In brief: acquisition and exit strategies for private equity firms in Nigeria

Acquisition and exit

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 when a person intends to acquire 30% 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 Securities and Exchange Commission (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 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% 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% 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 transactions covered by the Federal Competition and Consumer Protection Act (FCCPA), there is an obligation to notify the Federal Competition and Consumer Protection Commission (FCCPC) and obtain its approval of the transaction. Transactions resulting in a company establishing direct or indirect control over the whole or part of any company through an acquisition of shares or assets are considered mergers and therefore subject to the approval of the FCCPC. In certain instances, pre-notification enquiries are required to be made to the FCCPC for clearance before the transaction.

For private companies, requirements for the acquisition of control will be governed by the provisions of the articles of association of the company, any shareholders’ agreement entered into by the shareholders, investment agreement entered with prior investors in the company and industry-specific regulations.

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 acquirer?

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 pre-emption rights, tag-along rights, restrictions on drag-along rights, and put options. These rights are usually set out in shareholders’ agreements, in addition to pre-emptive rights of shareholders in private companies provided in the Companies and Allied Matters Act (CAMA).

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, on the Alternative Securities Market, or on the Growth Board of the Nigerian Exchange (NGX), promoters and directors must retain 50% of shares held at IPO for the first 12 months from the date of listing.

Further, the company must meet at least one of the Initial Listing Standards in the NGX Rulebook.

Contractual time limitations may be agreed upon concerning 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 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.

In the context of competition and the implications of such transactions (ie, selling its stake), the firm must determine whether the sale will be considered a merger under the provisions of the FCCPA. As such, it may have to confer with the FCCPC to make such a determination before taking major steps in such a transaction.

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 be subject to more regulations including:

• the Investments and Securities Act;
• the Securities and Exchange Commission Rules and Regulations;
• the Financial Reporting Council; and
• the NGX Rulebook.

In respect of lock-up restrictions, the Listing Requirements provide that the issuer in respect of an IPO must ensure that the promoters and directors will hold a minimum of 50% 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 private equity entity, an institutional investor or the management.

What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in industry 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. The companies were typically within the fast-moving consumer goods, oil and gas, and banking industries.

Transactions involving companies in 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.