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Transaction formalities, rules and practical considerations
Types of private equity transactions
What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?
Private equity (PE) transactions in Nigeria can generally be classified into venture capital, growth capital, buyouts (including management buyouts) and mezzanine financing. Available structures commonly used for private equity investments are equity investments and quasi-equity investments, which would include taking preferred stock or convertible notes by the private equity fund entity.
Limited liability companies and limited partnerships are most typically used as investment vehicles for PE investments.
Corporate governance rules
What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?
There are no special corporate governance rules applicable to private equity transactions other than those imposed by sector-specific regulators such as the Code of Corporate Governance for the Telecommunications Industry 2016 issued by the Nigerian Communications Commission. Corporate governance issues relating to private companies in Nigeria, including companies with private equity participation, are generally addressed by contractual agreements, memorandum and articles of association subject to the Companies and Allied Matters Act (CAMA) and any code of corporate governance rules adopted by the company.
The Securities and Exchange Commission (SEC) rules and regulations are applicable to public companies and these rules make substantial provisions for disclosure and reporting requirements. In addition, there are regulatory and disclosure requirements if a public company is listed, as such companies are also subject to the Listing Requirements of the Nigerian Stock Exchange (NSE).
There are obvious advantages when a public or listed company goes private as this will mean less regulation and disclosure obligations. However, it should be noted that it is not a common practice to have companies going private as a result of private equity investments whether in a leveraged buyout or any other transaction.
Where a target company with private equity participation remains a public company, nothing changes. However, where a private company becomes a public company, such company would become subject to the application of the SEC Rules and Listing Requirements of the NSE.
Issues facing public company boards
What are some of the issues facing boards of directors of public companies considering entering into a going-private or private equity transaction? What procedural safeguards, if any, may boards of directors of public companies use when considering such a transaction? What is the role of a special committee in such a transaction where senior management, members of the board or significant shareholders are participating or have an interest in the transaction?
One major issue that may be faced by the board of directors of a public company entering into a PE transaction is that of ensuring that each of the directors of the company carry out the fiduciary duties as prescribed by CAMA. The fiduciary duties of the directors include a duty to act in good faith, exercise independent judgment, act in the best interest of the company as a whole - so as to protect its assets and promote its business - and avoid conflict of interest, thus mandating that directors declare any interest in any proposed transaction or arrangement.
Conflicts of interest may arise where a director has a personal interest in the private equity transaction. This director is obliged to disclose any such conflict or potential conflict of interest. In addition to the requirements of CAMA on disclosure of conflicts of interest by directors, companies generally have provisions in their articles of association or another document dealing with issues of conflict of interests regarding the board, management and other personnel of the company. This situation needs to be handled properly by the board to avoid the exploitation of any information or opportunity of the company. A special committee of the board, which may consist of independent non-conflicted directors, may be constituted for this purpose. The special committee may be charged to objectively evaluate, review and approve the private equity transaction on behalf of the company.
Are there heightened disclosure issues in connection with going-private transactions or other private equity transactions?
Under the SEC Rules, the provisions guiding the operation of private equity funds in Nigeria provide for submission of quarterly returns, annual report of the fund to the SEC and semi-annual reports to its investors.
A company to which a takeover bid has been made is required to provide sufficient time and information to all its shareholders to enable them to reach a properly informed decision in respect of the bid. Such disclosures are required to be prepared with the highest standard of care and accuracy and must contain all information relevant to the transaction. Further, listed companies are required to ensure that investors and the public are kept fully informed of all factors that may affect their interest and to make immediate disclosures of any information that may have material effect on market activity in, and the prices or value of, listed securities as well as details of any major changes in the business or other circumstances of the company to shareholders and the NSE. The NSE requires all listed companies to maintain publicly accessible websites whereon companies are required to display conspicuously, information submitted to the NSE.
The Listing Requirements of the NSE stipulate, among other things, that in order for a public company to voluntarily delist its securities from the NSE, the prior approval of the shareholders must have been obtained by way of a special resolution passed at a duly convened meeting of the company. The company must have given its shareholders at least three months’ notice of the proposed withdrawal of the listing including the details of how to transfer the securities. The public company going private must also give the shareholders who so elect, an exit opportunity before the shares are delisted.
SEC Rules mandate a public company seeking to delist to notify the SEC of its intention to delist. The NSE is also required to consider and dispose of the application within 10 days and notify the SEC when it is approved.
What are the timing considerations for a going-private or other private equity transaction?
Timing considerations for private equity transactions include the time within which proper due diligence exercises can be concluded, the length of time required for the formation or structuring of the vehicle to be used for the execution of the transaction and the exit time projections. Sector specific regulations and approvals also form part of key timing considerations of private equity transactions.
With respect to going-private transactions, a company seeking to voluntarily delist from the NSE is required by the Listing Requirements to have been listed on the NSE for a minimum of three years prior to when it seeks to delist. Consequently, private equity investors seeking to go into a private equity transaction with a public company that has been listed on the NSE for less than three years will have to factor in this timing requirement with respect to voluntary delisting. The SEC Rules require the NSE to consider and dispose of applications to delist within 10 days.
Where a private equity transaction involves a takeover, the offeror is required by the Investments and Securities Act (ISA) and the SEC Rules to seek the approval of the SEC as well as register the proposed bid with the SEC prior to making a takeover bid. Where the approval is granted, the offeror is required to make the approved bid within a period of three months following the date of approval. The offeror may thereafter apply for an extension of this period before the expiry of the three-month period. Where a takeover bid is made for all the shares of a class in an offeree company, the offeror is proscribed from taking up shares deposited pursuant to the bid until 10 days after the date of the takeover bid. Where the bid is made for less than all the shares in a class of the offeree company, the offeror is proscribed from taking up shares deposited pursuant to the bid until 21 days after the date of the takeover bid. A takeover bid is required when the shares being acquired are not less than 30 per cent of the shares of the company.
Further, delays caused by addressing issues such as the rights of dissenting shareholders may form part of the timing considerations in private equity transactions.
Dissenting shareholders’ rights
What rights do shareholders have to dissent or object to a going-private transaction? How do acquirers address the risks associated with shareholder dissent?
Shareholders who do not accept the terms of a going-private transaction may vote against it at the general meeting of the company at which the issue is considered or may choose not to accept a takeover offer. However, where a takeover offer is accepted by the shareholders of a company holding not less than 90 per cent of the shares of the company or the class of shares in respect of which the bid is made, the dissenting minority shareholders’ shares may be bought by the offeror at the same price as the other shares or at fair market value after notifying the dissenting shareholders of its intention to do so.
Shareholders, personal representatives of deceased shareholders and persons to whom shares have been transferred or transmitted by operation of law who dissent or wish to object to a going-private transaction can make an application to court to restrain the company from going private on the ground that such an act would affect the individual right of the shareholder as a member of the company.
Further, shareholders, personal representatives of deceased shareholders, persons to whom shares have been transferred or transmitted by operation of law, directors, officers, former directors, former officers and creditors of the company, as well as the Corporate Affairs Commission (CAC), are empowered to apply to court to object to a going-private transaction. Such an application may be sustained only where it can be shown that proceeding with the transaction is:
- illegal, oppressive, unfairly prejudicial or in disregard of interests of a member or members in the case of an application by a shareholder, personal representative of a deceased shareholder and persons to whom shares have been transferred or transmitted by operation of law;
- oppressive, unfairly prejudicial or discriminatory to such director, officer, former director, former officer or creditor of the company; or
- oppressive, unfairly prejudicial or discriminatory against a member or members in a manner that is in disregard of public interest in the case of an application by the CAC.
To deal with any issues that may arise from shareholders’ dissent to going-private transactions, acquirers are careful to comply with the relevant provisions of the law and regulations to avoid creating possible grounds upon which the dissent may subsist.
What notable purchase agreement provisions are specific to private equity transactions?
As with other transactions, the provisions of purchase agreements will depend on negotiations between the parties. Provisions on issues such as warranties, default, anti-dilution, redemption or conversion of preferred equity, composition and powers of the board and management of the company, matters exclusively reserved for shareholders’ decision, finance and accounting regime, non-compete, confidentiality and disclosures, tag-along and drag-along rights, exit options and corporate governance obligations are often prominently featured in purchase agreements for private equity transactions.
Participation of target company management
How can management of the target company participate in a going-private transaction? What are the principal executive compensation issues? Are there timing considerations for when a private equity buyer should discuss management participation following the completion of a going-private transaction?
One of the concerns of private equity investors includes ensuring that the interests of management align with the interests of the investors with a view to the growth of the company. To this end, management of the offeree company may be required to execute employment agreements with non-compete and confidentiality provisions. Further, the terms of employment of management may constitute part of the pre-closing covenants in a going-private transaction such that management participation and compensation issues are dealt with prior to the completion of the transaction.
Timing considerations for the participation of management in a going-private transaction are often a product of the provisions of the purchase agreement entered in respect of the transaction.
What are some of the basic tax issues involved in private equity transactions? Give details regarding the tax status of a target, deductibility of interest based on the form of financing and tax issues related to executive compensation. Can share acquisitions be classified as asset acquisitions for tax purposes?
The tax issues involved in a PE transaction depend on the structure of the transaction. Where a PE vehicle is registered as a partnership, the individual partners will be liable to pay tax on their personal income. Limited liability companies, on the other hand, bear the tax as an entity while the individual investors (which could be corporate or individual) are liable to tax on their investment income. Income such as dividends, interest and management fees are subject to withholding tax. For non-resident investors, such taxes withheld are treated as their final tax obligation. The target and investors will also need to note that stamp duties may arise at a flat rate or ad valorem on the transaction documents. Other investor tax liabilities will depend on the exit model the PE transaction adopts. For instance, management fees will incur withholding tax while carried interest will incur capital gains tax. Note also that interest on foreign loans that have a repayment period (including moratorium) of two years and above enjoy certain tax exemptions. The rate of the exemption ranges from 40 to 100 per cent and is subject to the grace period allowed.
Targets incorporated as companies are taxed under the Companies Income Tax Act. Generally, company profits are taxed at the rate of 30 per cent. In Nigeria, interest payment on sums borrowed and employed as capital in acquiring profits is tax deductible. Consequently, some businesses prefer debt financing to equity financing to enable them benefit first from the loan and subsequently from the tax deductibility of interest payments. Equity financing, whether in the form of preferred or ordinary stocks, will entitle the shareholders to dividends. Such dividends will be subject to a 10 per cent withholding tax. Upon deduction of the withholding tax, such dividend will be treated as franked investment income.
Capital gains tax payable on gains earned on the disposal of assets are not applicable to the disposal of shares. Consequently, with respect to this tax, share acquisitions are not asset acquisitions. In practice however, where it is a major transaction the revenue authorities might investigate to compare the proceeds from the sale of shares and the net book value of the assets to decide whether or not capital gains tax should arise.
Debt financing structures
What types of debt are typically used to finance going-private or private equity transactions? What issues are raised by existing indebtedness of a potential target of a private equity transaction? Are there any financial assistance, margin loan or other restrictions in your jurisdiction on the use of debt financing or granting of security interests?
Depending on the structure of a private equity transaction, loans may be sought to finance a PE transaction and such loans may be senior or subordinated debts. In practice, such loans are often in the form of senior debt. Foreign loans are subject to the relevant foreign exchange regulations and may be brought in through approved channels to enable repatriation of repayments.
Existing indebtedness of a potential target would play a role to the extent of the priority ranking of such debts and whether or not such debts are being serviced at the time of the proposed private equity transaction. As part of the structure, it may be decided to either keep or repay the existing indebtedness depending on how such repayment may affect the cash flow of the target company. The consent of the provider of the existing indebtedness would usually be required before new financing would be taken by the company.
There are restrictions under CAMA on the provision of financial assistance by a company whether by way of loan, guarantee, security, indemnity or any form or credit in relation to the acquisition of its own shares. There are also restrictions on margin loans.
Debt and equity financing provisions
What provisions relating to debt and equity financing are typically found in going-private transaction purchase agreements? What other documents typically set out the financing arrangements?
The financing provisions will depend on whether the structure is pure equity, debt, quasi-debt, leveraged or a combination. As such, it could range from fairly straightforward to very complex credit documentation. In practice, banks have traditional provisions that govern the various facilities they offer. However, it is not unusual to have debt and equity finance raised from institutional investors who are not banks. It is also important that the financier or investor ensures that the target has complied with all CAC requirements and filings for a going-private approval.
In a debt and equity financing arrangement, provisions creating conditions precedent to the investment are very usual, following the outcome of due diligence on the target entity. Further, provisions on redemption of shares, pre-emptive rights, restrictions on indebtedness, tenor, interest rate, reporting requirements, obligation of parties, tag-along rights, drag-along clauses, share transfers, anti-dilution and closing or exit, among others, are typical. The documentation may include investment or loan agreement, share sale and subscription agreement, sale and purchase agreement and shareholders’ agreement.
Fraudulent conveyance and other bankruptcy issues
Do private equity transactions involving leverage raise ‘fraudulent conveyance’ or other bankruptcy issues? How are these issues typically handled in a going-private transaction?
Some transactions made prior to an insolvency may be avoided under certain circumstances, for example conveyances, mortgages, payments or other acts relating to property that amount to a fraudulent preference of creditors. Also, any conveyance or assignment of all of a company’s property to trustees for the benefit of all its creditors shall be void.
These concerns are often mitigated with representations and warranties by the target company that there are no ongoing, threatened or imminent winding-up or liquidation proceedings and that a receiver or manager has not been appointed with a provision for indemnity upon breach. The scope of the warranties would further be determined by the outcome of the due diligence on the target company.
Shareholders’ agreements and shareholder rights
What are the key provisions in shareholders’ agreements entered into in connection with minority investments or investments made by two or more private equity firms? Are there any statutory or other legal protections for minority shareholders?
To protect the interest of minorities, a shareholders’ agreement may provide that certain decisions may be taken only if approved by a supermajority or qualified majority of the body or organ of the company making the decision. The voting threshold would therefore typically include an affirmative vote from a part of the minority. Such matters may include decisions as to the issuance of new shares, increase in share capital, acquisitions, disposals, mergers, borrowing and giving guarantees or security, related party transactions, approval of budgets, change of business plan and alteration of the constitution. The agreement may also make provision for breaking deadlocks.
There is also some statutory protection under CAMA that requires a special resolution (a resolution passed by not less than three-quarters of the votes cast) of shareholders to take the following decisions:
- a change of name of the company;
- an alteration of the articles of association;
- a change of the objects of the company;
- variation of class rights;
- rendering the liability of the directors unlimited; and
- an arrangement or reconstruction on sale of the assets of a company.
Acquisition and exit
Acquisitions of controlling stakes
Are there any legal requirements that may impact the ability of a private equity firm to acquire control of a public or private company?
A takeover bid is required where a person intends to acquire 30 per cent or more of the voting rights in a public company irrespective of whether it was acquired in a single transaction or a series of transactions over time. A takeover bid can be made only if the SEC grants authority to proceed to that effect. In deciding whether or not to grant authority to make a takeover bid, the SEC would consider the likely effect of the proposed takeover bid on the economy of Nigeria and on any policy of the federal government with respect to manpower and development. A takeover bid shall not be made to fewer than 20 shareholders representing 60 per cent of the members of the target company, but it can be made to such a number of shareholders holding in the aggregate a total of 51 per cent of the issued and paid up capital of the target company. There is no need for a takeover bid where the shares to be acquired are shares in a private company.
For a private company, save for companies in certain sectors that are subject to industry specific regulations, any requirements for the acquisition of control will primarily be governed by the provisions of the articles of association of the company or any shareholders’ agreement entered into by the shareholders or investment agreement entered with prior investors in the company.
What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity buyer?
Contractual limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company may include provisions such as pre-emption rights, tag-along rights, restrictions on drag-along rights and put options. These rights are usually embedded in shareholders’ agreements.
Also, listing requirements may limit the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company. To list on the Main Board or on the Alternative Securities Market (ASeM) of the NSE, promoters are required to retain 50 per cent of shares held at IPO for the first 12 months from the date of listing.
Further, with respect to the Main Board, the company to be listed must have a cumulative pre-tax profit of at least 300 million naira for the last three fiscal years with a pre-tax profit of at least 100 million naira in two of these years and a market capitalisation of not less than 4 billion naira at the time of listing, calculated using the listing price and shareholders’ equity. Listing on ASeM does not have these requirements.
With respect to listing on the Main Board, a minimum of 20 per cent of share capital must be offered to the public and held by at least 300 shareholders. In listing on ASeM, a minimum of 15 per cent of share capital must be offered to the public and held by at least 51 shareholders.
Contractual time limitations may be agreed with respect to representations or warranties, or both, given by a private equity firm to a buyer. A private equity firm investing in a portfolio company would usually require warranties from sellers and from the management team of the target company. The said warranties may relate to compliance with applicable laws, the power to contract, title to shares and to assets.
Portfolio company IPOs
What governance rights and other shareholders’ rights and restrictions typically survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO?
The holdings of the existing shareholders may be restructured for purposes of the IPO and some of the governing rights of the shareholders will survive the IPO such as representation on the board and non-compete rights. However, the company will now be subject to more regulations including the ISA, SEC Rules and Regulations and Listing Requirements.
In respect of lock-up restrictions, the Listing Requirements provide that the issuer in respect of an IPO to the Main Board of the Exchange shall ensure that the promoters and directors will hold a minimum of 50 per cent of their shares in the company for a minimum period of 12 months from the date of listing and will not directly or indirectly sell or offer to sell such securities during that period.
Subject to the lock-up restrictions, private equity sponsors or investors may dispose of their stock through a buyout, which may be by another PE entity, institutional investor or the management.
Target companies and industries
What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?
There are not many going-private transactions in Nigeria as there are few instances of public companies that have gone private, although foreign investors who want to strengthen their control of, and investments in, the companies tend to want to go private.
Transactions involving companies in some sectors such as telecommunications, electricity, insurance, financial services and the petroleum industry will be subject to further industry-specific regulation. It is yet to be verified that industry-specific regulations have limited the potential targets of private equity firms, even though such regulations make the process more elaborate.
What are the issues unique to structuring and financing a cross-border going-private or private equity transaction?
There are few financing concerns that are unique to cross-border private equity transactions. These include tax considerations, importation of capital and repatriation at the point of exit. Where capital is to be imported in a PE transaction, the investors require a certificate of capital importation that is issued by a bank within 24 hours of the entry of the capital into the country. Obtaining the certificate of capital importation is a prerequisite for repatriation. There are no foreign investment restrictions on cross-border private equity transactions in Nigeria except for certain industries in which private participation, both local and foreign, is prohibited except with a licence from the federal government (eg, defence).
Club and group deals
What are some of the key considerations when more than one private equity firm, or one or more private equity firms and a strategic partner or other equity co-investor is participating in a deal?
There are no restrictions preventing multiple private equity firms, or a private equity firm and its strategic partner, from participating in a club or group deal.
The concerns, however, depend on the relative size and interests of the parties to the transaction. In a takeover context, a key consideration for parties to such transactions is that they will likely be scrutinised for the purposes of assessing whether the obligation to make a mandatory takeover offer is triggered. The threshold for triggering this obligation is an aggregate holding of 30 per cent of the voting shares.
Issues related to certainty of closing
What are the key issues that arise between a seller and a private equity buyer related to certainty of closing? How are these issues typically resolved?
Several issues may arise during the closing of a PE transaction. Such issues may include failure to obtain mandatory clearances or regulatory approvals and failure to satisfy financing closing conditions such as the provision of a comfort letter issued to the buyer by its lender. Where these closing issues arise, the non-defaulting party can grant an extension of time, with or without a provision for costs, to enable the resolution of the issues, or it can terminate the agreement in accordance with its terms. In the latter instance, the inclusion of a reverse termination fee clause in the agreement will be prudent.
Update and trends
Update and trends
Have there been any recent developments or interesting trends relating to private equity transactions in your jurisdiction in the past year?
According to the Nigerian Bureau of Statistics, the value of capital imported into Nigeria in the second quarter of 2017 rose by US$884.1 million to stand at US$1.79 billion with portfolio investments being the main facilitator for the growth. The private equity sector also witnessed a series of transactions in diverse industries. Earlier in the year, Sahel Capital, fund managers for the Fund for Agricultural Finance in Nigeria and Cardinal Stone Capital Advisers, a Nigerian private equity fund manager, entered agreements for an investment in Crest Agro Products Limited, an integrated cassava processor based in Kogi state. In finance, the FSDH Merchant Bank, a financial services group in Nigeria, received investment funds from Advanced Finance and Investment Group, through the Atlantic Coast Regional Fund. The educational sector also had private equity transactions such as the agreement entered by Verod Capital Management, a leading West African private equity firm, to acquire a significant minority stake in Greensprings Educational Services Ltd, a 32-year old educational service provider offering pre-primary, elementary, secondary and post-secondary schooling.