General structuring of financing
1 What territory's law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Under Nigerian law, parties have freedom to contract and will, generally, be bound by the terms of their contract. The Nigerian courts will, as a general rule, give effect to the parties' choice of a foreign (non-Nigerian) governing law and will, accordingly, apply such law in the determination of any claims that come within their jurisdiction. Nigerian courts will, however, only interfere with parties contract in circumstances where the terms of the contract are contrary to Nigerian public policy, inconsistent with Nigerian law or where there are vitiating elements (for example, mistake, misrepresentation, undue influence, illegality, etc) in the terms and conditions of the contract. The Nigerian Supreme Court has held that the parties' choice of law is not conclusive and that to be effective the choice of law must be 'real, genuine, bona fide, and reasonable'. The Nigerian Supreme Court has further held that the foreign law chosen by parties as the proper law of their contract must have some relationship to and must also be connected with the realities of the contract considered as a whole.
Where a party has obtained a judgment (a foreign judgment) in a court other than a Nigerian court, the party can enforce the judgment in the Nigerian courts in either of two ways. Where the judgment has been obtained in the courts of a country that accords reciprocal treatment to the judgments of Nigerian courts, the party can enforce such judgment in the Nigerian courts by virtue of either the Reciprocal Enforcement of Judgments Act, chapter 175, Laws of the Federation of Nigeria (LFN), 1958 (in the case of the judgments of an English court) or the Foreign Judgments (Reciprocal Enforcement) Act, chapter 35, Laws of the Federation of Nigeria, 2004. A foreign judgment will not be enforced if it is contrary to Nigeria's public policy, or does not relate to a definite sum; or if it is made by a court of the foreign country that has no jurisdiction over the matter or where the defendant was not given an opportunity to present its case. A foreign party also has the option of suing upon or bringing a fresh action for the recovery of a debt, based on the foreign judgment.
As regards foreign arbitral awards, Nigeria is a signatory to and has ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been incorporated into Nigerian law through the Arbitration and Conciliation Act (chapter 19), LFN 2004. The Nigeria's Arbitration Act is modelled very closely on the United Nations Commission on International Trade Law (UNCITRAL) model law and rules. What this means is that arbitral awards made by a recognised international arbitration, such as the London Court of International Arbitration, will be recognised and enforced by Nigerian courts subject to the provisions of the Arbitration Act.
2 Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
Other than restricted enterprises, which are prohibited for both Nigerians and foreign investors and restrictions in highly regulated sectors such as the oil and gas and broadcasting sectors, there are no other applicable restrictions on acquisitions by foreign entities in Nigeria. The areas of business prohibited under Nigerian law are: the production of arms and ammunition; production of and dealing in narcotic drugs and psychotropic substances; production of military and paramilitary wears and accoutrement including those of the police and the customs, immigration and prison services; and other items as the Federal Executive Council may from time to time determine.
Acquisition of private or public companies are principally regulated under the Investments and Securities Act 2007 (ISA) and the Rules and Regulations made pursuant to the ISA (the SEC Rules). The listing rules of the Nigerian Stock Exchange (the Listing Rules) also contain regulations that impact on acquisition transactions by public listed entities. The provisions governing schemes of arrangement are contained in the Companies and Allied Matters Act, Cap C20, Laws of the Federation of Nigeria 2004 (the Companies Act). Pursuant to the ISA, the key regulator of acquisitions in Nigeria is the Securities and Exchange Commission (SEC).
Section 118 of the ISA and Rule 229(1) of the SEC Rules respectively provide that every acquisition 'between or among companies' is subject to the mandatory prior review and approval of the SEC. This applies irrespective of whether the merging entities are public or private companies. An acquisition is defined by the SEC Rules to mean 'the take-over by one company of sufficient shares in another company to give the acquiring company control over that other company'. Notably, the ISA and SEC Rule provide certain exemptions to the requirement to obtain SEC approval. It is only with respect to transactions involving holding companies acquiring shares solely 'for the purpose of investment' and not using same by voting or otherwise to cause or attempt to cause substantial restraint of competition or where the acquisition of such shares by a holding company will not tend to create monopoly in any line of business enterprise – that is a holding company that intends to acquire the shares of its subsidiary for investment purposes only; as well as in the case of 'small mergers', that the merging entities are not required to notify the SEC of that merger but are required, only, to inform the SEC at the conclusion of the merger.
There are also other sector-specific laws that regulate acquisition transactions – the prior approval of the relevant sector regulator is required for a change of control. These laws and guidelines are binding on the companies in that industry in addition to the SEC Rules.
There are no mandatory requirements that a foreign lender must comply with in order to advance a loan to a borrower in Nigeria. Having said that, Nigeria foreign exchange regulations stipulate that in order for a borrower to remit interest and principal payments to a lender through the official foreign exchange market, the lender must have obtained evidence, in the form of a certificate of capital importation issued by a Nigerian bank (commonly referred to as a CCI), to the effect that the foreign loan was brought into Nigeria. In the absence of a CCI, the borrower will be unable to access the official foreign exchange market for the purpose of remitting interest and principal payments, but could, if it has access to independent sources of foreign currency (as would a borrower that generates foreign currency through exports) lawfully make such interest and principal payments from its own resources.
We should mention that if the articles of association of a Nigerian borrower require it to obtain shareholders and/or board approval before it can obtain the type of credit facility from a bank or other institution, the Nigerian borrower must obtain that approval before it can lawfully obtain such a credit facility.
3 What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
Many acquisition finance deals are financed with corporate cash (especially in the banking sector and small/medium-sized deals). External financing for acquisitions is predominantly debt in recent years due to a slowdown in the equity market. The main debt instruments used are secured, unsecured and syndicated loans. Bridge to equity loans also feature to some extent in private equity transactions.
4 Are there rules requiring certainty of financing for acquisitions of public companies? Have 'certain funds' provisions become market practice in other transactions where not required?
While there is no regulatory requirement for 'certain funds' in such transactions, the SEC requires that the sources of funds to finance an acquisition must be clearly disclosed and backed by documentary evidence that must be attached to the application made to the SEC.
The ISA also provides that consideration for the shares deposited pursuant to a takeover bid must be paid within 14 days after the offer closes, if the terms stipulated by the bidder and not subsequently waived by him have been complied with. The SEC has interpreted this provision of the ISA to mean that the shares deposited pursuant to a takeover bid must be either taken up and paid for or released within 14 days of the offer closing, regardless of whether all of the conditions of the offer have been satisfied.
5 Are there any restrictions on the borrower's use of proceeds from loans or debt securities?
The loan agreement usually provide a purpose clause specifying the purpose to which the loan is to be put.
Originally published in Getting the Deal Through – Acquisition Finance 2014
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.