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Trends and climate
What is the current state of the M&A market in your jurisdiction?
Nigeria has witnessed a reduction in M&A activity as a result of the economic challenges arising from the decline in global prices of crude oil. This has been made worse by the current economic recession. Despite this, the Nigerian market has remained resilient and been named one of the most attractive markets for investment. The telecoms, manufacturing, solid minerals, lottery and sports betting, maritime and admiralty, construction and real estate sectors remain interesting prospects for M&A in Nigeria.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
The impact of the global decline in oil prices on Nigeria’s foreign exchange earnings and reserve has led to the following:
- currency depreciation;
- a degree of regulatory uncertainty within the past 12 months; and
- fewer home remittances by Nigeria’s abroad and lingering FX liquidity challenges.
These have contributed to a decrease in foreign direct investment, portfolio investment and M&A activity in Nigeria.
Are any sectors experiencing significant M&A activity?
Despite the relatively low M&A activity in Nigeria, the country attracted in excess of $1.9 billion in reported M&A and investment deals in 2016 across diverse sectors – notably, in the financial services, energy, fast-moving consumer goods, food and beverage, insurance, travel, real estate and agricultural sectors. While most M&A deals were initiated by foreign direct investment, others were the result of regulatory directives and local investments.
Are there any proposals for legal reform in your jurisdiction?
The National Assembly recently passed the Federal Competition and Consumer Protection Bill 2017. When assented, the bill will promote fair, efficient and competitive markets in the country. The objectives of the bill are to:
- promote and maintain competitive markets in the Nigerian economy;
- promote economic efficiency; and
- promote and protect the interests and welfare of consumers by providing competitive prices and product choices.
The bill further seeks to prohibit business practices that prevent, restrict or distort competition or constitute an abuse of a dominant position of market power in Nigeria. This will contribute to the sustainable development of the Nigerian economy. The bill will assist in the ease of doing business in Nigeria, facilitate access to safe products for all citizens and secure the protection of rights for all consumers in Nigeria.
What legislation governs M&A in your jurisdiction?
The principal legislation regulating M&A in Nigeria is the Investment and Securities Act 2007, the Securities and Exchange Rules and Regulations and the Companies and Allied Matters Act.
How is the M&A market regulated?
The key regulator of M&A in Nigeria is the Securities and Exchange Commission (SEC). The SEC, pursuant to its key roles as provided by the Investment and Securities Act, produced the Securities and Exchange Rules and Regulations to regulate the M&A market in Nigeria. The Corporate Affairs Commission also regulates companies in the market pursuant to the Companies and Allied Matters Act.
Are there specific rules for particular sectors?
In addition to the principal regulations, additional rules regulating M&A apply in the following key sectors in Nigeria:
- Banking ‒ the Banks and other Financial Institutions Act requires that M&A in the financial sector is subject to the approval of the Central Bank of Nigeria.
- Insurance ‒ the Insurance Act 2003 provides that any acquisition of 25% or more of the shares of an insurer is subject to prior approval from the National Insurance Commission.
- Telecoms ‒ the Nigerian Communications Act 2003 provides that prior approval of the Nigerian Communications Commission must be obtained in relation to any mergers in the telecoms sector, including the transfer or assignment of a licence and transactions involving the acquisition of 10% or more of the shares of a licensed operator.
- Energy ‒ the Electric Power Sector Reform Act 2005 requires the approval of the Nigerian Electricity Regulatory Commission before any M&A in the sector.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
Acquiring a company in Nigeria is achieved in the following ways:
- Being a majority shareholder ‒ when a person or company acquires up to 20% of another company’s shares, that person or company is said to have acquired the company.
- Takeover bidding ‒ when a company acquires 30% of another company’s shares, the Investment and Securities Act provides that such action is a takeover and a takeover bid should be sent to the company before the shares are acquired. In the event of a successful takeover, the acquiring company takes over the management of the acquired company.
- Purchase and assumption ‒ another way of acquiring a company is by purchasing the assets of a failing company and assuming its liabilities. The purchase of a company’s assets is usually at auction price. The assumed company is dissolved through judicial sale of its assets and liabilities.
- A scheme of merger ‒ this scheme of arrangement involves the transfer of the assets, undertaking or property of a company to another company.
Due diligence requirements
What due diligence is necessary for buyers?
Buyers must undertake financial and legal due diligence before any scheme arrangement. Financial due diligence is managed by the buyer’s accountants and management team, and is expected to reveal the following:
- the accounting and financial control system of the company;
- the value of assets and liabilities to be acquired;
- the product development and competitors; and
- the company’s ability to raise short and long-term capital and the cost of such capital in relation to general industrial indications.
Legal due diligence is conducted by the buyer’s lawyer and identifies the potential legal issues and problems that may impede transactions, such as IP and technological issues and those relating to transactional documents and agreements, business profiles or employees.
What information is available to buyers?
Generally, if an offer has the support of the target, all of the relevant information will become available. This would not be the case if the directors are adverse to the offer.
No rules or regulations oblige a company to make its information available to buyers.
What information can and cannot be disclosed when dealing with a public company?
If the target is a public company, buyers can access all of the target’s records which have been filed with the Corporate Affairs Commission and the Securities and Exchange Commission. Companies that are operating in regulated industries are required to make filings to the relevant regulator and these filings may become public.
How is stakebuilding regulated?
Section 144 of the Investment and Securities Act sets out that, in a takeover bid, the offeror must state in the bid if it intends to purchase the target’s shares in the market during the offer period. If the offeror purchases the target’s shares during the offer period in a manner other than that which is pursuant to the bid and makes payment that is greater than the price offered in the bid, such payment will be deemed to be an amendment to the bid and the bidder will be required to immediately notify the target’s shareholders of the increased consideration and pay such increased consideration. Shares bought outside the offer process will be counted for the purpose of determining whether the minimum acceptance for the offer has been fulfilled.
Under the Companies and Allied Matters Act, if the offeror holds, either by itself or through a nominee, shares which entitle it to exercise 10% or more of the unrestricted voting rights at any general meeting of the target, it must give notice to the target within 14 days of becoming aware of its shareholding in the company.
What preliminary agreements are commonly drafted?
In an acquisition, the agreements commonly drafted before the purchase include:
- an agreement between the acquiree and the acquirer agreeing to be acquired;
- a share purchase agreement; and
- a financial service agreement between the acquirer and the acquiree and the respective financial advisers.
What documents are required?
In a scheme of merger, the main document is the scheme document. Section 428 of the Securities and Exchange Rules and Regulations requires that the document contain the following:
- separate letters from the chairpersons of the merging companies addressed to their respective shareholders;
- an explanatory statement to the shareholders by the financial advisers addressing issues relating to the proposals;
- any condition precedent;
- reasons for the merger;
- synergies and benefits;
- a plan for employees;
- capital gains tax information; and
- other relevant issues.
Other information set out in scheme documents include:
- background information on the merging companies;
- a memorandum on profit forecast;
- information on the enlarged company;
- statutory and general information about the merging companies;
- the basis of valuation and allotment of new shares;
- the scheme itself;
- notices of court ordered meetings to the shareholders of the merging companies; and
- proxy forms.
Other important documents include the merger implementation agreement (where one exists), the court processes and the resolutions.
In a takeover, the main document is the takeover bid. Section 446 of the Securities and Exchange Rules and Regulations provides that a takeover bid must state the following:
- the full name and address of the offeror;
- the maximum number and offer particulars of the shares in the target proposed to be acquired by the offeror;
- the price and other terms on which the shares will be acquired;
- the number and particulars of shares held by the offeror (or any of its group companies) in the target immediately before the date of the takeover bid;
- whether the offer is for all shares of a class in the target;
- whether the offeror intends to invoke the right under the Investment and Securities Act to acquire shares of dissenting shareholders in the target;
- whether the offeror intends to buy shares of the target in the market during the offer period; and
- the manner and date on which the obligations of the offeror will be satisfied.
Other important documents include the information memorandum (where applicable) and the resolutions.
In an acquisition, the main documents are the memorandum of information (containing background information on the acquirer, the offer, the acquired and the effect of the acquisition on the relevant industry) and the extract of board resolutions.
Which side normally prepares the first drafts?
In M&A proceedings, the acquirer prepares the first draft by filing a letter of intent. The Securities and Exchange Rules and Regulations requires that, before the commencement of a takeover, a takeover bid must be made by such person or group of persons or through their agent to the shareholders of the target.
What are the substantive clauses that comprise an acquisition agreement?
An acquisition agreement should contain:
- the parties to the acquisition;
- the background information on the acquirer and the acquiree;
- the number of shares and purchase price;
- a list of assets to be acquired and their value;
- the purchase consideration;
- the terms and conditions of the acquisition;
- the representations and warranties;
- any tax issues;
- the shareholders consent;
- the treatment of dissenting shareholders; and
- the employee pension and benefit plans.
What provisions are made for deal protection?
What documents are normally executed at signing and closing?
At closing, the documents usually executed include the following:
- the share purchase agreement;
- the asset purchase agreement;
- the purchase consideration; and
- the agreement on transfers of employment.
Are there formalities for the execution of documents by foreign companies?
Are digital signatures binding and enforceable?
Electronic and digital signatures are legally recognised in Nigeria under Section 93(2) of Evidence Act 2011, which states that “where a rule of evidence requires a signature, or provides for certain consequences if a document is not signed, an electronic signature satisfies that rule of law or avoids those consequence”. Further, Section 17 of the Cybercrime (Prohibition and Prevention) Act 2015 provides that “electronic signature in respect of purchases of goods and any other transaction shall be binding”. The joint provisions of these laws make digital signatures binding and enforceable and they are admissible in Nigerian courts as long as the legal requirements are satisfied.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Agreements entered into in Nigeria can provide for a foreign governing law, as Nigerian courts recognise parties’ choice of foreign law and jurisdiction. Generally, the Nigerian courts will give effect to parties’ choice of a foreign governing law and apply such law in the determination of any claims that are brought within their jurisdiction.
What provisions and/or restrictions are there for foreign ownership?
Certain industries have local content regulations that restrict the level of foreign ownership of a Nigerian company, such as:
- Oil and gas ‒ in order to be competitive in the award of contracts, at least 51% of the shares of the company must be owned by Nigerians.
- Aviation ‒ to qualify for the grant of an aviation licence or permit, the Nigerian Civil Aviation Authority must be satisfied that an applicant is a Nigerian company or citizen.
- Shipping ‒ the Coastal and Inland Shipping (Cabotage) Act restricts the use of foreign-owned or manned vessels for coastal trade in Nigeria.
- Broadcasting ‒ a company applying for a broadcasting licence must demonstrate that it is not representing any foreign interests and that it is substantially owned and operated by Nigerians.
- Pharmacy ‒ the Pharmacist Council of Nigeria Act 2004 provides for the registration of non-Nigerian citizens only if the applicant’s home country grants reciprocal registration to Nigerians and if the applicant has been resident in Nigeria for at least 12 months before the application.
- Engineering ‒ a company engaged in engineering services must be registered with the Council for Regulation of Engineering in Nigeria. To do so, the company must have Nigerian directors that are registered with the council and who hold at least 53% of the shares in the company.
- Private security ‒ a foreigner cannot acquire an equity interest in, or sit on the board of, a Nigerian private security guard company in Nigeria.
Valuation and consideration
How are companies valued?
Companies are valued using book value as well as tangible and intangible elements. An analysis of the company’s cash flow is the most important means of determines its value. Therefore, a company’s ability to consistently generate profit will improve its value. Other common methods for determining company value include asset valuation, capitalisation of income, owner benefit valuation and multiplier or market valuation.
What types of consideration can be offered?
Consideration in M&A transactions can be in the form of cash, shares, other consideration or a combination of these. In a takeover bid, if the consideration is cash or partly cash, the offeror must make adequate arrangements to ensure that funds are available and state what steps have been taken to ensure that the offer will be implemented if all the offerees accept.
What issues must be considered when preparing a company for sale?
A company for sale must consider the prospects that the buyer will add to the company.
What tips would you give when negotiating a deal?
The actual liquidity of the company should be ascertained instead of mere reliance on the information stated in the company’s books. This is because an insolvent company may doctor its books to appear solvent and become attractive to buyers.
Are hostile takeovers permitted and what are the possible strategies for the target?
No laws of rules recognise hostile takeovers in Nigeria. Acquisitions are typically achieved through:
- a negotiated contractual sale or buyout;
- a scheme of arrangement;
- a merger; or
- a takeover bid.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
In M&A proceedings, the seller must warrant that it has made full disclosure; warranties encourage the seller to disclose known issues and problems and potential problems. Warranties usually cover that:
- the seller is a company in good standing;
- the seller is the owner or beneficial owner of the shares and has right to transfer the shares to the buyer;
- the seller has the authority to enter into the agreement and perform its obligations under it;
- all documents and statements of the seller’s business or shares provided to the buyer are correct;
- all financial documents and statements in respect of the shares and seller’s business were prepared in accordance with generally accepted accounting principles and fairly present the financial condition of the business; and
- the seller has provided a complete and accurate list of its assets, rights and liabilities attached to the shares and there are no undisclosed liabilities.
In most purchase agreements, the buyer also makes certain warranties, including that:
- the buyer is a company in good standing;
- the buyer has the authority to enter into the agreement and perform its obligations under the agreement;
- if the purchase is not being made in cash, the buyer should make representations concerning its financial standing or ability to pay the purchase price in future; and
- the buyer is capable and willing to carry out the post-transaction plan.
Limitations and remedies
Are there limitations on warranties?
Sellers normally seek to limit their liability under the warranty that they give to buyers. Such limitations act as a shield for the seller to defend against or mitigate claims for breach of warranty. One way for sellers to limit their liability is a ‘disclosure letter’, by which the seller states the known facts so that the buyer cannot later contend that there was a breach of warranty because it was already aware of those facts by virtue of the disclosure letter.
What are the remedies for a breach of warranty?
A breach of warranty is a breach of contract and it gives the buyer a claim for damages. The buyer has the option to maintain an action against the seller for breach of warranty. Other remedies available to the buyer include rescission of the contract (if it was contained as one the conditions) and a reduction of the purchase price if the transaction has not been completed. Further, if the agreement contained an indemnity clause, the buyer can sue for whatever was provided in the clause by the seller.
Are there time limits or restrictions for bringing claims under warranties?
The seller can negotiate the timeframe in which the buyer can claim for breach. This is because in the absence of any express term in the agreement, the statutory limitation period will apply. The negotiated time limit is normally between six months and two years.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Tax considerations depend on the manner in which the combination is structured. Where the transaction involves an asset acquisition, the company disposing of the asset will be liable to pay capital gain tax of 10% on the gains realised on the disposal. Where the combination is effected by an acquisition of shares, no capital gain tax will be payable because the Capital Gain Tax Act exempts gains accruing on the disposal of stocks and shares from tax. For tax purposes, the value of an asset transferred between connected companies is deemed to be equal to the residue of the qualifying expenditure.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
There is no capital gain tax on the transfer of shares in Nigeria.
What are the common methods used to mitigate tax liability?
What fees are likely to be involved? N/A.
Management and directors
What are the rules on management buy-outs?
The Securities and Exchange Rules and Regulations provide that an application for the approval of a management buyout must be filed by the management making the acquisition, accompanied by the following:
- the resolution of the shareholders of the company approving the management buyout;
- the resolution of the management team undertaking the management buyout;
- a copy of the certificate of incorporation of the company;
- a copy of the memorandum and articles of association of the company;
- two copies of the prospectus, which must contain the following:
- a profile of the company;
- a profile of the management team undertaking the management buyout;
- objectives of the management buyout;
- A five-year audited financial statement of the company; and
- claims and litigation; and
- the sale agreement between the company and the management team, which must contain the following:
- terms and conditions of sale;
- indemnity against contingent liabilities by the seller to third parties and pay tax not provided for in the account;
- a clause on the continuation of the scheme if the employees of the target operate a pension scheme;
- sale and purchase of assets;
- contracts and creditors;
- regarding employees ‒ the liabilities and obligations under the existing employment contract will pass to the buyer with accrued contractual and statutory rights unaffected; and
- regarding debtors ‒ the agreement should reflect that monies owed to the seller by debtors should be paid to the seller unless assigned to the buyer. The purchase price must reflect the fact that the debts are assigned.
What duties do directors have in relation to M&A?
Directors owe a duty to the company to act in its best interests to preserve its assets, further its business and promote the purposes for which it was formed. In general, this duty to the company extends to its members and its employees. However, there are no specific statutory provisions on the duties of directors in relation to M&A.
Where a takeover bid has been sent to the directors of the offeree company, the directors must send a directors’ circular to all of the shareholders and the Securities and Exchange Commission before the date for the takeover bid terminates. Any disagreement or dissenting opinion that portrays the takeover bid as disadvantageous to the shareholders should be included in the circular.
Consultation and transfer
How are employees involved in the process?
Employees do not play a formal role in the process, although they must be notified. The Investment and Securities Act requires that, in every merger, both the acquiring company and the target must provide a copy of any notice given to the Securities and Exchange Commission in respect of such merger to the trade unions of the employees concerned or the representatives of the employees.
What rules govern the transfer of employees to a buyer?
No specific rules regulate the transfer of employees to a buyer. The general regulatory framework for employment will apply. The governing legislation is the Labour Act and the Personal Income Tax Act. The Securities and Exchange Rules and Regulation provide that the information memorandum of an acquisition must show the effect of the acquisition on the management and employees of the acquired company. In addition, the Nigeria Stock Exchange (NSE) Rules provide that in notifying the NSE of the merger and takeover, the purchaser must show its intention regarding the company’s employees.
What are the rules in relation to company pension rights in the event of an acquisition?
Pension rights take priority salaries and allowances of the acquired company’s employees.
Other relevant considerations
What legislation governs competition issues relating to M&A?
The Federal Competition and Consumer Protection Act 2017.
Are any anti-bribery provisions in force?
There is no law dealing specifically with anti-bribery in connection with M&A in Nigeria. However, there are wide-ranging provisions in several laws which may apply, such as the Criminal Code Act, Money Laundering (Prohibition) Act 2004 and the Corrupt Practices and Other Related Offences Act.
What happens if the company being bought is in receivership or bankrupt?
A company that intends to acquire a company in bankruptcy will not deal with the shareholders and directors of that company, but with the liquidator. Under the Companies and Allied Matters Act, the liquidator has the power to:
- sell property of the company;
- execute deeds and conduct all acts on behalf of the company; and
- endorse bills of exchange on behalf of the company.
Further, any transfer of shares made without the approval of the liquidator is void.