Acquiring high-growth technology companies in Africa presents an opportunity for scale-ups and strategic investors to acquire more customers, increase revenue and also become more attractive to trade buyers or public markets. Our work with firms in the tech industry in Nigeria (among them venture capital firms, angel investors, corporate venture arms, accelerators and tech startups) suggests that the issues below should be top of mind for investors looking to acquire tech start-ups in Africa. These issues may also find relevance within the context of a legal due diligence exercise.
Regulatory Approvals
It's important to be sure that a tech start-up has obtained or, where it hasn't, will commit to obtaining all the regulatory approvals required to carry on its business, following a carefully prepared and agreed timeline. It is not unusual to find companies operating without the relevant operating license and they may not be new companies. Where key sectoral licenses are absent, it may be prudent to procure same before announcing the acquisition of a tech start-up. The other level of approval is transaction-specific. The type of transaction-specific approvals will generally depend on the sector in which a tech start-up operates and the start-up's location within Nigeria. Additionally, Nigeria now has a new competition law which generally mandates regulatory approvals for mergers and acquisitions. However, not all tech companies are subject to merger review under the new competition law. For Fintech acquisitions, please see our update on the New Rules for Operating Fintechs in Nigeria
Deal Structure
Foreign investors usually acquire companies in Nigeria by acquiring either the shares or the assets of the Company. Nigerian mergers & acquisitions can also be effected using a scheme of merger or scheme of arrangement which, by law, requires the approval of a Federal High Court. Within the tech start-up space, we have seen and advised on a number of acqui-hires, in which case, the investor is keen only on acquiring members of the target's team and sometimes, the intellectual property, which a target uses for its business. For the most part however, acquisition of tech start-ups in Nigeria are often structured to provide some liquidity to existing founders/investors and to allow founders continue to bear some level of equity risk and operational responsibility, typically in the form of equity for equity deals with a cash component. In our experience, investors who propose all-cash deals are more likely to already have some local presence and also a working knowledge of the industry and teams. All equity deals are also possible but not as common.
Pricing
Tech Founders typically have high expectations on the enterprise values of their companies and it is not unusual to have lengthy conversations around pricing. One way we have seen investors deal with complications around pricing within the context of an acquisition is to propose an earn-out clause which essentially defers additional compensation to a time in the future when the tech start-up/founder achieves certain pre-agreed customer acquisition or revenue targets
Board Representation
It's often overlooked but nevertheless important for investors to appoint representatives to the board of a tech start-up at the level of the operational subsidiary as well as, at the holding company level. By design, tech start-ups often have a multiplicity of boards across different jurisdictions and will often be subject to a variety of corporate law. In addition to considering D&O insurance, it is also prudent for investors to have a clear understanding of what the duties and liabilities of directors are, under the relevant corporate laws and how local courts have interpreted, limited or expanded the duties and liabilities of directors.
Capital Control Rules
When acquiring a technology start-up in Nigeria, it helps to have a clear understanding of the relevant laws around capital control. The kind of issues we have addressed here, revolve around how best to convert foreign exchange into local currency, at the point of capital importation and in an exit scenario; as well as how to access official FX market to repatriate capital or pay dividends. Other issues revolve around the type of capital to import,the need to comply with the minimum requirements for capital importation as well compliance with the rules around technology importation. In Nigeria, the type of capital approved for importation can be cash ( equity or debt), or equipment/machinery.
Background Checks
When acquiring a technology start-up, we always recommend background checks in Nigeria on key people whether or not the such key people remain in a tech start-up post-acquisition. Limiting backgrounds checks to just the founders of tech start-up may not prove as useful as tech companies often work with a number of advisers and consultants who may exercise some level of influence over the founders and management team. A good background check can also throw up indicators which may be critical for the continued operation of a target.
Existing Stock Options
It's customary for tech start-ups to issue stock options or other equity-linked incentives to employees. These benefits would typically be subject to a vesting arrangement which may not be fully vested at the time of an acquisition. The kind of issues we have addressed here, within the context of a tech acquisition, revolve around the allocation of the M&A consideration within the context of the existing stock options as well as the acceleration of any unvested stock options on account of an acquisition. Typically, investors would require non-compete agreements as well as take steps validate the chain of IP flowing from employees to the Company. We have also seen investors require key persons to re-vest their shares
Use Tech Lawyers Licensed to Practice in Nigeria
There are often reported cases of unqualified lawyers practicing law (both litigation & corporate commercial transaction) in Nigeria. This has been a concern for the Nigerian Bar Association & one of the approaches which the Nigerian Bar Association has taken in recent time, is to enact a stamp and seal policy which requires each duly-qualified Nigerian lawyer to affix an NBA-issued stamp on every legal document prepared by that lawyer. Such documents will include legal letters, legal due diligence reports and court processes. The Nigerian Bar Association also has a portal which allows investor to confirm that a lawyer is licensed to practice law in Nigeria. See link to the NBA lawyer search portal here
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.
