'Squeeze-out' is a right that entitles a majority shareholder with at least 90% of the shares or voting rights in a company to acquire the remaining shares or voting rights compulsorily, and allows minority shareholders to exit the company by selling their shares to the majority shareholder.
In the context of an M&A transaction, the issue of a squeeze-out notice triggers an appraisal right: that is, the statutory right of the minority shareholders of the target to fair valuation of their shares by a court or an independent valuer and the acquirer's corresponding obligation to purchase their shares at that price. Any shareholder of the target that dissents to the transaction may elect to transfer its shares on the terms proposed by the acquirer or demand payment of fair value for its shares.
The key question in relation to appraisal rights is: what is the fair value of the target's shares at the time of the transaction? When this question arises, the acquirer or target may approach the court to determine the fair value of the shares and the court, upon application, can exercise its discretion to appoint an independent valuer to make such determination. However, in order to exercise their appraisal rights, the shareholders must act expeditiously, as the squeeze-out procedure is time limited.
The Investments and Securities Act (ISA) 2007 governs the squeeze-out procedure in Nigeria, although it is largely untested. Section 129 governs squeeze-out in relation to merger schemes and contracts, while Section 146 governs squeeze-out in relation to takeovers of public companies.
Merger schemes and contracts
Where the transaction is a merger scheme involving the transfer of shares in the target to the acquirer, the acquirer has four months to make an offer to acquire the shares of the target, which must be approved by holders of at least nine-tenths in value of the shares which are to be transferred.
The acquirer may, within two months of the expiry of this four-month period, give squeeze-out notice that it desires to acquire all outstanding shares in the target.
If a shareholder dissents to the merger scheme or contract for the acquisition of its shares under the terms agreed under the scheme or contract, it can exercise its appraisal rights by applying to court within one month of the date on which squeeze-out notice is given.
If the dissenting shareholder delays in exercising its appraisal right beyond this timeframe, it will be deemed to have acquiesced to the transfer or waived its appraisal right, and the acquirer will be deemed bound to acquire the target's shares under the terms agreed under the scheme or contract.
If a month has passed since the squeeze-out notice was given, or if a dissenting shareholder has applied to the court to exercise its appraisal right but the court has not yet ordered anything to the contrary, the acquirer has two options:
- Transmit to the target a copy of the notice and an instrument of transfer executed on behalf of the shareholders by any person appointed by the acquirer; or
- Pay or transfer to the target the amount or other consideration representing the price payable for its shares, to which the acquirer is entitled.
If the acquirer performs any of these activities, it will be registered as the holder of the target's shares; the sums or consideration payable to the target will be paid into a separate bank account and held in trust for the shareholders on whose behalf the sums or consideration has been received.
Where a takeover bid has been made, the shares that are subject to the takeover offer shall be "shares subject to acquisition", excluding shares of the acquirer.
Where outstanding shares of 90% or more, subject to acquisition, are accepted, the acquirer may give squeeze-out notice to any dissenting shareholders within one month of the date on which acceptance is completed, to seek to obtain the outstanding shares.
Within 20 days of receiving the squeeze-out notice, a dissenting shareholder may:
- elect to transfer its shares to the acquirer on the terms on which the acquirer acquired the shares of those shareholders which accepted the takeover bid: or
- demand payment of fair value for its shares in accordance with Section 147 of the Investment and Securities Act.
Otherwise, the dissenting shareholder will be deemed to have elected to transfer its shares to the acquirer on the terms on which the acquirer acquired the shares of those shareholders which accepted the takeover bid, and will be required to send to the acquirer its share certificates for the class of shares to which the takeover bid relates.
Within 20 days of sending squeeze-out notice to a dissenting shareholder, the acquirer must pay or transfer to the target the sum or other consideration that it would have to pay if the dissenting shareholder elected to transfer its shares to the acquirer on the terms on which the acquirer acquired the shares of those shareholders which accepted the takeover bid. The target will hold that sum or consideration in trust for the dissenting shareholder in a bank account established for this purpose, or place it in the custody of a bank.
As provided for in Section 148, if the dissenting shareholder fails to deposit its share certificates, the target has a duty, on becoming aware that the acquirer has made available sufficient consideration for the acquisition of all shares belonging to dissenting shareholders, to issue a notice to each dissenting shareholder which has failed to deposit its share certificates within the prescribed timeframe, informing it that:
- its shares have been cancelled;
- the acquirer has deposited sufficient consideration for the acquisition of the shares ?of all dissenting shareholders; and
- it will be entitled to consideration for its cancelled shares when it ?submits the share certificates to which such consideration relates.
The acquirer shall also send to the target a copy of every squeeze-out notice sent to a dissenting shareholder and notify the target of the election made by a dissenting shareholder or deemed to have been made by it. It must further send to the Securities and Exchange Commission (SEC) a copy of each squeeze-out notice sent to a dissenting shareholder within one month of sending it to the dissenting shareholder.
Section 147 provides that the acquirer can apply to court for a determination of fair value for the shares within 20 days of paying the sum or other consideration for the dissenting shareholder's election to transfer its shares to the acquirer on the terms on which the other shares of the target were acquired. If the acquirer fails to apply to court, the dissenting shareholder demanding payment of fair value for its shares can apply to court within a further 20 days, for the court to determine the fair value of the shares for all dissenting shareholders. The Federal High Court is entitled to exercise its discretion to appoint one or more independent valuers to assist it in determining fair value.
As noted above, the squeeze-out procedure is largely untested. The need for this procedure to be tested cannot be overstated: in developing a thoughtful independent valuation based on sound analysis and modelling, the court or independent valuer will set a precedent - taking into account industry-specific factors and broad economic trends - that may be used in similar cases that subsequently arise. An increase in litigation concerning M&A deals generally and appraisal rights specifically may result in the introduction of a competition law, which is presently lacking from the Nigerian legal framework. Although the SEC examines mergers to ascertain whether they may substantially lessen competition or result in the removal of an effective competitor,(1) this is insufficient to address all potential competition issues. It is hoped that there will be a more radical approach to M&A deals in Nigeria, through which the squeeze-out procedure can be tested sufficiently.