This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in the Nigeria.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The principal legislation governing M&A in Nigeria is the Investments and Securities Act No. 29 of 2007 (“ISA”). M&A transactions are regulated primarily by the ISA and the Rules and Regulations issued by the Securities and Exchange Commission (“SEC Rules”) and where any of the entities is listed on a securities exchange, the Exchange Rules will apply i.e. the listing rules of the Nigerian Stock Exchange (“NSE Listing Rules”).
The Companies and Allied Matters Act (“CAMA”), Cap. C20, Laws of the Federation of Nigeria (“LFN”), 2004 and the regulations made pursuant to it – the Company Rules 2012 (as amended) – also govern various aspects of M&A transactions. The Stamp Duties Act also regulates the application of stamp duties to some types of M&A deals as well as transaction documents. The Securities and Exchange Commission (“SEC” or “Commission”) is the apex regulatory authority in the Nigerian capital market. All mergers and acquisition that fall within the thresholds specified in the ISA and or the SEC Rules, require the prior approval of the SEC. In addition, there are industry-specific regulators, statutes and regulations in sectors such as banking, insurance, telecommunications, power and oil & gas that also impact M&A transactions.
- Where the transaction is a merger, an order will be obtained from the Federal High Court (“FHC”) to convene a shareholders’ meeting of the merging entities and another order will be obtained sanctioning the merger following the receipt of all other regulatory and shareholders’ approval.
- Where any of the parties to an M&A deal is listed on the Nigerian Stock Exchange (“The NSE”), certain disclosure obligations imposed by The NSE will also apply.
What is the current state of the market?
The market witnessed a few M&A deals in recent times in sectors such as insurance, oil & gas, banking & financial services, real estate, healthcare, Fast Moving Consumer Goods (“FMCG”), construction & infrastructure, power etc. buoyed largely by divestment from certain sectors of the economy by investors, and relative stability in the foreign exchange (“FX”) market.
Before this period, policy and regulatory uncertainties surrounding the country’s foreign exchange regime put pressure on the economy and resulted in a lull in the market. According to data compiled in the Baker McKenzie’s 2017 Global Transactions Forecast, total M&A deals completed in 2016 and 2017 were twenty-eight (28) respectively, indicating a sharp decline in recorded activities in the previous years 2014 and 2015.
Whilst recent risks of illiquidity and volatility in the FX market negatively impacted FX-denominated transactions and slowed down a number of M&A deals, the CBN’s liberalized FX policy initiatives have further enhanced stability in the market. The diversification of the economy from oil and gas has also boosted the M&A activities in the country. According to the earlier mentioned market survey by Baker McKenzie, the total value of Nigerian M&A deals was predicted to hit $4billion in 2018.
As the 2019 general elections scheduled for Q1 2019 draw near, we envisage another lull in the market due to perceived political risks.
Which market sectors have been particularly active recently?
Insurance, Pension, Healthcare, and FMCG.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
(i) Increased capital base requirements for companies within certain industries/sectors of the economy
(ii) Diversification of operations
(iii) Economy of large scale and the need to expand market shares.
What are the key means of effecting the acquisition of a publicly traded company?
A publicly traded company can be acquired in different ways thus:
- By strategic acquisition of the shares of the target company on the floor of the NSE through a stock broker (subject to resultant shareholding of the acquirer pursuant to acquiring such shares, a mandatory take-over may be triggered).
- By means of a Scheme of Arrangement eﬀected under the Companies and Allied Matters Act. This frequently used framework has the advantage of acquiring 100% of the shares in the target on completion, including from any minority dissenting shareholders.
- Through a Voluntary Tender Offer (“VTO”) whereby the acquirer makes an offer to all the shareholders of the target.
- Section 129 of the ISA also provides a mechanism, though not often relied upon, for acquiring the shares of a company through a Scheme or Contract (not being a take-over bid). As part of this structure, provided the statutory minimum acceptance conditions are met, a buyer can use a statutory "squeeze-out" procedure to compulsorily acquire the shares of dissenting shareholders.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Generally, information in the financial statements of the target and other information filed at companies’ registry or otherwise publicly published will be available.
With regards to disclosure of information, save where the target company is listed on a stock exchange, there is no regime governing compulsory disclosure of information. The extent of disclosure in a transaction involving a listed company is curtailed by the need to ensure that “price sensitive information”/ information not publicly available are not shared during transactions or that the information, if shared, is not utilized for insider trading by the recipient or its advisers.
To what level of detail is due diligence customarily undertaken?
This will largely depend on the nature of the transaction and agreed scope of diligence by the parties. Diligence audits are generally very detailed and extends to legal, financial, environmental, taxation and commercial due diligence. Documents reviewed in the process includes records at the companies’ registry, litigation files, contracts, financial statements (sometimes with the Auditor’s management letter), licenses, minutes of board and shareholders’ meetings and sanctions.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
Key decision making organs of a target company are the Shareholders in the General Meeting and the Board of Directors. Pursuant to the provisions of the Nigerian companies’ law, a company shall act through its members in general meeting or its board of directors. The general powers for managing the affairs of the company is vested in the board of directors unless otherwise stated in any applicable law, the Articles of Association of the target or rules and regulations of the appropriate regulatory authority. In an asset sale, subject to the provisions of the seller’s constitutional documents, the board of directors have the powers to act without shareholders’ approval. However, in practice, where the sale is a disposal of significant assets, the Directors would seek the approval of shareholders.
A scheme of arrangement requires the approval of shareholders holding not less than 75% in value of the shareholders or class of shareholders present and voting at the relevant shareholder meeting. An acquisition effected pursuant to section 129 of the ISA requires the approval of shareholders representing not less than three-quarters in number of the holders of the shares sought to be transferred and such shareholders must hold not less than nine-tenth in value of such shares.
What are the duties of the directors and controlling shareholders of a target company?
Directors owe a fiduciary duty to the company and the shareholders and must act in good faith and in the best interest of the company at all times. Subject to the transaction structure, the directors must ensure that the terms of the transaction are not inimical to the interest of the Company. Furthermore, members of the board are also required to disclose any interest they may have in any potential transaction involving the target. In that instance, the affected director will not be allowed to vote.
Where the acquisition is being structured pursuant to the mandatory take-over rules, the directors will issue a Directors’ circular stating the recommendations (approval or disagreement) of the directors to the take-over bid.
The controlling shareholders of a target company have no specific legal role in a merger or acquisition transaction. However, a minority shareholder can bring a claim if they believe that the actions of the company are unfairly prejudicial or oppressive to the minority shareholders. Furthermore, where the controlling shareholder has an interest in the acquirer and the transaction is structured as a Scheme of Arrangement, the controlling shareholder will be precluded from voting at the meeting to consider the scheme (i) if the target is a publicly listed company; or (ii) in any other case, at the direction of the SEC.
Do employees/other stakeholders have any specific approval, consultation or other rights?
No, employees generally do not have approval, consultation or other rights in an M&A transaction. However, in a merger, the employees of the merging companies as well as the trade unions operating within the relevant industry are required, in accordance with the provisions of the ISA, to be given notice of the proposed merger. The Scheme of Merger also sets out the plan for the employees of both companies.
In other cases, subject to the terms and conditions of any collective bargaining agreement that the Target had executed with the trade unions, consultation with the employees may be required.
In relation to other stakeholders, approval, consultation or other rights is dependent on the terms of the contracts/relationship with the target.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality is an accepted standard practice in Nigeria. indeed, the provisions of the ISA on take-over assumes that the offeror can impose terms which can subsequently be waived. The conditions vary based on the commercial objectives of the parties. However, in practice, it is difficult for bidders to invoke a condition, other than a material regulatory condition, an acceptance condition or a condition which is required in order to implement the transaction. Private deals can be subject to whichever conditions are agreed between the parties, including a ﬁnancing condition.
What steps can an acquirer of a target company take to secure deal exclusivity?
An acquirer of a target company can secure deal exclusivity by entering into an exclusivity agreement with the target company.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
In addition to exclusivity and conditionality, acquirers also rely on break-fee provisions. It is however imperative that the break fee must not be construed as a penalty. In some cases, the seller accepts to pay or reimburse due diligence cost if the deal does not close. Confidentiality is also another common mechanism. The directors of the target company always have to consider their fiduciary obligations and the application of any cost coverage mechanism is highly deal specific.
Which forms of consideration are most commonly used?
Payment fully in cash or shares or a combination of both. The target company must also be mindful of the financial assistance restriction.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
- An acquisition of 5% or more of the shares of a public company must be notified to the SEC and The NSE.
- An Offeror is required to make an announcement on the floor of The NSE of its intention to make a takeover bid to the Offeree Company.
- Where the target or the offeror is a publicly traded company, it must notify The NSE upon giving or receiving a notice of intention to make a take-over, an acquisition or a tender offer.
- Any notification to The NSE is announced to the market/investing public by the NSE, unless otherwise exempted.
- In some cases, industry regulators are notified of any acquisition of 5% or more in the target but such notifications are not announced to the public. However, acquisition/transfer of shares is registered at the companies’ registry upon completion of the deal (save for publicly traded companies) and information at the registry is generally available to the public.
At what stage of negotiation is public disclosure required or customary?
There is no statutory requirement to notify the public of the negotiation. However, where the target, the seller or offeror is a publicly traded company, disclosure must be made in accordance with the Rules of The NSE unless otherwise exempted. Notwithstanding an exemption, an announcement may be triggered in certain circumstances, including where the target becomes the subject of rumour and speculation. Generally, in relation to publicly traded companies, secrecy is encouraged until an oﬀer announcement is made.
Is there any maximum time period for negotiations or due diligence?
There is no maximum period for negotiations and due diligence. Time for negotiation and due diligence is dependent upon the structure of the deal and agreed contractual timelines.
Are there any circumstances where a minimum price may be set for the shares in a target company?
Yes, where the take-over rules apply to the transaction, all the shareholders have to be treated equally.
Is it possible for target companies to provide financial assistance?
No, Nigerian law generally prohibits a target company or any of its subsidiary from giving financial assistance (either by way of a gift, guarantee, security/indemnity, loan or any form of credit that may cause material reduction to its net assets) to a proposed acquirer. However, a target company is exempted from this general prohibition if:
- it lends money in the ordinary course of its business, where money lending forms part of the company’s objects;
- it provides money under any existing scheme for the purchase of, or subscription for, its own fully-paid shares or that of its holding company, being a purchase/subscription by trustees of the company or for shares to be held by or for the benefit of its employees and/or directors in salaried employment;
- it grants loans to persons bonafide in the employment of the company (excluding directors), to enable the persons subscribe for fully-paid shares in the company or its holding company, as beneficial owners; and
- any of the company’s acts or transactions otherwise authorized by law.
Which governing law is customarily used on acquisitions?
The parties can choose the governing law for the transaction documents. Acquisitions are generally governed by Nigerian law and in some cases, English law. Where English law is the governing law, Nigerian law still applies to the transfer mechanism.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
The public facing documents include the Information Memorandum or Offer Document (as applicable) that will be approved by the SEC and The NSE Both documents include information regarding the acquirer, directors’ circular, the acquirer’s intentions regarding the target and its employees, and the resources for funding the offer. Other documents will be as specified in the SEC Rules or The NSE Rules and this will include the various announcements that the law requires the buyer and the target to publish.
With a scheme of arrangement, the documentation will include a scheme document together with an explanatory statement and the notice convening meetings of shareholders instead of an oﬀer document with a directors’ circular. Save for these, the content of the scheme document and the offer document is largely same.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Subject to any restrictions specified in the constitutional documents of the target, shares of a Nigerian company are transferable by the execution of written instrument of transfer. With regards to publicly traded companies, the transfer must be effected in accordance with the rules and regulations of the exchange where the shares are listed. Furthermore, shares traded on The NSE are subject to taxes and other charges, including brokerage commission, typically borne by the buyer and the seller respectively. The acquirer will also pay some fees to the SEC, typically calculated on an ad valorem basis based on the deal size.
The Capital Gains Tax Act exempts any gains realized by a person from a disposal of shares from capital gains tax. In addition, the Stamp Duties Act exempts instruments for the transfer of shares (share transfer forms) from the payment of stamp duty. In practice, however, parties to share acquisition transactions will usually stamp the share transfer forms at a nominal rate of 500 Naira (about US$3.30) for the original document and 50 Naira (about US$0.30) for each counterpart.
Are hostile acquisitions a common feature?
No, hostile take-overs are not a common occurrence.
What protections do directors of a target company have against a hostile approach?
There are no specific provisions under Nigerian law for the protection of the directors of a target company against a hostile approach. However, the Directors do have an opportunity not to recommend the offer to the shareholders in the Directors’ circular. In doing this, the Directors must take cognisance of their fiduciary obligation and act in the best interest of the company.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Yes, a mandatory take - over rule applies:
- where an acquirer acquires shares, whether by a series of transactions over a period of time or otherwise, which (taken together with shares held or acquired by persons acting in concert with it), carry 30% or more (or any threshold as may be prescribed by regulation) of the voting rights in the target company; or
- where an acquirer together with persons acting in concert with it, holds not less than 30% but not more than 50% (or any threshold as may be prescribed by regulation) of the voting rights in the target company and such person or persons acting in concert with it acquires additional shares, which increase its percentage of the voting rights.
There are however certain exemptions from the Mandatory take-over provisions even where the acquisition threshold is triggered.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
The minority shareholders can in certain circumstances require their shares to be compulsorily acquired. Where a minority shareholder alleges that the aﬀairs of the company are being conducted, or that the powers of the directors of the company are being exercised in a manner oppressive to it, it may be possible to bring an action under the Companies and Allied Matters Act.
Is a mechanism available to compulsorily acquire minority stakes?
Yes, a bidder can effect a compulsory purchase or squeeze-out of the minority shareholders in the target. Accordingly,
(i) where the acquisition is done pursuant to the mandatory take-over rules, the bidder can squeeze out the minority shareholders where it has received 90% acceptances both in value and voting rights of those shares that are subject of the offer.
(ii) where the acquisition is effected pursuant to Section 129 of the ISA, the bidder can effect a squeeze-out within two months of the expiry of the four-month offer period, where it has received the acceptance of the contract by not less than nine-tenth in value of the shares whose transfer is involved; and
(iii) such approving shareholders must not be less than three-quarters in number of the holders of the shares the acquirer seeks to acquire.