Examining The Prohibition On Financial Assistance And Its Impact On Leveraged Buyouts

Introduction

In the dynamic landscape of modern corporate finance, leveraged buyouts ("LBOs") have emerged as a powerful tool for corporate restructuring and value creation. These transactions, which gained prominence in the 1980s during the era of corporate raiders, continue to shape the global merger and acquisition (M&A) landscape. However, in jurisdictions like Nigeria, the interaction between LBOs and financial assistance rules creates a complex regulatory framework that merits careful examination.

The global private equity industry has witnessed remarkable growth, with LBO transactions reaching $1.1 trillion in 2021 alone.¹ Despite this global trend, the Nigerian market has seen relatively limited LBO activity, at least in part due to regulatory constraints and financial assistance restrictions. ² This article examines the delicate balance between fostering market dynamism through LBOs and protecting stakeholder interests through financial assistance restrictions.

Commercial Context of LBOs

The global experience with LBOs offers valuable insights for the Nigerian market. Consider the landmark acquisition of RJR Nabisco by KKR in 1988, which at $25 billion remained the largest LBO in history for nearly two decades.³ This transaction demonstrated both the potential and pitfalls of leveraged acquisitions, as the acquiring firm used a complex mix of debt instruments to finance the purchase. Similarly, the 2013 take-private transaction of Dell by its founder, Michael Dell and Silver Lake Partners showed how LBOs can facilitate strategic repositioning, allowing a public company to undergo fundamental transformation away from market pressures.

Legal and Regulatory Framework for Financial Assistance and Leveraged Buyout

Leverage Buyouts

Leveraged buyouts can play a significant role in driving economic growth and attracting foreign investments in the country.

A leveraged buyout is essentially when a company's stocks or assets are bought using borrowed money, leading to a new capital structure that is mainly composed of debt.⁴ Under this method of acquisition, the cash flows or assets of the target company serve as collateral for securing and repaying the debt. Thus, the essence of an LBO is to acquire majority of shares in the target company through mostly debt financing. In the LBO approach, investors employ external financial resources to acquire a company, thereafter, leveraging the assets of the acquired entity to settle the borrowed debts.⁵

In a leveraged buyout the acquirer usually purchases a controlling stake of the company using a combination of debt and equity financing. The debt that is used to acquire the target company is often secured with assets of the target company and the cash flow of the target company is used to settle the debt overtime. The acquirer in a leveraged buyout may gain ownership of the company for a fraction of the actual acquisition cost.

Financial Assistance

Financial assistance refers to the provision of funds or support by a target company to aid in its own acquisition or the acquisition of its shares.

The Companies and Allied Matters Act defines financial assistance as "a gift, guarantee, any form of security or indemnity, a loan or any form of credit or any other financial assistance given by a company, the net assets of which are thereby reduced by up to 50%, or which has no net assets" ⁶

.Considering that in an LBO, the debt used to acquire the target company is typically secured by the assets of the target company, it is easy to see how LBOs could be caught by financial assistance regulations. The rules prohibiting financial assistance by companies originated from English law and this principle has also been referred to as the leveraged buyout prohibition in the doctrine.⁷

Section 183(2) Companies and Allied Matters Act 2020 ("CAMA") outrightly prohibits a company from offering financial assistance in the acquisition of its shares or its subsidiaries. The company is also prohibited from limiting or discharging the liability of shares already acquired.

Where Financial Assistance Can Be Permitted

The financial assistance prohibition applies universally to both public and private companies, without differentiation.

The provisions of CAMA prohibiting financial assistance also restricts leveraged buyout. Somewhat ironically, while this provision serves as a means of protecting the capital, it discourages private equity investments, mergers and acquisitions.

The restriction on financial assistance under Nigerian law is contained in section 183, CAMA. Specifically, section 183(2)(a), CAMA stipulates that "where a person is acquiring or is proposing to acquire shares in a company, it shall not be lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place" (emphasis ours). Section 183(2)(b) CAMA goes further in stipulating that "where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of this acquisition, it shall not be lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred." (emphasis ours).

There are some exceptions to the prohibition of financial assistance. Section 183(3) CAMA provides for certain circumstances in which a company may provide financial assistance. They include; ]

a) where lending of money is the ordinary course of the company's business.

b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully-paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company. This arrangement, such as for fulfilling share qualification criteria, is a common practice.

c) the act of a company extending loans to individuals, not including directors, who are genuinely employed by the company, aiming to assist these individuals in acquiring or subscribing to fully-paid shares in the company or its parent company, to be held by them as beneficial owners.

d) any act or transaction authorised by law, including;

(i) The distribution of a company's assets by way of dividend lawfully made or a distribution made during the company's winding up

(ii) the allotment of bonus shares.

(iii) reduction of capital confirmed by order of the court under this Act

(iv) redemption or purchase of shares.

e) anything done in pursuance of an order of the court under a scheme of arrangement, scheme of merger or any scheme of or restructuring of a company done with the sanction of the Court.

CAMA also allows a company to provide financial assistance where the primary purpose is not to discharge or reduce the liability of the individual acquiring shares in the company, where such liability is reduced or discharged then it must be given in good faith for the benefit of the company at large.

Private companies are not restricted from providing financial assistance if the shares being acquired are or were shares of the company itself, or if the company is a subsidiary of another private company and the shares in question are those of the parent company. However, certain conditions must be met for such assistance:

(a) the company must have sufficient net assets that are not depleted by the financial assistance, or if there is a reduction, it must be covered by distributable profits.

(b) the provision of assistance must be approved by a special resolution passed at a general meeting of the company.

(c) before providing the financial assistance, the directors of the company proposing to give the assistance, and if the shares involved belong to its parent company, the directors of that parent company, must make a statutory declaration in a form specified by the Corporate Affairs Commission. ⁸

Relationship Between LBO and Financial Assistance

The provisions of the CAMA that prohibit financial assistance often influence and limit leveraged buyouts. This is because LBOs typically involve securing acquisition financing with the target company's assets. Where such security or loan reduces the company's net assets up to fifty per cent, the rules that prohibit financial assistance may apply, potentially rendering the agreement between the acquirer and the target company voidable.

One of the key ways financial assistance affects leveraged buyouts is through legal and regulatory constraints. Many jurisdictions⁹ have laws that restrict or prohibit a company from providing financial assistance for the purpose of acquiring its own shares. These restrictions are primarily aimed at protecting creditors and minority shareholders from potential financial risks or abuse. As a result, companies and investors involved in LBOs must navigate these regulations carefully to ensure compliance.

The regulatory framework on financial assistance directly affects LBO transactions by limiting the acquirer's ability to use the target company's assets as collateral for acquisition financing. This restriction makes it more challenging for investors to structure LBOs, reducing the feasibility of debtfinanced acquisitions. Consequently, firms seeking to engage in LBOs must explore alternative financing structures or legal workarounds, such as whitewash procedures available to private companies under section 183(4), CAMA. Additionally, providing financial assistance can create conflict of interest and corporate governance issues within the acquiring entity. When the target company provides financial support to facilitate its own acquisition, it raises questions about the independence and objectivity of the decision-making process. This can undermine investor confidence and lead to corporate governance challenges, particularly if minority shareholders perceive the transaction as unfair or detrimental to their interests.¹⁰

Advantages of LBO

Leveraged buyouts have posed as an advantage for many companies in that it serves as a way the company can utilize its debts. Some of the advantages of LBOs include:

Minimal Capital Investment and Tax Advantage

One of the key benefits of LBOs as a form of private equity investment is the tax advantage associated with debt financing acquiring a company through debt, rather than an outright purchase, reduces the equity risk for investors while offering the potential for high-yielding returns, underscoring its significance in investment strategies.¹¹

A primary tax benefit is that the interest paid on the debt used to finance the acquisition is taxdeductible, thereby lowering the taxable income derived from the target company's cash flow. This contrasts with traditional share acquisitions, where no such tax deductions apply, making LBOs a more tax-efficient financing strategy. ¹²

Improved Operations

LBOs can also lead to enhanced operational efficiency where the acquirer seeks to optimize the target company's performance to repay the acquisition debt. The introduction of new management strategies, cost-cutting measures, and streamlined operations can drive higher profitability and longterm growth. Additionally, the pressure to meet debt obligations can foster innovation and disciplined financial management, ultimately improving the company's market position.

Leveraged Buyout in Nigeria

Although the concept of leveraged buyouts (LBOs) is not widely adopted in Nigeria, there are notable instances where LBO or LBO-adjacent structures have been employed to acquire companies. The country's oil and gas sector provides a compelling context in which certain elements of leveraged buyout structures are implemented and how they interact with Nigeria's financial assistance rules.

These elements have become more visible in the acquisition and expansion of oil and gas companies and their assets. During the early 2000s, in the wake of Nigeria's broader privatisation initiatives, several transactions exhibited LBO-like features, as buyers acquired strategic interests in both downstream and upstream petroleum companies using funding structures heavily reliant on syndicated loans arranged by domestic financial institutions. These structures enabled acquirers to secure significant equity stakes while limiting their upfront capital commitments.

More recently, large-scale acquisitions in the sector have been financed through a blend of senior and subordinated debt, including reserve-based lending arrangements and financing backed by multilateral institutions. These approaches have supported the acquisition of major upstream assets by local companies, reflecting a pragmatic adaptation of LBO principles within Nigeria's capitalconstrained environment, particularly where anticipated cash flows from the acquired assets can be used to service the acquisition debt.

Challenges and Outlook

The practical reality of executing LBOs in Nigeria extends beyond pure legal considerations. The country's debt markets, while growing, remain relatively underdeveloped compared to major financial centers. High interest rates and typically short loan tenors create additional complexity for deal structuring. Moreover, the Nigerian market presents unique challenges in terms of currency volatility and exit opportunities that must be carefully considered in any LBO strategy.

Despite these challenges, creative solutions have emerged. The Nigerian energy and project finance sector exemplifies how Nigerian companies can successfully navigate the regulatory landscape while pursuing ambitious acquisition strategies.

The experience of other emerging markets offers valuable lessons for Nigeria. South Africa, for instance, has developed a more robust LBO market, supported by well-established debt markets and a different regulatory approach to financial assistance. Brazil's experience demonstrates how emerging market companies can successfully execute LBOs despite currency volatility and complex regulatory requirements. These examples suggest potential pathways for the evolution of Nigeria's LBO market.

Looking beyond individual transactions, the broader impact of LBOs on corporate efficiency and market development deserves attention. When properly structured, LBOs can drive operational improvements through enhanced management focus and reduced agency costs. The pressure of debt servicing often leads to more disciplined capital allocation and improved operational efficiency. This has been demonstrated globally through successful post-LBO transformations in companies across sectors.

The future development of Nigeria's LBO market will likely depend on finding an appropriate balance between regulatory protection and market flexibility. While financial assistance rules serve important protective functions, their application should evolve to accommodate legitimate business transactions while maintaining appropriate safeguards. The experience of markets like South Africa and Brazil suggests that a more nuanced approach to financial assistance regulation could help unlock significant value while protecting stakeholder interests.

The role of international capital markets cannot be overlooked in this context. As Nigerian companies increasingly access global capital pools, the interaction between domestic regulations and international financing practices becomes more critical. The success of recent cross-border transactions suggests that international capital can help bridge domestic financing gaps while bringing global best practices to the Nigerian market.

Conclusion

The strict enforcement of the financial assistance rule needs to be eased to promote leveraged buyouts. Leveraged buyouts can drive economic growth, attract foreign investment, and enable strategic corporate restructuring, making them a valuable tool in the Nigerian investment landscape.

In other words, the prohibition on financial assistance prevents a company from indirectly funding the purchase of its own shares, which could artificially inflate share prices or manipulate the market. By categorizing it as an "evasive transaction," the regulatory authorities aim to underscore the importance of upholding the integrity of share buy-back regulations and preventing attempts to bypass them through indirect means.

As Nigeria's financial markets continue to mature, the evolution of LBO practices will likely reflect both global trends and local realities. The challenge for market participants and regulators alike is to develop structures that facilitate value-creating transactions while maintaining robust protections for stakeholders. The experiences of other emerging markets suggest that this balance is achievable, though it requires careful attention to both legal and practical considerations. The future of LBOs in Nigeria may well depend on the market's ability to adapt global best practices to local conditions while navigating the complex requirements of financial assistance regulation.

Footnotes

1 MacArthur H, Burack R, De Vusser C and Yang K, 'The Private Equity Market in 2021: The Allure of Growth' (Bain & Company, 7 March 2022) https://www.bain.com/insights/private-equity-market-in-2021-global-private-equity-report2022/ accessed 28 June 2025.

2 CAMA, section 183.

3 BSP E-Club, 'The LBO of RJR Nabisco: How Has Private Equity Evolved Since the 1980s?' (BSPEClub) https://bspeclub.com/the-lbo-of-rjr-nabisco-how-has-private-equity-evolved-since-the-1980s/ accessed 28 June 2025.

4 Stanley F. Reed, Alexandra R. Lajoux & Peter H. Nesvold, Art of merger and acquisition; A Merger Acquisition Buyout Guide (4th edn, McGraw-Hill 2007) 5.

5 Erkan EREN, LL.M., PhD, " An Analysis Of Leveraged Buyouts Under Financial Aid Prohibition Of The Turkish Commercial Code" https://erkaneren.eleganzaajans.com.tr/erkaneren/userfiles/files/yeni-makaleler/7.pdf accessed on May 18 2025.

6 See section 183 CAMA

7 Erkan EREN, LL.M., PhD, " An Analysis Of Leveraged Buyouts Under Financial Aid Prohibition Of The Turkish Commercial Code" https://erkaneren.eleganzaajans.com.tr/erkaneren/userfiles/files/yeni-makaleler/7.pdf accessed on May 18 2025.

8 See section 183 (4) CAMA

9 such as United Kingdom, Turkey, India and South Africa.

10 Erkan EREN, LL.M., PhD, " An Analysis Of Leveraged Buyouts Under Financial Aid Prohibition Of The Turkish Commercial Code" https://erkaneren.eleganzaajans.com.tr/erkaneren/userfiles/files/yeni-makaleler/7.pdf accessed on May 25 2025.

11 Nicholas Idoko, "Leveraged Buyouts in Nigeria: An In-depth Look" https://corporatefinance.ng/leveraged-buyouts-innigeria/ accessed on May 23, 2025.

12 S. 2 Capital Gains Tax Act, Cap. C1, LFN 2004

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