MERGERS AND ACQUISITIONS IN NIGERIA: REGULATORY, CORPORATE AND TAX CONSIDERATIONS
Over the years there have been unprecedented numbers of mergers and acquisitions ("M&A") transactions in key economic sectors in Nigeria, particularly in the banking & financial services, energy (oil/gas and power) and insurance sectors. Despite the economic recession the country experienced few years ago, recent regulatory reforms aimed at solving the problems arising from foreign exchange scarcity and low oil price are likely to increase investors' appetite for M&A deals.
This Note seeks to examine the structures usually adopted for these deals, as well as the considerations that parties and their advisers need to consider when carrying out their cost-benefit analysis on the type of structure to adopt for a transaction.
II. MERGERS AND ACQUISITIONS STRUCTURES
Under Nigerian law, a merger is defined as any amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate. A strict legal definition of an acquisition has been provided under the Securities and Exchange Commission ("SEC") Rules 2013, as where a person or group of persons buys most (if not all) of a company's ownership stake in order to assume "control" of a target company.
The Federal Competition and Consumer Protection Act ("FCCPA") for its purposes defines a merger as follows:
(a) a merger occurs when one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking; and
(b) a merger contemplated in paragraph (a) above may be achieved in any manner, including through -
(i) the purchase or lease of the shares, an interest or assets of the other undertaking in question,
(ii) the amalgamation or other combination with the other undertaking in question, or
(iii) a joint venture.
The question of what amounts to 'control' of a business or commercial undertaking has been considered by relevant enactments to wit: the FCCPA and the Investment and Securities Act ("ISA") 2007. Section 92 (2) of the FCCPA stipulates that for purposes of subsection (1), an undertaking has control over the business of another undertaking if it -
(a) beneficially owns more than one half of the issued share capital or assets of the undertaking;
(b) is entitled to cast a majority of the votes that may be cast at a general meeting of the undertaking or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that undertaking;
(c) is able to appoint or to veto the appointment of a majority of the director of the undertaking;
(d) is a holding company, and the undertaking is a subsidiary of that company as contemplated under the Companies and Allied Matters Act;
(e) in the case of an undertaking that is a trust, has the ability to control the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust;
(f) has the ability to materially influence the policy of the undertaking in a manner comparable to a person who, in ordinary commercial practice can exercise an element of control referred to in paragraph (a) to (f).
Section 119(3) of the ISA 2007 also provides for what amounts to control, a person is said to be in control of a company, if that person -
(a) beneficially owns more than one half of the issued capital of the company;
(b) is entitled to vote a majority of the votes that may be cast at a general meeting of the company, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that person;
(c) is able to appoint or to veto the appointment of a majority of the directors of the company;
(d) is a holding company and the company is a subsidiary of that company as contemplated by the Companies and Allied Matters Act;
(e) in the case of a company that is a trust, has the ability to control the majority of votes of the trustees, to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust;
(f) has the ability to materially influence the policy of the company in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in paragraphs (a) to (e).
From a transactional perspective, it is suggested that parties do not rely only on the strict statutory definition of M&A to categorize their transaction as either one of both terms. This is because a "merger" can be practically achieved in any manner, including through -
(a) purchase or lease of the shares, interest or assets of the company in question; or
(b) amalgamation or other combination with the other company in question or
(c) a joint venture.
The use of the phrase - "purchase of shares, interest or assets of the company in question" lends credence to the fact that there is an overlap in the definition of both terms and an evaluation of the substance of the transaction is needed to decipher the true intent of the parties or nature of the transaction. This evaluation is also relevant in drawing distinctions between typical M&A transactions from those transactions where a party is only interested in acquiring marginal number of shares or acquiring shares solely for investment and not for voting.
In practice, merger transactions are structured as either a direct or indirect merger. In a direct merger, the acquiring company merges directly with the target company to become a single entity. In a direct merger the assets and liabilities of the target company are assumed directly by the acquiring company. In the case of an indirect merger, the acquiring company creates a wholly-owned subsidiary company usually called the merge sub; the merge sub then merges with and into the target company. An indirect merger would either result in the target company remaining as a wholly-owned company of the subsidiary (reversed subsidiary merger) or the target company being subsumed or surviving as a wholly-owned subsidiary of the acquiring company (forward subsidiary merger).
In the case of an acquisition, it could either be by way of a direct share purchase or asset purchase. In a direct share purchase, the acquiror would acquire all the shares of the target company from its shareholder(s) that have been made available for sale. Under Nigerian law, an acquisition of any number of shares that amounts to 30% - 50% of the company's shareholding would entitle the shareholder to make a mandatory takeover bid for the outstanding shares of the company pursuant to Section 131 of the ISA. In the case of an asset purchase, the acquiror acquires all or certain assets that are fundamental to the target company's business. The assets are usually transferred by contractual agreements.
III. VARIOUS TRANSACTIONAL CONSIDERATIONS
A. Regulatory Approval
Mergers and acquisitions and corporate restructuring in general are subject to regulatory approval of the Federal Competition and Consumer Protection Commission, Securities and Exchange Commission and Corporate Affairs Commission, Federal Inland Revenue Services (see discussion under tax regime) and the Federal High Court. Depending on whether the entities involved are private and/or public, the Nigerian Stock Exchange and the National Association of Securities Dealers would also exercise some regulatory oversight. It is pertinent to note that in addition to the above-mentioned regulators, corporates carrying on business in a given sector may also be required to seek approval from the sector regulator. Typical sector regulators are the Central Bank of Nigeria, Department of Petroleum Resources, National Insurance Commission, Nigerian Communication Commission and National Pension Commission etc.
For the purposes of this Note, attention will be given to the main and more generic regulatory bodies from whom approvals are needed before a M&A transaction can be concluded.
Securities and Exchange Commission
Under Nigerian law, the Securities and Exchange Commission is the apex regulator of securities. The enactment of the FCCPA in early 2019 has effectively divested the Securities and Exchange Commission of some of its powers as a regulator of M&A transactions in Nigeria particularly as it relates to the issue of lessening competition or creating a monopoly that a M&A deal may trigger in the economy.
The Federal Competition and Consumer Protection Commission
The Federal Competition and Consumer Protection Commission ("FCCPC") is a creation of the FCCPA. Section 17 of the FCCPA charges the FCCPC with the promotion of competition in the Nigerian markets at all levels through eliminating monopolies, prohibiting abuse of dominant market position and penalizing other restrictive trade or business practices. Section 104 of the FCCPA further provides that notwithstanding the provision of any other law, but subject to the provisions of the Constitution of the Federal Republic of Nigeria, in all matters relating to competition and consumer protection, the provision of this FCCPA shall override the provision of any other law.
In terms of mergers, Part XII of the FCCPA provides for such matters. The FCCPC is empowered to approval a proposed merger subject to the notification of threshold to be determined from time to time. Unlike the provisions of the ISA and the SEC Rules, the FCCPA simply states that the threshold for a "small merger" or "large merger" shall be stipulated by the FCCPC through its regulations. The FCCPA did exempt a party to a merger determined as a "small merger" pursuant to the FCCPC Regulation, from notifying and obtaining the approval of the FCCPC unless it is required to do so by the FCCPC. It is important to bear in mind that the FCCPC still has the statutory powers within six months after a small merger is implemented, to require the parties to notify it of the merger in the prescribed form and manner; if in the opinion of the FCCPC having regards to the provision of the section, the merger may substantially prevent or lessen competition.
When considering a merger or a proposed merger, the FCCPC is required to (a) determine whether or not the merger is likely to substantially prevent or lessen competition, by assessing the factors set out in subsection (2); (b) if it appears that the merger is likely to substantially prevent or lessen competition, then determine - (i) whether or not the merger is likely to result in any technological efficiency or other pro-competitive gain which will be greater than or off-set, or is likely to result from the merger and would not likely be obtained if the merger is prevented, and (ii) whether the merger can or cannot be justified on substantial public interest grounds by assisting the factors set out in subsection (3); (c) otherwise, determine whether the merger can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsection (3).
In assessing the strength of the competition in the relevant market and the probability that the undertaking in the market after the merger will behave competitively or co-operatively, the FCCPC is required to take into account any factor that is relevant to the competition in that market including - the actual and potential level of import competition in the market; the ease of entry into the market; tariff and regulatory barriers; the level and trends of concentration and history of collusion in the market; the degree of countervailing power in the market; the dynamic characteristics of the market, including growth, innovation and product differentiation; the nature and extent of vertical integration in the market; whether the business or part of the business of a party to the merger or proposed merger has failed or is likely to fail; and whether the merger or proposed merger will result in the removal of an effective competitor.
When it appears that a merger or proposed merger is likely to substantially prevent or lessen competition, the FCCPC shall determine if the merger is likely to result in any technological efficiency or other pro-competitive advantage which will be greater than and offset the effect of any prevention or lessening of competition, while allowing consumer a fair share of the resulting benefit; and whether the merger can or cannot be justified on substantial public interest grounds by assessing factors such as effect on (a) a particular industrial sector or region; (b) employment; (c) the ability of national industries to compete in international markets; and the ability of small and medium scale enterprises to become competitive.
Nigerian Stock Exchange
The Nigerian Stock Exchange ("NSE") as a self-regulatory organization licensed by the SEC is authorized by its constituent documents and the SEC to operate different markets amongst which are (i) the main or first -tier securities market (ii) the second-tier securities market. The main or first-tier securities markets as the name connotes, is the general market into which the shares of publicly quoted companies are normally listed.
When an acquisition involves the shares or assets of a public listed company, there are provisions in the Rulebook of the NSE to the effect that there should be disclosures to the NSE of any dealing that would impact on the share value. There is also the requirement to notify the NSE of a deal that would bring about a change in the beneficial ownership of the company's shares owned by the investor to 5% or more. Further, the Rulebook requires the shares of publicly quoted companies to be exchanged on the floor of the NSE as part of the completion process for the transaction.
As part of the exchange process, the acquiror would be required to open an account with the Central Securities Clearing System ("CSCS") (where it does not already have a CSCS account). The CSCS account would be opened on behalf of the acquiror by a Nigerian licensed Stockbroker appointed by the acquiror. The purpose of crossing on the floor of the NSE is to enable the transfer of the shares from the CSCS account of the Vendor to the CSCS account of the acquiror. The crossing of the shares would be undertaken by the Stockbroker appointed by the acquiror and the Stockbroker appointed by the vendor.
National Association of Securities Dealers
The National Association of Securities Dealers ("NASD") is the body responsible for regulating the sale and purchase of securities of unquoted public company. Pursuant to the SEC Rules on Trading in Unlisted Securities 2015, no person shall buy, sell or otherwise transfer securities of an unlisted public company except through the platform of a registered securities exchange established for the purpose of facilitating over-the-counter trading of securities.
NASD is a securities exchange registered by the SEC to operate a formal Over The Counter ("OTC") market in Nigeria. NASD OTC provides trading platforms where all instruments not listed on a traditional exchange, registered by the Securities and Exchange Commission, can be traded through licensed stockbroking houses.
B. Corporate Consideration
Irrespective of whether the M&A transaction is between private or public companies, there are corporate issues that the parties need to take into consideration when structuring the transaction. These issues are the requisite shareholders/board of directors resolutions, the court-ordered meetings if it is a merger deal, crossing of the shares on the floor of an exchange (NSE or NASD) for a public company, transfer of the shares in the case of a private company, appointment of new directors/reconstitution of the board of directors and filing of the relevant returns with the CAC and payment of statutory CAC fees.
In addition to the above, irrespective of whether the corporates involved in the M&A transaction are private or public limited companies, the company secretary and/or transaction counsel must ensure that the name of the acquiror is entered in the register of members in respect of the acquired shares. The failure to take this step would mean that as far as the company is concerned, the transferor of the shares remains the holder of the shares.
C. Tax Regime
There are certain tax obligations that may arise depending on whether the parties are involved in a merger transaction or in an acquisition. When it is an acquisition involving the purchase of shares the tax consideration is usually different from that of an acquisition of the underlying business assets.
It is important to note that no merger or acquisition transaction can take place without the clearance of the FIRS with respect to capital gains tax ('CGT'), stamp duties or other tax components. The CGT Act exempts any gain realized by a person from a disposal of shares from being subject to CGT. If the transaction is an acquisition of the underlying business assets, the transferor may be liable to pay CGT on any gains realized from a disposal of the assets.
In the case of stamp duties, the Stamp Duties Act exempts the parties from the payment of stamp duty on the instruments for the transfer of shares. However, the parties usually pay stamp duty on the instrument at a nominal or fixed rate. If the transaction involves the acquisition of assets, stamp duty is usually paid on the sale and purchase agreement on an ad valorem basis. The failure to stamp an instrument that is subject to the stamp duties will render such an instrument inadmissible in the event of a court proceedings before any Nigerian court. The transaction may also be subject to Value Added Tax ('VAT) Act 2004, if it involves the acquisition of the underlying assets. Save for those goods and services exempted by the VAT Act, the acquiror will be liable to pay VAT on the consideration payable for the assets that are being purchased.
In the coming months and years, the main economic sectors would most likely continue to benefit from the headline and high value M&A transactions. Nevertheless, with the right economic variables other sectors such as fintech, manufacturing, pharmaceutical and agribusiness etc. are well positioned to drive the next phase of M&A deals in Nigeria, particularly from a cross-border perspective. This is made more evident by the fact that ours is still an emerging and developing market. Thus, there is the need for investors and deal advisers to take into account the various transactional considerations discussed above, when structuring their deals, so as to maximize profitability and create value for the parties involved in these deals.
*Author - Mr. Ikemefuna Stephen Nwoye
Principal Chief Counsel - NWOYE (Barrister and Solicitor)
Disclaimer: This article should not in any way serve as a substitute for legal advice or opinion. The views expressed are personal to the author and do not necessarily reflect the views of any organization or person that the author is or might have been affiliated to. This is an updated version (20 May 2019) that takes into account the role of the newly created Federal Competition and Consumer Protection Commission in M&A transactions.
Sections 92 (1) (b) of the FCCPA; see also Section 119 of the ISA, 2007. Rule 22 of the SEC Executed Rules and Regulation, June 2017 (it amends Rule 421 of the SEC Rules 2013) defines an acquisition (mergers) as the takeover by one company of sufficient shares or assets in another company to give the acquiring company control over that other company.
 In addition to its jurisdiction on companies' matters, the Federal High Court grants the court order required by the merging entities to hold meetings and afterwards it approves the resulting mergers.
The Central Securities Clearing System is a central depository that is responsible for maintaining records of transactions undertaken on the floor of the NSE. The Central Securities Clearing System is responsible for clearing and settlement of transactions in shares on the floor of the NSE.