World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).

The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.

This chapter covers Ghana. View the full guide.

Ghana

ENSafrica

1) In your jurisdiction, which sectors do venture capital funds typically invest in?

The sectors in which venture capital investments are made (and the extent of such investments) is difficult to ascertain since few venture capital deals are required to be disclosed to the public. In our experience, venture capital funds typically invest in private small and medium enterprises which enables them to have the capacity to tap into economies of scale and expand rapidly.

A 2020 report on Africa Venture Capital produced by Partech indicates that the technology sector, particularly FinTech, is currently popular for venture capital investment in Ghana.

2) Do venture capital funds require any approvals before investing in your jurisdiction?

a. Venture capital funds can generally invest directly in Ghana without any approval, subject to specific approvals that may be required for specific industries. In such regulated industries, investments may require regulatory approval from the relevant regulatory body (particularly if change of control thresholds are triggered as a result of the proposed investment). Specific requirements vary from industry to industry.

b. A venture capital company that intends to set up in Ghana is required to be licensed by the Securities and Exchange Commission (the “SEC”) as a venture capital fund. The SEC will only issue a license to a company:

i. incorporated in Ghana or registered in Ghana as an external company, and which is determined by the SEC to be fit and proper to be licensed as a venture capital fund; and

ii. which has:

1. ‘the provision of risk capital to small-, medium- and large-sized businesses as its principal object in its constitution;
2. an initial minimum fund size of approximately USD 1.7million;
3. a board of directors with at least 1 independent director;
4. one independent professional such as a lawyer or a similar person as a company secretary; or
5. a fund manager licensed by the SEC.

3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?

There are generally no restrictions on offshore venture capital funds investing in and influencing the business and operations of an investee company in Ghana, subject to any regulatory approvals or limitations applicable to a change in control in the investee company.

4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?

No. There are currently no antitrust laws in Ghana. There is however a Competition and Fair Trade Practices Bill currently pending before Parliament.

5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?

a. There are no preferred investment structures for venture capital deals in Ghana. The main factors in determining the specific investment structure are usually (i) the level of preferred control over the activities of an investee company; and (ii) the extent or limitation of liability and risks of the investee company.

b. Thus investment structures may include, but are not limited to, the following:

1. Equity Financing - The most common structure is where the venture capital fund acquires a shareholding in the investee company as this allows for greater control over the activities of the investee company. The venture capital fund may invest a specified amount in the company as consideration for ordinary or preferred shares in the company. Preferred shares are typically used in venture capital deals as they provide preferred rights in respect of dividends, voting rights as well as anti-dilution protection in the event of a liquidation.
2. Debt Financing - Another common structure, if the investee company is already incorporated and operating, is debt financing. Although this may allow only for limited control over the affairs of the investee, investors tend to find debt financing less risky than equity financing.
3. Convertible Debt – This structure provides the option for the venture capital fund to convert its debt in the investee company into ordinary shares of the company.

6) Is there any restriction on rights available to venture capital investors in public companies?

No. There are no restrictions on the rights available to venture capital funds in public companies.

7) What protections are generally available to venture capital investors in your jurisdiction?

a. Venture capital investors typically receive significant contractual protection in the transaction documentation (which will most often consist of a shareholders' agreement, share subscription or purchase agreement or an amendment to the company’s constitution). Amongst others, the transaction documentation may provide for (i) a list of reserved matters in respect of which the venture capital investor's consent will be required, (ii) restrictions on share transfer and change of control and (iii) the investor’s right of first refusal to any transfer of shares. These provide the venture capital investor a greater degree of control than the rights attached to its shareholding would otherwise give.

b. The law also provides inalienable remedies to venture capital investors including the (i) right to institute legal action in the name and on behalf of the investee company against the directors for their negligence or default, and (ii) right to request the investee company to purchase its shares in the event of a major transaction, arrangement or merger.

c. Venture capital investors are further generally protected by the following:

1. Limited Liability: the liability of investors is limited to their contributions to the venture capital fund;
2. Accountability to investors: a venture capital fund licensed by the SEC is required to circulate annual and half-yearly investors’ reports which include the statement of assets and liabilities, an income and distribution account, and reports of the auditor as well as the fund manager on the activities of the venture capital fund during the financial year; and
3. Powers of the investors: Investors of a venture capital fund licensed by the SEC are authorized to convene meetings to remove directors of the venture capital fund whom they consider to be unfit to manage the assets of the fund.

8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?

a. Warranty and indemnity insurance is not common in Ghana although some insurance companies may provide such insurance. We understand that the lack of such insurance is due to the lack of information, and the inability of the insurance industry to assess the risks involved in insuring such warranties and indemnities.

b. As a result of the above, venture capital funds in Ghana typically rely on contractual warranties and indemnities, the right to claim damages, and specific reliefs in law in transactions. Such contractual indemnities do not typically cover matters disclosed in the due diligence on the company and matters disclosed by the investee company.

9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?

a. Exits or the disposal of the venture capital fund’s participation in the investee company, usually occur in the following ways: (i) sale of shares in the investee company, (ii) share buyback by the company, and (iii) the liquidation or winding up of the investee company.

b. We note that the most common exit mechanism is the sale of shares in the investee entity. No risks are associated with this exit strategy. However, depending on the terms of the transaction documents or the constitution of the company, such exits may be subject to obligations such as drag-along rights or tag-along rights.

c. The exit mechanisms for public or listed companies in Ghana may however include: (i) an initial public offering (IPO), (ii) a sale of the company’s shares by a trade executed on the stock exchange, or (iii) share buy-back of the investors' shares by the company.

10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?

a. While public market exits via IPO are legally permissible, public market exits via an IPO by a venture capital fund are rare in Ghana. Most IPOs on the Ghana Stock Exchange have been for the purpose of raising capital for the listed company.

b. Additionally, the listing of shares of an investee company on the Ghana Stock Exchange or Ghana Alternative Market (GAX) in the course of an IPO is subject to (i) the listing rules of the Ghana Stock Exchange (or the GAX Rules), (ii) the requirements under the Companies Act 2019 (Act 992), and (iii) the requirements of the Securities Industry Act 2016 (Act 929), the Security and Exchange Commission Regulations 2003 (LI 1728) and the directives of the Security and Exchange Commission, as applicable. The costs and organizational efforts required to comply with the regulatory requirements set out above therefore present a challenge to exits via IPOs.

Contributor

ENSafrica
Nana Yaa Ahmed
nahmed@ensafrica.com

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