The Global Transaction Report obtained by Sweetcrude Report has predicted that the value of merger and acquisition (M & A) transactions in Nigeria and other African nations will rise to $4.5 billion in 2018, and $5.2 billion in 2019, compared to the $4.4 billion value in 20171. One of the most conventional investment options for acquiring a business is through the purchase of the entire or part of the shares of the target company. For example, Actis and its investment partners announced the sale of Ikeja City Mall to South African firms, Hyprop Investments and Attacq Limited in 2015. Hyprop acquired 75% interest in the Mall whilst Attacq acquired the remaining 25%. More recently, Zinox Technologies Limited also completed the acquisition of Konga, one of Nigeria's foremost e-commerce companies in February 2018.
The obvious implication of such share deals is that the investor steps into the shoes of the seller and takes on the ownership of the target company. This comes with the attendant benefit of preserving the reputation, goodwill and customer base of the target company. A share deal is also ordinarily the most tax efficient method of acquisition. However, the share deal could easily become the buyer's worst nightmare where proper due diligence is not done particularly to identify any historical tax liabilities of the target company or any regulatory compliance obligations that have not been fulfilled. The tax base of the target company could easily be eroded with such latent liabilities. It thus becomes imperative for investors to review the overall affairs of the target company before concluding a transaction.
This piece examines the importance of conducting a comprehensive due diligence exercise before concluding a share deal and highlights instances where an asset deal may be preferred over a share deal.
Why Share Deals?
When acquiring interests in a business, the investor has a choice to purchase the shares of the business or purchase the assets. An investor can have various reasons for preferring one type of deal/transaction over the other. However, a major reason why share deals are preferred is that it is generally simple and more straightforward to execute in comparison to an asset deal which could require several legal processes to complete the transaction. For instance, there is no need for change in ownership/title of the target company's assets under a share deal since the legal status of the target company would remain the same. In that regard, the investor would not be required to file any document or pay consent fees at the Lands Registry in respect of any of the target company's landed properties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.