process involves each entity making a substantial contribution to the venture, which is typically established as a separate business entity that is jointly owned and controlled by the parent entity.

Similar forms are found in Securities Act (41/2016) the applies to companies whose shares are publicly traded on the Lusaka Stock Exchange (applies to public M&A transactions).

Key differences: Share acquisitions, amalgamations and joint ventures are distinct business structures that differ significantly in key respects, such as:

• the involvement of entities;
• the results of the transaction;
• control;
• liabilities; and
• integration.

A share or asset acquisition involves one entity purchasing shares or assets from another entity. In this process, while the target continues to exist, the acquirer gains control over it together with its assets, liabilities and other obligations, unless otherwise agreed.

On the other hand, amalgamation involves the merging of two or more entities into a single entity. This typically dissolves the original entities, with their assets and liabilities integrated into the newly formed entity. This also results in the consolidation of the control and operations of the two entities into the newly formed entity, resulting in a complete transformation and integration.

A joint venture is typically a collaboration between two or more independent entities on a common project where a separate legal entity is created to manage the affairs of the venture, with the parent entities retaining their independent control and ownership. Unlike share and asset acquisitions and amalgamations, joint ventures involve no dissolution of the parent entities, and they integrate their operations only to the extent necessary for the venture.

Advantages and disadvantages:

Share and asset purchase: Share and asset purchase agreements are advantageous in that the buyer acquires the entire entity, including the assets, contracts and goodwill, ensuring that the business continues with minimal interruption. However, the buyer assumes all liabilities of the target, including:

• tax obligations;
• penalties; and
• pending litigation.

Amalgamation: This allows two entities to merge into one entity. This typically streamlines operations and creates synergies. However, since the transaction requires shareholder and regulatory approval, this involves a lengthy decision-making process which slows down progress.

Joint ventures: One advantage of joint ventures is the risk-sharing aspect, which allows parties to mitigate financial exposure and market access, thereby benefiting foreign investors. Notwithstanding this advantage, control and decision conflicts often arise due to the parties’ different strategic priorities and management styles.

The choice of structure is mainly influenced by factors such as tax efficiency. Targets seek to minimise tax liability through either a share or asset acquisition.

Regulatory compliance is another factor that influences the choice of structure, especially in industries in which there are:

• restrictions on foreign ownership; or
• licensing requirements that favour certain structures.

Operational continuity is another important aspect. Share acquisitions pave the way for a smooth business transition, while asset transfer transactions require a lot of negotiation and licences.

A number of procedural considerations must be considered where a share sale is structured as an auction. Most importantly, the parties must ensure that the auction process is compliant with the local laws governing:

• auctions;
• sales; and
• contract information.

In Zambia, the laws governing the sale of shares are the Securities Act and the Companies Act, with the latter applicable to private companies. The Companies Act provides the legal framework for the formation, management, administration and dissolution of companies in Zambia. Most importantly, it sets out the procedures for the issuance, transmission and transfer of shares, which are critical to any sale process.

The type of auction must also be considered. There are generally two types of auction sales: auction reserve and non-reserve auctions.

An auction reserve is the minimum price that the seller is willing to accept for an item in an auction sale. The seller is under no obligation to sell the item if it does not meet the minimum price. A non-reserve auction is an auction where the item is sold to the highest bidder regardless.

Further, the parties must be able to conduct due diligence before the auction in order to avoid disputes. This includes ensuring that:

• the seller owns the shares; and
• the auctioneer is legally authorised to conduct the sale.

During the preparatory stage, the first and most important document to be executed is one that relates to confidentiality – typically a non-disclosure agreement (NDA) (see further question 5.2).

Second, the buyer will draft a document that grants it exclusive rights to negotiate for a defined period. This ensures that the seller does not present the offer to another buyer before the conclusion of the negotiations. This can be achieved through a lock-out agreement or exclusivity agreement.

Third, the parties will execute a term sheet or letter of intent (see further question 5.1). This document outlines the key terms of the proposed transaction.

Legal advisers: Lawyers play a very important role, as they provide guidance on the legal aspects of the transaction. They contribute their expertise in structuring the deal and ensure that it complies with the applicable laws and regulations.

Lawyers provide legal counsel and expertise on:

• the deal;
• corporate governance;
• the deal structure;
• regulatory approvals;
• tax implications; and
• competition law considerations, particularly, regarding merger control and approval from the Competition and Consumer Protection Commission (CCPC).

Financial advisers: Financial assist in assessing the financial aspects of the deal, including:

• risk management;
• financing; and
• valuation.

The key players on the financial side include:

• investment bankers, who:
• • act as intermediaries between the parties; and
  • help to determine the fair value of the target; and
• accountants, who:
• • assist in the review of financial statements;
  • assess the financial health of the target; and
  • advise on any potential financial risks and/or liabilities associated with the proposed deal.

Tax consultants: Tax consultants play a critical role in M&A deals, as they:

• help to design the most tax-efficient structure; and
• advise on the implications of the various M&A structures.

Regulatory authorities: The CCPC is responsible for:

• reviewing the proposed transaction and assessing any potential anti-competitive ramifications that the proposed transaction may have in the market; and
• once all requirements have been met, approving the proposed transaction subject to satisfaction of the sector-specific requirements.

Depending on the industry in which the target operates, sector-specific regulators may need to be consulted. For example, Section 79 of the Insurance Act 2021 prohibits any M&A transaction entered without the prior approval of the Pensions and Insurance Authority, regardless of whether the parties have satisfied the requirements under the Competition and Consumer Protection Act.

Shareholders and directors: Shareholders and directors of both the buyer and the target also play a vital role in M&A transactions. Without them, a proposed M&A cannot be brought before the regulatory authorities. The directors enter into contracts that bind the entities. Therefore, they play a pivotal role during the negotiation process.

The shareholders have ownership interests in the parties; thus, their consent is needed before any M&A transaction can be concluded. Section 131 of the Companies Act (10/2017) reserves certain powers for shareholders as conferred upon them under the articles of association and the act itself. With regard to M&A transactions – or indeed any transaction that involves the purchase or sale of assets – Section 87 of the Companies Act proscribes directors from:

• selling or leasing the whole or part of the assets of a company without the approval of the shareholders; or
• entering into transactions that are likely to have the effect of acquiring rights and interests or incurring liabilities or obligations whose value is equivalent to the value of the company’s assets.

The advisers in these transactions are professionals and are members of professional and regulated bodies.

The legal profession is regulated by the Law Association of Zambia, whose rules of practice are governed by:

• the Legal Practitioners Act (Chapter 30 of the Laws of Zambia 1973); and
• the Legal Practitioners Practice Rules (Statutory Instrument 51/2002).

Under Rule 17 of the rules, legal professionals must inform clients about:

• the charges for their legal services; and
• the basis for those charges.

Further, the rules prohibit legal practitioners from offering free legal services, except where such services are offered for a charitable cause, such as on a pro bono basis in accordance with the pro bono framework of the Law Association of Zambia.

Similarly, accountancy services are regulated by the Zambia Institute of Chartered Accountants (ZICA), governed by the Accountants Act (13/2008). Under Section 16(2) of the act, accountants are mandated to charge client service fees as determined by ZICA.

A seller in an M&A transaction can pay adviser costs to the professional advisers it employs during the transaction. Where the seller is willing to pay adviser costs, this will not amount to financial assistance within the meaning of Section 183 of the Companies Act.

Due diligence in private M&A deals is a very important step in assessing the liabilities, risks and value of the target. This encompasses legal and financial, taxation, regulatory and all operational aspects of the entity in order to ensure compliance with the legal and regulatory framework, including:

• the National Anti-Money Laundering Policy; and
• the Countering Terrorism Financing and Proliferation Financing Policy.

Legal and financial due diligence: The buyer will:

• evaluate the target’s outstanding liabilities, tax obligations, debt structures and cash flow, to ensure its financial health; and
• review the target’s:
• • ownership structure;
  • contracts;
  • pending litigation;
  • corporate documents;
  • IP rights; and
  • compliance with regulatory obligations.

Depending on the structure that the M&A deal takes, due diligence of the target’s real and movable property may be needed. In the case of real property, robust due diligence is particularly important. The buyer will need to obtain a certificate of official search from the registrar of the Lands and Deeds Registry at the Ministry of Lands and Natural Resources in accordance with Section 23 of the Lands and Deeds Registry Act (Chapter 185 of the Laws of Zambia). This is to ensure that the assets to be purchased are not encumbered by any mortgages or other competing interests.

As for movable property, such as motor vehicles, the buyer will need to verify the status of any financing statements on the movable property in accordance with Sections 26 and 28 of the Movable Property (Security Interest) Act (3/2016).

Tax, regulatory, anti-money laundering and financial intelligence due diligence: The buyer will need to ensure that the target:

• is compliant with the tax laws; and
• has fulfilled all its tax obligations with the Zambia Revenue Authority.

Compliance with the following must also be ensured:

• competition law requirements;
• sector-specific regulations; and
• the requirements of other regulatory bodies, such as the Patents and Companies Registration Agency (PACRA).

In order to ensure that the target is not involved in any illicit activities, such as money laundering, terrorist financing or other financial-related crimes, the buyer will need to verify the beneficial owners of the target in accordance with the Financial Intelligence Centre’s Suspicious Transaction Reporting Guidelines.

Human resource management and operational due diligence: This process involves reviewing:

• the target’s employee contracts;
• potential risks related to the entire workforce;
• compliance with the Employment Code Act (3/2019); and
• most importantly, the target’s key business operations.

How the due diligence is conducted: The target or both parties will provide to each other all corporate, financial, legal and regulatory documentation for critical examination. Further, all site visits and inspections of business will be conducted as necessary. Interviews will additionally be conducted with the target’s key management personnel.

The buyer will:

• analyse the legal and financial risks; and
• verify any outstanding compliance issues with the regulatory bodies.

After completion of all the procedures, the findings will be compiled into a due diligence report, which identifies:

• potential deal breakers;
• compliance inconsistencies; and
• other risks that may influence the deal’s terms and conditions.

In private M&A transactions, participants must ensure that the target is compliant with the legal, financial and regulatory requirements. Specifically, attention must be paid to:

• the Competition and Consumer Protection Commission;
• the Financial Intelligence Centre;
• PACRA; and
• other sector-specific regulators, such as the Pensions and Insurance Authority and the Bank of Zambia (the latter is extremely important to ensure full compliance and prevent future liabilities that could hinder the parties from achieving the purpose of the transaction).

The parties must also assess the target’s reputational and environmental, social and governance compliance.

Depending on the findings in the due diligence report, parties must ensure that they structure the deal in a way that properly addresses all risks. This typically involves negotiating warranties, indemnity clauses and price adjustments to manage the identified risks.

Environmental compliance and liabilities: The buyer will usually evaluate whether the target is compliant with the requirements of the Zambia Environmental Management Agency, pursuant to the Environmental Management Act (12/2011). This typically involves:

• verifying all environmental permits and licences; and
• assessing waste management, pollution and carbon emissions compliance.

Social responsibility and labour considerations: The target’s safety standards and health and labour policies are very important. It is crucial to access the target’s:

• compliance with the Employment Code Act;
• safety policies; and
• record of occupational health violations.

For entities in sensitive sectors such as mining, agriculture and manufacturing, in which the use of chemical substances is high, an assessment of the target’s community relations is necessary in order to ascertain any future liabilities.

Various corporate and regulatory approvals are required for a successful private M&A transaction. They are entirely dependent on:

• the industry involved; and
• the corporate and legal structure of the parties.

Shareholder approval: As stated in question 3.2, Section 87 of the Companies Act requires an ordinary resolution of the members for substantial transactions, such as:

• the sale or purchase of major assets; or
• transactions that would affect the control of an entity.

This is a power reserved for shareholders pursuant to Section 131 of the Companies Act. Therefore, a director cannot approve a transaction such as an M&A deal without prior approval from the shareholders.

Third-party approval: Where the target has third-party stakeholders such as creditors and suppliers, it is important to engage them in order to secure their support and approval so as to ensure a smooth transition.

Regulatory, tax and financial intelligence approval: For transactions that meet the prescribed threshold set by the minister of commerce, trade and industry pursuant to Section 26(5) of the Competition and Consumer Protection Act, the requisite notification is needed before the parties may procced with the transaction. The Competition and Consumer Protection Commission will review the transaction for:

• any anti-competitive effects; and
• any possibility of abuse of dominance in the market.

Further, depending on the industry, approvals from sector regulators such as the following may be necessary:

• the Bank of Zambia (BoZ);
• the Pensions and Insurance Authority;
• the Energy Regulation Board; and
• the Zambia Information and Technology Authority.

Further, to ensure compliance with tax obligations, there is a need to obtain tax clearance certificates or tax exemption certificates (where applicable) from the Zambia Revenue Authority.

Lastly, it should be assessed whether there are any potential risks related to money laundering or any financial-related crimes, in accordance with:

• the Prohibition and Prevention of Money Laundering Act (14/2001) and its amendment of 2010; and
• the Financial Intelligence Centre Act (46/2010).

These approvals are important, as failure to obtain them may delay or invalidate the transaction. This also requires robust legal and financial due diligence to ensure that the target is fully compliant.

Zambia’s reform path and the programmes it has instituted in the last decade have been aimed at fostering private sector development and improving the overall economic and business environment to attract foreign direct investment into the country. Much as Zambia has an open investment climate, certain sectors impose restrictions on foreign ownership, such as the following.

Land ownership restrictions: Section 3(3) of the Lands Act (Chapter 184 of the Laws of Zambia) limits the circumstances in which non-Zambian citizens may own land in Zambia. Among other things, land ownership is permitted in the following circumstances:

• The non-Zambian is a permanent resident in Zambia;
• The non-Zambian is an investor within the meaning of the Investment, Trade and Business Development Act (18/2022);
• The non-Zambian has obtained the president’s consent in writing; or
• The non-Zambian is a company registered pursuant to the Companies Act and less than 25% of its issued shares are owned by non-Zambians.

The Competition and Consumer Protection Act requires the approval of merger control for foreign investors that wish to acquire Zambian businesses, especially if the business is in a dominant market.

For businesses in the financial sector, Section 8 of the Banking and Financial Services Act provides that a banking licence, financial business licence or financial institution licence for a subsidiary or a foreign company can be granted once the BoZ is satisfied that the foreign company:

• is a financial service provider;
• is authorised to engage in banking business in the country where its principal place of business is located; and
• is adequately supervised by competent authorities in the country of incorporation.

As stated in question 4.1, participants in private M&A transactions must ensure that the necessary approvals from regulatory bodies and from the internal stakeholders of the parties (eg, the board of directors and shareholders) are obtained. The need to engage all third parties cannot be overemphasised, as failure to do so may lead to breach of contract and risk of termination, which could complicate the transaction.

Several essential documents are prepared during private M&A deals, with each serving a particular purpose in the facilitation of the transaction. The key players in the preparation and finalisation of these documents are legal practitioners and financial advisers, depending on the nature and complexity of the transaction.

Due diligence report: Before any negotiations take place, it is necessary to prepare a robust due diligence report that incorporates the findings of the due diligence conducted on either party. This report assesses the legal, financial, operational, environmental and regulatory issues associated with the parties. It is usually prepared by legal practitioners and financial advisers engaged by the buyer.

Sale and purchase agreement (SPA): The SPA is usually the primary contract that makes the transaction official. It addresses:

• the terms of the sale;
• the consideration;
• conditions precedent;
• warranties and indemnities;
• jurisdiction clauses;
• termination; and
• dispute resolution mechanisms.

This document is often supplemented with a term sheet that outlines the preliminary terms of the transaction, including:

• the consideration;
• the structure;
• exclusivity;
• confidentiality; and
• key terms and conditions.

Non-binding as it may be, some of its provisions may be enforceable, such as exclusivity and confidentiality clauses.

The agreement may also contain a confidentiality clause, providing for non-disclosure of confidential information exchanged between the parties. However, for the parties to reap optimum benefit from this clause, it is always recommended that the parties execute a non-disclosure agreement at the outset of the negotiations so as to protect confidential information exchanged between the parties during the negotiation phase before the formal agreements are executed.

Resolutions and application forms: These include:

• board resolutions;
• shareholders’ resolutions;
• share transfer forms;
• property transfer tax application forms; and
• prescribed forms by regulatory bodies in order to effect the transfer of ownership or shares.

These documents are lodged with:

• the Patents and Companies Registration Agency;
• the Competition and Consumer Protection Commission; and
• other sector-specific institutions, depending on the industry involved.

Each of these documents plays an important role in ensuring a smooth transition. The preparation phase often involves legal, financial and regulatory experts who assist in addressing any risks and possibly missed procedures.

The documents involved in private M&A transactions play different roles, as each of them addresses a particular legal, financial or regulatory obligation. Confidentiality obligations and the consequences of breach are covered in the confidentiality clauses or a separate NDA.

As for due diligence, this covers the legal risks, including:

• corporate and regulatory compliance;
• financial health;
• tax obligations or liability; and
• operational liabilities.

The SPA, together with the term sheet, defines the structure of the transactions – that is, whether the transaction of a share or asset purchase is a joint venture or amalgamation. The document also addresses warranties and representations made by the target regarding its business operations.

The choice of law in a private M&A transaction is influenced by a number of factors, including the nature of the transaction. As stated in question 1.1, there are two types of M&A transactions: private and public. If the transaction relates to a company listed on the Lusaka Stock Exchange, the procedure to be adopted is set out in the Securities (Takeovers and Mergers) Rules (Statutory Instrument 170/1993).

The nature of the transaction and the parties involved will determine the applicable law. For example, parties in the insurance sector will need to comply with:

• the Competition and Consumer Protection Act; and
• the Insurance Act.

Where land is involved, there is a need to ascertain whether the buyer is eligible to own land in Zambia; therefore, it will be necessary to consult the Lands Act accordingly.

Representations and warranties are critical provisions in M&A transactions. They aim to protect both parties to the transaction by ensuring that certain statements about the business and its operations are accurate. The target usually makes these representations and warranties to the buyer, as the buyer is more likely to risk a lot in these transactions. These cover various aspects of the target’s business. The key representations and warranties to be considered include the following.

Compliance with laws and regulations: The target represents that it will endeavour to comply with all applicable laws and regulations, which typically entails confirmation that:

• it is compliant with all local, international, tax, environmental, health, safety and employment laws;
• all necessary regulatory filings have been made; and
• it holds all required licences and/or permits.

The target will further confirm that it has not:

• been subject to any criminal investigations or enforcement actions by state agencies; or
• violated any applicable laws that would have the effect of obstructing a smooth transition.

Intellectual property: The target will represent that it owns or has the legal rights to use all IP rights applicable in its operations. These include all trademarks, copyrights, designs and patents. Further, the target will warrant that there is no IP dispute or existing or recorded infringements.

Tax compliance: The target will represent that:

• it is in full compliance with all tax laws, including the filing of annual tax returns; and
• it is not under audit of investigation by the Zambia Revenue Authority (ZRA) and has no undisclosed tax liabilities or penalties.

Litigation and disputes: The target will also represent that it is in no way involved in any ongoing litigation, arbitration or any other administrative proceedings before any court of law, arbitral tribunal or any quasi-judicial tribunal. The target is obliged to disclose all such dispute or litigation in which it is involved.

Material adverse change: The target will represent that there have been no material adverse changes in the business or its financial or legal operations. This protects the buyer, ensuring that the target has not, immediately before the transaction, experienced any major negative changes.

Anti-money laundering and Financial Intelligence Centre compliance: The target will confirm that it is compliant with all relevant laws and regulations relating to the prohibition and prevention of money laundering. This involves confirmation that the target has put in place policies and procedures to identify and prevent any financial criminal activities.

In private M&A transactions, the buyer may seek indemnity for a number of risks, to ensure that the target bears full responsibility for all unforeseen and undisclosed risks post-transaction. The indemnity typically relates to:

• tax liabilities for protection against undisclosed tax obligations, penalties or adverse assessments that have not been appealed;
• environmental law violations such as contamination or regulatory non-compliance;
• pending litigation, including employee or labour disputes;
• IP infringements; and
• ownership concerns.

The remedies available in case of breach are those available under contract law, which typically include:

• specific performance;
• repudiation;
• damages; or
• termination.

The innocent party should avail of the dispute resolution mechanism specified in the agreement in pursuing a claim for the remedies available under contract law. Where there is no dispute resolution clause, the innocent party may commence legal proceedings before a court of competent jurisdiction.

As regards the statutory limitation period, the general limitation period for proceedings relating to contract disputes is six years, pursuant to Section 3 of the Law Reform (Limitation of Actions) Act (Chapter 72 of the Laws of Zambia). This timeframe begins to run from the date of accrual of the cause of action.

Liability is typically subject to a number of limitations, aimed at protecting both parties from excessive exposure. Normally, these limitations are negotiated as between the parties with the objective of striking a balance between protecting the buyer’s investment and limiting the target’s post-transaction risks. They include the following.

Time limits: For warranties, liability is usually limited to between 12 and 24 months from the date of completion of the transaction.

Exclusion for known risks: The target may negotiate to include a limit for liability for disclosed matters, meaning that the buyer cannot claim for:

• issues identified during the due diligence; or
• issues that the target could not, under reasonable circumstances, have been able to disclose.

Consequential loss exclusions: Usually, liability is limited to direct loss. Therefore, losses such as consequential or indirect losses are excluded. Examples of consequential losses include loss of profit or reputational damage.

Third-party recovery: Where there is a strong possibility that the buyer can recover losses from a third party, such as an insurer, the target’s liability is limited or extinguished.

Increasingly over the past five decades, contracts in Zambia have incorporated warranty and indemnity insurance. In M&A transactions, this is still developing and gaining traction, especially in cross-border transactions. Buyers are increasingly considering warranty and indemnity insurance to mitigate risks, especially where the target negotiates for the limitation of post-transaction liability.

Buyers usually take several measures to ensure that the target can meet any anticipated claims post-transaction. Normally, a portion of the consideration may be held in escrow for an agreed period to cover any post-transaction claims.

In order to ensure certainty, the buyer must conduct robust financial due diligence to review the target’s assets, solvency and potential liabilities before finalising the transaction.

It is extremely important for a target to include restrictive covenants in the agreements to protect the value of the target’s business. One example of a restrictive covenant that may be considered is a non-compete covenant, which prevents the target from engaging in similar business in the same geographical area as the business being sold for a given period.

Further, the parties may include a non-solicitation covenant to the effect that the target will be restricted from poaching clients, suppliers or employees of the target’s business.

Generally, these covenants:

• are enforceable for one to three years from the date of the agreement; and
• typically depend on:
• • what the parties have agreed to; and
  • the reasonableness in scope and geographical area.

However, care must be taken as excessive restrictions may be considered anti-competitive and unenforceable.

It is common to include clauses that allow the buyer to repudiate the agreement if a significant adverse event occurs that substantially affects the target’s business or financial situation.

Common conditions precedent in M&A transactions in Zambia include:

• obtaining regulatory approvals from the relevant bodies, such as the Competition and Consumer Protection Commission and the ZRA;
• ensuring the settlement of outstanding liabilities; and
• confirming compliance with labour laws.

These safeguards help to minimise any risks and ensure a smooth transition post-transaction.

In Zambia, consideration for various contracts, including M&A transactions, is typically offered in the form of a cash payment, where the parties agree on an upfront or instalment payment plan.

Consideration may also take the form of share swaps, where the target receives shares in the buyer in lieu of cash. In some cases, the parties may structure the consideration in such a way that it covers a combination of methods, such as:

• cash payment;
• earn-outs, where part of the purchase price is contingent on the target achieving a specific objective post-transaction; and
• share swaps.

The advantages and disadvantages of the different payment methods relate to:

• risk allocation;
• financial flexibility; and
• future value.

Cash payment is the most reliable mode of consideration in M&A transactions, affording immediate liquidity for the target and certainty in valuation. Notwithstanding the benefits that cash payments offer, the buyer must ensure that it secures financing, potentially straining its cash flow.

As for share swaps, since these involve the acquisition of shares in lieu of payment, the value of the shares may increase with time, putting the target at the advantage of profiting from the transaction. However, uncertainty in valuation and market fluctuations pose a risk to the target. Instead of gaining value, depending on the economic situation, the shares may actually lose value.

Earnouts reduce the upfront risk for the buyer and the potential upside for the target. However, disputes over financial metrics, post-transaction management issues and reliance on the buyer’s management to meet the agreed targets cannot be ruled out.

Each method of consideration has its own benefits and risks. Therefore, the choice depends on the financial strategic goals, negotiating power and financial position of the parties.

As stated in question 7.2, in private M&A transactions, the choice of consideration is typically influenced by a number of factors, including the financial position of the parties. A buyer with strong cash reserves may prefer to make a cash payment, which is the most straightforward method. However, a buyer that wishes to avoid debt or preserve its liquidity may elect to offer a share swap.

Market conditions are another factor that influences the choice of consideration. The target may prefer cash to avoid exposure to fluctuating share prices in volatile markets. The buyer, on the other hand, may choose share swaps to maintain flexibility.

Further, in order to manage and minimise risks, the buyer may use earnouts to ensure that the target meets expectations before paying the full price; whereas the target may insist on an upfront payment to minimise the risk of default.

The price mechanism in private M&A transactions is usually agreed by the parties, with both locked-box and completion accounts the preferred structures.

The locked-box structure involves fixing the consideration at the execution stage, based on the target’s financial position at a given period. This affords certainty to both parties while limiting adjustments after execution.

The accounts structure, by contrast, enables adjustments to be made after completion, based on the target’s financial position at the execution date, thereby offering flexibility.

The choice between the two structures is influenced by the intricacies surrounding the transaction. The locked-box structure is usually preferred for its simplicity, while the completion accounts structure is more suitable where a large transaction is involved and financial adjustments are required.

Most agreements are structured in such a way that the price is not paid in full at execution. Instalment plans are common in private M&A transactions. Instalments may be paid over an agreed period, which benefits the buyer. Besides instalment plans, arrangements may take the form of escrow funds or earnouts.

Escrow funds may be held back to deal with post-transaction adjustment or indemnity claims; while an earnout involves the buyer paying additional consideration based on the future performance of the target, which typically aligns with the interests of both parties.

Where payment is deferred or an earnout arrangement is adopted, the target will seek protection mechanisms to ensure that it receives the agreed consideration. The most common protection mechanism is the post-completion veto right, which allows the seller to be involved in the decision-making process of the target – especially for decisions that may affect the target’s future performance, such as alterations in business strategy.

The target may also seek audit rights in order to verify that the buyer has a financial report related to the earnout.

Further, the target may wish to incorporate a covenant to the effect that the buyer:

• will maintain business continuity; and
• will not take actions that could negatively affect the target’s performance.

Section 183 of the Companies Act prohibits a company from providing financial assistance to any person for the acquisition of its shares. ‘Financial assistance’, according to Section 3, includes gifts, loans, guarantees or other forms of financial support to facilitate the purchase of its shares. The purpose of this prohibition is to maintain the share capital of the company and keep it from dilution.

In private M&A transactions, the implications of this are that a target cannot directly or indirectly assist a buyer in financing the acquisition of its shares. In order to ensure compliance with the doctrine of maintenance of share capital, the parties are often encouraged to seek legal advice in order to explore alternative arrangements for financing that do not offend the law and regulations.

In Zambia, participants in private M&A transactions must critically examine funding options such as equity and credit finance to ensure that the buyer can secure the necessary funding.

Credit finance may affect operational flexibility and the cost associated with financing, including interest rates, which must be considered. Since the doctrine of maintenance of share capital prohibits the target from funding the transaction, buyers must explore alternative financing arrangements.

The M&A transaction process involves several stages, each serving a different purpose.

Preliminary discussion: The parties:

• engage in preliminary discussions to assess their interests;
• establish the platform for negotiations; and
• formally appoint their advisers.

Usually, it is at this point that the necessary non-disclosure agreement is executed to ensure confidentiality.

Due diligence: Upon completion of the preliminary discussion and upon establishing the parties’ interests, the buyer conducts due diligence to assess the target’s financial, legal, tax, operational and regulatory compliance.

Negotiation of terms: Depending on the findings of the due diligence, both parties will engage in negotiation of the key terms of the transaction, including:

• the consideration; and
• representations, warranties and indemnities.

The findings of the due diligence usually affect the negotiating powers of the parties.

Drafting: Following successful negotiations, the parties’ legal representatives will draft the necessary documentation, such as the sale and purchase agreement (SPA), which spells out the agreed terms.

Execution: Once the parties have confirmed the accuracy of the terms in the agreement, the agreement will be duly executed by both parties, with the buyer usually making a downpayment of the consideration.

On closing the transaction, the main document to be signed is the SPA, which clearly outlines the terms and conditions of the transaction, including:

• the consideration;
• the structure; and
• representations, warranties and indemnities.

Closing usually takes place in a formal meeting or through electronic means. Representatives from both parties, together with their legal and financial representation, sign the documents. Upon execution, payments are made and ownership is transferred in accordance with the terms of the agreement.

If part of the consideration is held in escrow to cover any post-transaction adjustments or claims, an escrow agreement is executed, which will govern the terms of the agreement.

The transaction is considered complete once all documents have been executed and all payments or conditions have been met.

The first step in the process of transferring title to shares to the buyer is the execution of the SPA, as this outlines the terms of the sale, including:

• the consideration;
• representations, warranties and indemnities; and
• any conditions precedent.

Besides the SPA, the parties will be required to execute a share transfer agreement (STA), which formally records the intention to transfer ownership of the shares from the seller to the buyer.

Upon execution of the SPA and STA, the seller must ensure that the shares to be transferred are fully paid up before the transfer may be actualised in pursuance of Section 188 of the Companies Act. Further, the seller will be required to pay property transfer tax.

Once the taxes have been paid, the seller must fill in and lodge Company Form 18, which provides notice of the transfer of shares.

In certain circumstances, the seller or its advisers may be held liable for:

• misleading statements;
• misrepresentation;
• omissions; or
• related issues.

This typically arises from breaches of representations and warranties made by the seller. If the seller’s representations and warranties are discovered to be false or misleading, the buyer may have sufficient grounds to:

• commence legal proceedings for damages; or
• better still, rescind the agreement.

Where the seller intentionally or negligently makes a false statement which the buyer relies on, this may have the effect of vitiating the contract and the buyer may have grounds to rescind the contract.

In certain circumstances, the parties’ advisers may be held liable for failing to undertake comprehensive due diligence. However, this generally depends on:

• the specific terms of their engagement; and
• the extent of their professional obligations.

Post-closing steps in private M&A transactions are important in finalising the transaction, as they ensure legal and financial compliance. These include the following.

Transferring the shares or assets: This process involves finalising the transfer of shares or assets following execution of the agreements, ensuring that the necessary documents are signed.

Obtaining regulatory approvals: This involves:

• notifying the Competition and Consumer Protection Commission of the transaction;
• lodging documents at the Patents and Companies Registration Agency; and
• obtaining post-transaction approvals from regulators such as the Zambia Development Agency and the ZRA.

Notifying employees: It is necessary, as explained in question 10, to communicate the changes to employees and other stakeholders, including by:

• notifying employees about:
• • the new ownership structures; and
  • any changes in management; and
• reviewing and updating all contracts.

Settling liabilities and obligations: It is important to address all outstanding liabilities and obligations. This typically involves ensuring that any financial instruments such as loans, mortgages and debentures are redeemed. Further, finalising any pending litigation is important; this may be achieved by negotiating consent judgments or orders where possible.

Ensuring tax and accounting compliance: The parties must ensure that:

• the transactions are accurately recorded in their respective accounting books; and
• all taxes and penalties are paid and the requisite clearance certificates are obtained.

The law governing private M&A transactions in Zambia is the Competition and Consumer Protection Act and attendant regulations.

Other statutes regulating private M&A transactions in Zambia include:

• the Competition and Consumer Protection (Amendment) Act (21/2023); and
• sector-specific legislation such as:
• • the Insurance Act, 2021;
  • the Banking and Financial Services Act, 2017; and
  • the Mines and Minerals Development Act (11/2015).

Section 26 of the Competition and Consumer Protection Act requires the notification of all M&A transactions that exceed a threshold prescribed by the minister of commerce, trade and industry. If the transaction involved exceeds the prescribed threshold, the transaction must be notified to the Competition and Consumer Protection Commission (CCPC) for approval before completion. The CCPC is responsible for assessing whether the transaction will significantly reduce competition in Zambia.

Currently, the threshold is set at ZMW 30 million for the assets or turnover of the merging entities. As the minister is responsible for setting the threshold, this changes from time to time.

M&A transactions that are below the prescribed notification threshold are not notifiable to the CCPC. The CCPC may nevertheless ask the parties to notify the merger if it has reason to believe that the transaction has the potential to substantially reduce competition in the relevant market.

The notification process typically entails:

• the lodging of all relevant documentation with the CCPC; and
• the subsequent payment of the prescribed fees.

If the parties are not sure whether the transaction qualifies for merger review, they may apply to the CCPC for negative clearance in accordance with Section 28 of the Competition and Consumer Protection Act. This allows them to seek guidance on:

• whether a transaction or proposed transaction meets the definition of a ‘merger’; and
• whether the same is notifiable.

Failure to notify the CCPC attracts fines, which can ultimately disrupt the smooth flow of the transaction.

From a competition perspective, the parties must consider merger control compliance, as this is the starting point in every M&A transaction. If the transaction meets the prescribed threshold set by the CCPC, it must be notified and approved by the parties before completion.

The CCPC will also assess whether the transaction:

• could potentially restrict competition; or
• will create or strengthen a dominant market position.

Buyers must conduct robust due diligence to assess the target’s competition compliance history – including any past investigations, fines and proceedings before the tribunal or the courts – as this could impact the transaction’s feasibility and value.

Transactions must be structured in a way that ensures that they do not pave the way for any anti-competitive behaviour, such as:

• the establishment of a cartel;
• collusion;
• price fixing; or
• abuse of dominance.

In Zambia, the rules applicable in employee consultation during M&A transactions are found in the various labour laws, including:

• the Employment Code Act 2019; and
• the Industrial and Labour Relations Act (Chapter 269 of the Laws of Zambia).

The process involves informing employees if their jobs may likely be affected by the transaction. The buyer typically assumes responsibility for the employees’ terms and conditions of service. Because of this, the target must inform the employees about the transaction and the impact of the transaction on the employees, including:

• any alterations to their conditions of service; and
• any potential redundancies anticipated.

Where employees belong to a trade union, the employer must engage the union representatives, who will represent the employees’ interests and negotiate on their behalf – in particular, where the transaction may potentially lead to redundancies.

During the consultation process, it is important to take into consideration any collective bargaining agreements and negotiate terms relating to the effect of the transaction on the employees, especially with regard to remuneration, repatriation or redundancy.

Transfer rules in Zambia are governed by corporate and contract law and sector-specific regulations. In the case of a share transfer, the first step is to obtain approval from the board of directors; depending on the provisions of the articles of association or shareholders’ agreements, shareholder approval may also be required. Pursuant to the Companies Act, the share transfer must be approved and entered in the share register of the company at the Patents and Companies Registration Agency.

In order to effect the successful transfer of real property, the target will need to execute the appropriate documents, such as the deed of transfer, in accordance with the Lands and Deeds Registry Act.

Employees are accorded certain protections in the event of an M&A transaction, with the aim of protecting their rights and interests during the process. Since the contracts are usually transferred to the buyer, employees are generally protected against unfair dismissal during or after the transaction. If the transaction results in a loss of employment, such as redundancy, the proper procedures in the Employment Code Act must be followed, such as:

• provision of notice; and
• payment of severance packages.

The structure of the transaction determines the extent of the impact on the seller’s pension scheme. In an asset purchase, the buyer only acquires specific assets of the target’s business, with the target retaining its liabilities, including liabilities associated with its pension schemes.

If the employees’ pensions are the subject of the transfer, the buyer may assume responsibility for the pensions. However, such transfers require careful review of the terms of the pension scheme.

Where the transaction is a share purchase, the buyer acquires the shares of the target. The effect is that the pension scheme remains intact. If the employees are transferred to the buyer post-acquisition, the buyer may assume the pension liabilities.

In the case of an amalgamation, the pension schemes of the merging entities may be integrated into a single scheme. The new entity established by the amalgamation may elect to:

• retain the pension schemes of both entities; or
• create a new scheme that consolidates the benefits of both schemes.

In order to ensure that there are no concerns over potential misclassification of employee status for any employees, workers, directors, contractors or consultants of the target, a robust review of the workforce must be conducted in order to accurately classify each individual in accordance with their status (ie, employee, worker, contractor or consultant). This is important as misclassification could expose the buyer to a number of unforeseen liabilities for:

• unpaid benefits or taxes; or
• issues relating to compliance with the labour laws.

It is also crucial to undertake a robust review of contracts and consultancy services agreements in order to confirm that the terms and conditions accurately reflect their respective classification.

From an employment perspective, the players in the transaction should consider developing plans to ensure that key employees remain with the entity post-transaction. This is because it may be risky for the buyer to have to expend resources on onboarding and training new employees. This is particularly vital if the success of the target depends on a few employees.

In order to minimise disruption and ensure a smooth transition, the parties to the M&A transaction must openly communicate with employees about the transaction and its implications on their roles and their future with the entity. This is very important because the announcement of an M&A transaction can create uncertainty among employees, which can diminish morale if not handled properly.

The data protection rules that apply in Zambia are found in the Data Protection Act (3/2021) (DPA), which regulates the collection, processing, storage and transfer of personal data. Importantly, the parties must ensure that they have the necessary consent from individuals whose personal data is subject to transfer or is the subject of the transaction.

During the due diligence process, both parties must ensure that they follow the DPA when reviewing personal data. This includes ensuring that personal data is not shared without the requisite consent or a legal justification.

Parties must protect personal data during the transaction process by ensuring that they implement security measures such as:

• storing data in secured places; and
• restricting access to authorised individuals.

To sum up, data protection laws require the proper handling, processing and transfer of personal data during the transaction. Both parties should be aware of their respective obligations and take all necessary steps to protect personal data throughout the transaction.

From the data protection perspective, parties must:

• ensure that the necessary personal data is shared during the due diligence process; and
• avoid disclosing irrelevant data.

This minimises the risk of potential breaches of the data laws.

The parties must also consider the rights of the subjects provided by law, such as the right to access, rectification and erasure. If personal data is being transferred out of Zambia, it is important to ensure that the transfer complies with the relevant data protection laws.

Depending on the structure of the transaction, there may be a need to:

• notify data subjects about the transfer of their personal data; and
• ensure that their consent is obtained.

Liability for environmental contamination in Zambia is primarily governed by the Environmental Management Act, 2011 and enforced by the Zambia Environmental Management Agency. The clean-up of contaminated sites is generally the responsibility of those that caused the contamination. However, parties may agree on who bears the liability.

By default, the target is responsible for any environmental damage caused before the M&A transaction. The agreement may contain warranties and indemnities from the target to ensure that it remains liable for any pre-existing contamination. If the target fails to disclose any known contamination, this may have the effect of vitiating the agreement.

Where the buyer’s insufficient due diligence leads to the acquisition of contaminated land or assets, it may assume responsibility for environmental remediation costs.

In M&A transactions, participants must ensure that they carefully assess environmental risks to ensure regulatory compliance and prevent future liabilities. The buyer must verify that the target follows the Environmental Management Act and the Environmental Management (Licencing) Regulations (Statutory Instrument 112/2013), as any missing or expired permits could result in operational disruptions exacerbated by fines.

Before finalising the transaction, it is important to conduct a robust environmental impact assessment and site contamination audit in order to:

• identify potential liabilities; and
• enable the buyer to negotiate for indemnities and remediation obligations.

The existence of any historical pollution is another factor that should be considered. If the target owns land or is active in mining or manufacturing, the agreement should be clear as to which party will be responsible for any pre-existing contamination, notwithstanding the target generally bearing responsibility.

In Zambia, the taxes that are typically payable in private M&A transactions are income tax and property transfer tax (PTT). PTT may apply to any profits arising from the sale of assets or shares.

Additionally, certain tax exemptions may apply, including:

• those for specific types of sectors; or
• where the transaction involves businesses that are seeking to invest in a priority sector.

Tax treaties and incentives provide for such exceptions.

In private M&A transactions, parties can minimise tax exposure by adopting tax-efficient structuring strategies, such as choosing between asset or share purchases based on tax treatment.

Further, the parties may wish to:

• make use of available tax exemptions; or
• implement tax-neutral reorganisations.

Compliance with transfer pricing rules may also be beneficial, as it maximises deductions and allowances.

Additionally, debt financing may attract tax advantages, putting the buyer at an advantage.

Tax consolidation of corporate groups is not allowed under the current tax regime. Group companies are not allowed to transfer losses between each other for tax purposes. This is due to the separate legal personality of a company, making its tax liability separate from its sister companies. Therefore, losses incurred by one company cannot be offset against the profits of another company within the same group.

From a tax perspective, the parties to an M&A transaction must consider the potential tax liabilities arising from the transaction, such as value-added tax and corporate tax, depending on the structure of the transaction.

The structure of the transaction is an important factor that influences the parties’ tax positions. Additionally, parties must explore any available tax incentives, exemptions or reliefs in order to minimise tax exposure.

At no point should the buyer fail to conduct comprehensive due diligence on the target’s tax exposure, including outstanding liabilities or audits, as this will help to avoid unnecessary liabilities.

Further, the parties must consider the impact of transfer pricing rules, withholding tax and the potential for restructuring or tax planning to enhance the efficacy of the transaction.

Over the past 12 months, the M&A landscape in Zambia has seen a surge in activity, in particular in the financial and mining sectors. The financial sector continues to undergo strategic adjustments, while the mining sector is attracting significant foreign investment.

Mopani Copper Mines transaction: On 26 February 2024, Zambia Consolidated Copper Mines Investments Holdings Plc (ZCCM-IH) announced that its shareholders had unanimously approved the acquisition of 51% of the shareholding of Mopani Copper Mines Plc (MCM) by Delta Mining Limited, a subsidiary of International Resource Holdings (IRH) of the United Arab Emirates. The transaction was valued at $1.1 billion. The transaction was successful and currently, IRH holds 51% shareholding of MCM, with ZCCM-IH retaining a 49% shareholding.

Atlas Mara transaction: On 6 May 2024, Access Bank Zambia Plc announced its successful acquisition of African Banking Corporation Zambia Limited (trading as Atlas Mara), subsequently leading to the merger of the two entities.

This transaction has positioned Access Bank as a top five bank in Zambia by revenue, with ambitions to break into the top three by 2027.

Over the next 12 months, there are anticipated legislative reforms that may potentially affect private M&A transactions. Particularly, the proposed Companies (Amendment) Bill of 2025 introduces significant reforms targeted at solidifying transparency and accountability. They include enhanced disclosure requirements for beneficial ownership, mandatory declaration of nominee status for shareholders and directors, and the prohibition of bearer shares and share warrants. These reforms will enhance due diligence requirements in private M&A transactions, with the buying entity having to conduct more investigations into the ownership structures and verifying compliance with the corporate governance standards.

Further, the proposed Bill proposes more stringent enforcement measures and also introduces compliance obligations relating to the minimum number of shareholders or directors. These proposed reforms may affect the structuring of M&A deals as a result of increased regulatory oversight and potential delays in post-transaction processes such as share transfers and lodgements at the companies registry. As a result,rivate M&A transactions are more likely to become compliance-driven, with a more stringent due diligence paradigm.

In order to successfully close a private M&A transaction, the starting point is to involve the relevant advisers from the outset, as the success of the transaction will depend on their expertise and competence. Our top tips for smooth closing are as follows:

• Effective stakeholder and integration management: It is important to ensure that both the buyer and the target have the support of third parties such as creditors and address concerns from other stakeholders such as employees with regard to job security and benefits, to ensure a smooth transition.
• Transaction structure: The need to define the structure of the deal cannot be overemphasised, as it is vital to know the direction that the transaction will take, whether it is a share or asset acquisition, amalgamation or joint venture.
• Internal, regulatory and legal compliance: The advisers will need to conduct robust due diligence on all operational and legal risks. This is to ensure compliance with competition laws and sector-specific regulations as a prerequisite for approval. Most importantly, obtaining approvals from the board of directors, shareholders and regulators is important, as it prevents unnecessary and avoidable obstacles that normally occur at the last minute.