1 Deal structure
1.1 How are private and public M&A transactions typically structured in your jurisdiction?
Both private and public M&A transactions can be structured as share purchases or asset purchases. Such transactions can be effected by way of contract or by way of a court-sanctioned scheme.
An asset acquisition is implemented by the acquirer acquiring for value all assets of the target or a number of such assets sufficient to effectively transfer the business of the target to the acquirer. Here, the target whose assets have been purchased or acquired continues to survive after the deal, subject to any dissolution that the target may eventually suffer.
A merger or acquisition done through a scheme (whether a scheme of merger or a scheme of arrangement) needs:
- the approval of 75% of the shareholders present and voting at the court-ordered meetings of the merging entities; and
- the sanction of the scheme by the Federal High Court of Nigeria.
A scheme of arrangement is an arrangement between a company and its members or its debenture holders/creditors; while a scheme of merger involves the transfer of assets and liabilities resulting in a dissolution of companies other than the resulting entity.
A share acquisition entails the acquisition of shares issued by the target, such that the acquirer assumes control of the target. In private M&A transactions, an acquisition is effected by contracts in which the terms of the acquisition will be set out.
Share acquisitions in the public M&A context are often more nuanced, as the law proffers certain methods of carrying out the share acquisition. For example, such acquisitions can be:
- by way of sale and purchase of shares in the open market, especially on securities exchanges (eg, the NASD OTC Securities Exchange or the Nigerian Stock Exchange, provided that the target is listed on any one of those securities exchanges); or
- through a mandatory takeover, which will result in the acquisition of a controlling stake in the target.
1.2 What are the key differences and potential advantages and disadvantages of the various structures?
Where undertakings are acquired or merged through a scheme, the main advantage is the ease of effecting transfer of assets, liabilities, rights and interests of each of the companies into the relevant surviving entity without necessarily entering into different transfer agreements. A single stroke of the judicial pen can transfer assets and liabilities into new hands. In addition, the court order dissolving the transferor company(ies) will dissolve the company(ies) without having to go through the laborious process of liquidation of assets and the winding-up of affairs. While the Federal High Court must sanction the scheme, there is no such requirement for a share or asset acquisition effected by contract.
A share acquisition is more straightforward, as the only items that need to be transferred are the shares of the target. The acquirer effectively purchases the entire company or majority shares on completion, including all assets and liabilities, and as such can continue running the business with no or minimal disruption resulting from the change of ownership/control.
It also saves the acquirer time and costs that would otherwise have to be expended in having to perfect separately its title to the various assets being sold. From the perspective of the seller, a share acquisition is a most convenient way to achieve a ‘clean break' from the target. It can effectively walk away from the target, with all its actual and potential liabilities, subject to agreed terms in the share purchase agreement and the seller's obligation to contribute any balance of the amount payable in respect of the shares sold as obligated under sections 117 and 565 of the Companies and Allied Matters Act, 2020.
An asset acquisition, on the other hand, does not vest ownership of the target in the acquirer, but merely transfers ownership of some or all of the assets comprising the business that it has acquired. At the close of the transaction, both the acquirer and the target retain their respective separate corporate personalities, with the acquirer having ownership of the acquired assets of the target, while the target retains its liabilities and any assets excluded from the sale.
In terms of corporate structure, following an asset acquisition and share acquisition, both the target and the acquirer survive as a matter of course. A merger, in contrast, typically ends in the survival of only one of the entities.
Perhaps the most consequential disadvantage of an asset acquisition (not done pursuant to a scheme) is the tax implications. The Capital Gains Tax Act 1967, as amended, imposes capital gains tax at a rate of 10% on the gains accruing on the transfer of an asset, but no capital gains tax is payable on mergers where the consideration is not cash and the transferor entity is dissolved. No capital gains tax is payable on the sale of shares. Further, value added tax is payable on asset sales acquisitions at a rate of 7.5% of the consideration for the assets.
Also, sales of goods are exempt from stamp duty; but otherwise stamp duty is payable on asset transfer agreements at the rate of 1.5%. Where the assets are real estate, registration and other perfection costs at the relevant State's land registries become payable, in addition to stamp duty. Stamp duty is payable on share purchase agreements/subscription agreements; and if the share acquisition results in the increase of the target's shares, stamp duty will also become payable on such additional share capital.
1.3 What factors commonly influence the choice of sale process/transaction structure?
In considering the process by which an M&A situation may be concluded, the entities involved will usually consider factors such as:
- tax implications (as discussed in question 1.2);
- the length of time that it will take to execute such transaction (the choice of implementing a transaction contractually is usually faster, subject to regulatory approvals); and
- the size of stake to be acquired in the target (eg, where an acquisition is for shareholding of between 30% and 50% in the target, it can be structured as a mandatory takeover).
The choice of a surviving entity is also very important, from both cost and regulatory perspectives.
Regulatory considerations may also be a factor, especially where one of the merging entities is a public company. The parties may want the resulting/surviving entity to be a private company in order to eliminate or reduce regulatory oversight to which the surviving entity may be subject.
Another factor is the extent of the risk that the acquirer wants to assume. If the acquirer seeks only some assets of the target, but none of its liabilities, then an asset purchase confined to those assets may be the way to go, rather than a share acquisition. If, on the other hand, the acquirer intends to assume ownership or control of the target or combine both businesses or undertakings, then a share acquisition or merger may make more sense.
2 Initial steps
2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?
The initial transaction documents will typically include non-disclosure and confidentiality provisions, especially in high-profile transactions where one of the parties is likely to suffer greatly if information about the proposed transaction gets into the public domain.
It is also very usual for the parties to an M&A transaction to share and execute either a term sheet, a letter of intent or a pre-merger agreement. A term sheet identifies the high-level terms and conditions of the deal, which may be further expanded or changed by subsequent definitive agreements. The term sheet/ letter of intent is typically not legally binding on the parties, although the parties can choose to make binding the term sheet or any of its terms (eg, the provision on confidentiality). Upon execution, the term sheet/letter of intent ushers in:
- further negotiations;
- a due diligence process;
- the definitive documentation phase; and
- the obtaining of requisite regulatory and other approvals.
Also, in acquisitions that involve a competitive bid process, a non-binding offer from the acquirer/buyer is another document that rears its head early in the transaction process.
2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?
There are no express legal rules under Nigerian law proscribing break fees in M&A transactions. Under Nigerian law, what is not expressly forbidden is generally treated as allowed. Thus, parties are at liberty to contract for or out of break fees; although in merger and takeover transactions which involve a public listed company, disclosure must be made to the Nigerian Stock Exchange (NSE) where the offer is conditional upon payment of compensation for loss of offer (rule 15.8 of the Issuers' Rules of the Nigerian Stock Exchange Rule Book, 2015).
Break fees are usually paid in circumstances where a counterparty has expended significant resources (money, time and energy) with the aim of getting the deal through.
Parties should always be particularly mindful of the financial assistance rule when negotiating on who should pay the break fee – especially where the acquisition is not by subscription for the target's shares, but from an existing shareholder of the target. (The provision of financial assistance to anyone seeking to buy shares in a target is prohibited if the net assets of the target are reduced by up to 50% or which has no net asset as a result.) It may be considered as a violation of the financial assistance rule under the Companies and Allied Matters Act, 2020 if the break fees will be payable by the target and not the seller of the shares under a share purchase arrangement. The rules are not so stringent for private companies, for the reasons discussed in question 2.5.
2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?
Both debt and equity financing are commonly used as means of financing transactions in Nigeria. Also, it is not uncommon to finance acquisition transactions using debt and mezzanine structures including convertible debt and equity. Resorting to any of these methods is essentially the acquirer's strategic choice, with each circumstance subject to evaluation on its merits. These considerations could include factors such as:
- a desire for change in management or membership control;
- ease of exit from such investment; or
- long/short-term viability of the company involved.
Arguably, debt financing (whether by the issuance of debt securities or by the traditional secured loan) is more usual in today's market.
2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?
These include the prospective parties' respective investment and in-house transaction teams. The engagement of professional advisers is essential to complement the efforts of the in-house team and ensure the successful completion of such transactions. These professional advisers include solicitors, accountants, sector-specific regulatory experts and investment banks. Also, in some transactions, it may be prudent to engage informally and in advance with regulators such as the Securities and Exchange Commission, the Federal Competition and Consumer Protection Commission and even the Federal Inland Tax Revenue Service on a ‘no-name' basis to address controversial tax and regulatory issues/challenges.
2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?
A target can pay adviser costs where the acquirer is subscribing for shares issued by the target. However, it is unusual for the target to pay adviser costs where the deal is between existing shareholders of the target and an independent acquirer. The payment of adviser costs by the target, in the latter instance, may amount to prohibited financial assistance where:
- the target has no net assets; or
- its net assets will be reduced by 50% or more by reason of such payment.
There are certain new exceptions to the financial assistance rules, as follows:
- where any payment is made pursuant to an order of the Federal High Court under a scheme of arrangement;
- a scheme of merger or any other scheme or restructuring of a company done with the sanction of the Federal High Court; or
- where the financial assistance relates to an acquisition of shares in a private company or the private company is a subsidiary of another private company, provided that:
- the net assets of the target are not reduced or, where such net assets are reduced, the assistance is provided from distributable profits of the target;
- the assistance is approved by special resolution of the target in a general meeting; and
- the directors of the target or holding company make a statutory declaration before the financial assistance is given.
3 Due diligence
3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.
Specific issues to watch out for in the due diligence exercise in Nigeria include examining the legal status of the target, the directors, the shareholders (which are revealed by conducting a search at the Corporate Affairs Commission (CAC)) and the statutory books for compliance with applicable law. The shareholding is also important, especially in share acquisitions, in order to ensure that the shares are free from encumbrance. The target's material contracts and constitutional documents should also be examined to ascertain whether there are clauses therein that may impact on the deal or render the consent of any third party a prerequisite for the deal. It is also important to consider the general regulatory and sector-specific regulatory approvals that will be required for the transaction.
Scrutiny of the debt portfolio of the target is very important, to discover:
- the target's unpaid debts;
- the kinds of debts owed by the target (ie, subordinated or unsubordinated, secured or unsecured); and
- the nature of security given (if any).
The buyer will be concerned (especially where the seller is a shareholder) about whether:
- a certificate of capital importation has been issued to the seller (which is a foreign investor) in respect of the seller's investment in the company; and
- there are understamped documents that will further expose the buyer to financial risks.
Claims by or against the target before various courts and tribunals are analysed to ascertain whether the target is exposed to any contingent liability or whether the transaction will be adversely impacted by such litigation. For example, where the target is a licensed company (eg, a bank licensed by the Central Bank of Nigeria or a telecommunications company licensed by the Nigerian Communications Commission), and there is a claim for the suspension or revocation of the target's licence, such an action will be red-flagged in the due diligence exercise. The judicial system in Nigeria is generally slow and the actual risks may be brought to the fore only after completion of the litigation, when the transaction will most likely be closed.
The target's compliance with tax and other statutory payment obligations will be checked (eg, income tax, value added tax, withholding tax, tertiary education trust fund, industrial training fund). Nigerian tax collectors are aggressive and can act capriciously (eg, by imposing outrageous taxes on companies), and the Nigerian courts show them more sympathy than many courts elsewhere do.
Attention is usually paid to remittance of group life insurance, national housing fund, industrial training fund and pension contributions, and contributions to the Nigeria social insurance trust fund for the benefit of employees. These in total can exceed 20% of the net wage bill. An acquirer will also want to know:
- the key employees;
- whether there is any stock option plan; and
- provisions in employment contracts that confer an unusual advantage on any of the employees.
(f) Intellectual property and IT
The target's IP portfolio will be reviewed, including the date of registration, expiration date and whether the expired registered intellectual property has been renewed. In Nigeria, the effectiveness of the registration of service marks is debatable and there is no substantive patent examination system.
Also, the target's IT infrastructure will be examined to ascertain matters such as its nature, compatibility, applicable licences and outstanding obligations in relation thereto (eg, outstanding licence or renewal of such licence).
(g) Data protection
The acquirer will usually be concerned about the target's compliance with the Nigeria Data Protection Regulation, 2019 (NDPR) with respect to data protection. This regulation is broadly similar to the EU General Data Protection Regulation.
Consideration is usually paid to the target's cyber risk management and the framework in place to guard against cyber insecurity in compliance with the NDPR and the Cybercrimes Act, 2015. The authorities have been aggressive in investigating and prosecuting violations of the legislation, but violations are believed to remain rampant.
(i) Real estate
The target's real estate portfolio (owned and leased real estate) will be examined. The target's documents of title will be reviewed to ensure that the target indeed has title to real properties it purports to have and ascertain whether there are any encumbrances thereon. This will naturally include carrying out searches at the lands registries of the relevant States and, in some cases, physical inspection of the properties.
3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?
At the centre of a public search is the CAC, where a company's corporate information can be obtained. If real estate is involved, a search of title at the land registry of the State in which the land is located must be conducted. There are 37 States in Nigeria. Searches can also be conducted in respect of trademarks, patents, copyrights and industrial designs at the respective registries for these. Searches at the court registries may be prudent where the target is involved in material litigation. There are no truly helpful electronic and publicly available records of litigation, arbitration or administrative proceedings in Nigeria. In practice, the acquirer's advisers are largely confined to:
- the litigation portfolio made available to them by the target;
- manual/physical searches at the court registries; and
- their own personal knowledge and professional networks.
3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?
Pre-sale vendor due diligence is not uncommon in Nigeria. The vendor may undertake such due diligence to:
- shorten transaction timelines;
- manage large numbers of bidders that may all want to conduct due diligence at the same time; and
- ascertain in good time potential deal-breaker issues in the proposed transaction.
However, it is uncommon for acquirers to rely solely on the vendor's due diligence report. The acquirers that are eventually shortlisted usually prefer to conduct some further due diligence in order to make a better-informed decision.
4 Regulatory framework
4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?
The Federal Competition and Consumer Protection Commission (FCCPC) is the sector-agnostic regulator in charge of competition matters in Nigeria. The FCCPC is tasked with authorising (with or without conditions), prohibiting and approving mergers or any acquisitions leading to a change of control. It may also be important to ensure that the key contracts of the target are not anti-competitive, such that the FCCPC may challenge them successfully and alter fundamentally the economics of the deal. The Securities and Exchange Commission's ‘no objection' must also be obtained where the target or any of the merging entities is a public company.
As regards sector-specific approvals, reference should be made to the specific sector regulator, which may be relevant to the transaction. An M&A transaction involving the acquisition of a pension fund administrator, for instance, will require the approval of the National Pension Commission. In the same way, the acquisition of a telecommunications company will require the approval of the Nigerian Communications Commission.
Where an oil exploration and production company is involved, the approval of the minister of petroleum resources (acting through the Department of Petroleum Resources) will be required. Where the transaction involves a bank, the Central Bank of Nigeria's approval is required. Where the target is an insurance company, the National Insurance Commission must greenlight the deal; and likewise, the approval of the Nigerian Electricity Regulatory Commission is needed for any M&A deal involving a licensed power generation or distribution company.
4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?
M&A transactions across all sectors are supervised by the FCCPC. As the primary regulator of competition in Nigeria, the FCCPC is empowered to authorise (with or without conditions), prohibit and approve mergers that exceed, in target assets or turnover, the equivalent of approximately $1 million.
Additionally, sector-specific regulators supervise M&A activities within their respective sectors. The relevant enabling statutes spell out the powers of these sector-specific regulators in relation to M&A deals. These statutes typically include the power to approve or at least be notified of such deals within their respective sectors.
4.3 What transfer taxes apply and who typically bears them?
This depends on the nature and structure of the M&A deal in question. An asset acquisition, for example, triggers a duty for the purchaser to pay stamp duty on an ad valorem basis at a rate of 1.5% of the consideration amount on assets other than shares. Value added tax is also payable at a rate of 7.5% of the consideration amount on sales of goods.
The seller, meanwhile, will pay capital gains tax at a rate of 10% of its net gain from the sale of assets other than shares. In practice, however, the parties may contract to shift the burden of the payment of tax from one party to the other. Also, where a share or asset sale is between related entities, transfer pricing obligations may apply.
5 Treatment of seller liability
5.1 What are customary representations and warranties? What are the consequences of breaching them?
The customary areas are:
- due incorporation and going-concern status of the target (where the seller is a corporate entity);
- capacity and authority to enter into the transaction and execute transaction documents;
- that the requisite licence(s), regulatory and third-party approvals to effect the transaction have been obtained; and
- that the transaction documents will not breach the target's constitution documents or its legal and binding obligations under the law or any other contract.
Other customary warranties given include warranties as to:
- bank accounts;
- intellectual property;
- trading arrangements;
- regulatory compliance;
- anti-bribery and anti-money laundering safeguards;
- pension payments; and
The main consequence of breach of a representation or warranty is liability to pay damages. It may also give the other party the right to terminate or refuse to close the transaction if the breach arises before closing. However, each party may also negotiate to require the other to give indemnities to provide additional comfort in respect of the other, as well as breach or inaccuracy of warranties.
5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?
Where there is more than one owner of the asset (in an asset acquisition), or more than one owner of the shares that are the subject of the transaction, the transaction documentation may provide for the potential liability of each seller to be proportional or limited to the respective pro rata percentages of the asset or shares owned. Furthermore, it is not untypical for parties to contractually put a ceiling on liability, such that the aggregate liability of the sellers does not exceed a specified percentage of the price, and to bar any claim against the sellers that is less than a specified percentage of the price.
Other typical limitations to liability include provisions limiting the seller's liability for breach of warranty claims. The provisions usually prescribe:
- a time limit;
- an upper limit on any claim that may be brought by the acquirer; and
- a lower limit below which claims cannot be brought.
Other limitations include:
- provisions detailing the procedure that must be followed to bring a claim; and
- provisions barring claims, which might include provisions against bringing a claim where:
- the injured party is entitled to a claim under an insurance policy to remedy the injury in question; or
- the injured party or its affiliate is entitled to claim and recover from a third party in lieu of claiming directly against the defaulting party.
It is also common for the buyer's ability to claim to be limited by the usual requirements of loss, mitigation and foreseeability, as well as loss resulting from changes in law or regulation. Other typical limitations apply where the buyer's acts or omission led or contributed to the damage or injury in respect of which the claim is made.
It is typical to require the seller to indemnify the purchaser against losses, claims, actions, suits, damages and so forth arising from:
- non-compliance with or infringements of applicable law;
- defects in titles to shares or assets;
- litigation against the target; or
- outstanding tax or other statutory payment obligations.
5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?
Warranty and indemnity insurance is unusual in M&A transactions in Nigeria, but it is not completely unknown – and not cheap.
5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?
The usual approach is for:
- the acquirer to examine the seller's financial statements, rating agency report or title documents to assets; or
- the seller to provide a letter from its bankers or shareholders indicating their preparedness to support it.
An escrow structure may also be used, in which case a portion of the purchase price is kept in an escrow account for a certain period for the purpose of paying out, during a given time window, any legitimate claim brought by the purchaser against the seller. The seller can also be required by the buyer to provide a guarantee.
5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?
Restrictive covenants are regular features of M&A deals in Nigeria and are enforceable where they are reasonable at common law as to time, geography and scope, and consistent with statutory competition law. What constitutes a reasonable timeframe is a question of fact, to be determined in relation to each specific case. The Federal Competition and Consumer Protection Act, 2018 strikes down any agreement that may likely or actually prevent, restrict or distort competition in any market. Prohibited acts include:
- directly or indirectly fixing purchase prices for goods or services; and
- dividing markets by allocating customers, suppliers, territories or products.
5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?
It is common to include these and other usual conditions to closing in M&A deals in Nigeria.
6 Deal process in a public M&A transaction
6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?
Timetables differ depending on the transaction process adopted. Timelines for contractual M&A transactions are usually as agreed by the parties. These timelines can be affected by various factors, such as:
- regulatory approvals;
- closing requirements; and
- availability of information.
Where the offer occurs within the context of a mandatory tender offer (30% threshold), an application for authority to proceed with a takeover bid must be filed with the Securities and Exchange Commission (SEC) within three business days after the mandatory takeover has been triggered in accordance with the law. After filing, the SEC must first grant the acquirer an authority to proceed; this remains valid for three months, subject to renewal applications which must be made within 14 days and may warrant renewal, which will not last for more than an additional one month. After receipt of the authority to proceed, a bid will be lodged with the SEC for registration. Thereafter, the bid will be dispatched by the offeror to each director of the target, each shareholder of the target and the SEC.
The acquirer must notify any dissenting shareholders within one month of the other shareholders' acceptance of the bid to elect either to be paid in proportion to what the consenting shareholders would be paid under the deal or to have their shares valued. The dissenting shareholders must make their acceptance or non-acceptance known within 20 days; otherwise, they will be deemed to have accepted to be paid like the shareholders that consented. A schedule showing the target's shareholders that have accepted the offer and the value and volume of their shares, as well as evidence of payment of consideration, must be filed with the SEC within seven working days of the offer. A post-takeover inspection will be carried out by the SEC no less than three months after registration of the bid.
6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?
The buyer may build up a stake in the target in the period leading up to the transaction, subject to the fulfilment of applicable regulatory disclosures. In a mandatory takeover, for instance, the acquirer may strategically ramp up its shareholding until it has almost reached the 30% threshold that triggers a mandatory takeover. If the acquirer already holds at least 30% of the shares in the company (together with persons acting in concert), it can strategically build up its stake to 50% before the mandatory takeover is triggered.
Applicable disclosures include the required disclosure of substantial shareholders under the Companies and Allied Matters Act, 2020. A person with at least 5% of the unrestricted voting rights in a public company must notify the company of such shareholding. The registrar of a public company must also file information on the beneficial owners of 5% or more of such company's shares with the SEC and such information must also be disclosed in the company's annual reports to be filed with the SEC.
A public listed company is also obliged to disclose to the Nigerian Stock Exchange (NSE):
- any share purchases which are at least 5% of the share capital of the target;
- information on any material circumstances likely to affect its financial obligations;
- the details of any major changes in its business which may by virtue of their effect on the company's assets, liabilities, operations or reputation, affect the prices of its listed and traded securities; and
- whether any agreement or arrangement exists between the offeror and any of the directors of the target having any connection with or dependence upon the offer. and full particulars of any such agreement.
6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?
Different procedures apply depending on whether the transaction is a scheme of arrangement or contract on the one hand, or a mandatory takeover on the other. For a squeeze-out occurring within the context of a scheme of arrangement or contract, where the transferee company makes an offer to the transferor company to acquire its shares and this is approved within four months of making such offer by the holders of 90% in value of the shares (other than shares already held at the date of the offer by the transferee company) of the transferor company, the transferee company can, within two months of such acquisition, make an offer to acquire the shares of dissenting shareholders.
Where, at the date of offer, the transferee already holds more than one-tenth of the transferor's shares:
- approval of 75% (in head count) of the shareholders that hold not less than 90% of the value of shares to be acquired is required; and
- the transferee company must offer the same terms to all holders of the shares (other than those already held) whose transfer is involved.
The squeeze-out procedure in the context of mandatory takeovers is such that, for the acquirer to squeeze out minority shareholders, 90% of the shares subject to acquisition must already have been acquired by the offeror. Dissenting shareholders may transfer their shares to the acquirer at the offered price or demand fair value for their shares. Where a demand for fair value is made by the dissenting shareholders, the shares will be acquired on terms ordered by the Federal High Court.
Minority rights abound under Nigerian law. There is protection for minority shareholders against unfair, prejudicial and oppressive conduct. Unfairly treated minority shareholders may also petition the Federal High Court to wind up the company or compel the majority to buy out the minority at fair value. It is also within the rights of minority shareholders to request that the Corporate Affairs Commission investigate the company's affairs. Transaction agreements often include clauses that provide for minority protection, such as having a list of reserved matters that require the consent/concurrence of such minority shareholder(s).
6.4 How does a bidder demonstrate that it has committed financing for the transaction?
In tender offer transactions, where payment is to be made wholly or partly in cash, bidders are required by the SEC to show the source of funding for the proposed transaction. Financial capability is usually proved by:
- evidencing such funds in bank accounts;
- escrowing a percentage of the purchase price; or
- at the very least, providing a letter of commitment from a lender.
Some regulators in highly regulated sectors (notably the Central Bank of Nigeria) may go as far as to check the books of the buyer to see whether the acquirer has the financial capability to execute the transaction.
6.5 What threshold/level of acceptances is required to delist a company?
In voluntary delisting by a public company of shares listed on the NSE, prior approval of the shareholders must be obtained by way of special resolution (75% of shareholders present and voting), in addition to giving the shareholders at least three months' notice of such delisting. NASD also requires the prior approval of shareholders of the company by a special resolution (75% of shareholders present and voting) passed at its annual or extraordinary general meeting.
6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?
Bumpitrage is not a common feature in public takeovers in Nigeria – not least because:
- trading volumes in all shares tend to be low;
- the rules on the pricing of tender offers are unclear; and
- tender offers are few and far between.
6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?
No formal minimum level of consideration is stated in any statutes, regulations or judgments. In practice, in authorising tender offers to go forward, the SEC looks at:
- the price and volume trading history of the target shares for at least the past 12 months; and
- the premiums paid in the more recent tender offers.
There is not enough judicial authority on the subject to say with confidence what the position of the courts is.
6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?
Bidders are required, as part of the content of a bid, to specify the terms on which the shares are proposed to be acquired and other particulars of the offer. The bid document can provide for MAC conditions that can trigger the withdrawal of the bid. Withdrawal is provided for under the law. However, there are preconditions for such withdrawal, including the following:
- The bidder must, within 48 hours, make an announcement in the same newspapers in which the public announcement of the open offer was published, providing the grounds and reasons for such withdrawal; and
- At the same time as this announcement, the bidder must also inform in writing the board of the target and the exchanges on which the shares of the target are listed.
See generally rule 445(6-8) of the New Rule and Sundry Amendments to SEC Rules, 2017.
6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?
Shareholder irrevocable undertakings to accept a takeover offer are not customary in Nigeria. However, an acquirer can negotiate with individual shareholders at the preparatory stage of the transaction. The acquirer can ensure that each shareholder signs a binding memorandum of understanding stating the percentage of shares required from such shareholder as well as the terms on which the shares are to be bought. This helps to manage uncertainty, but by law an acquirer cannot offer some target shareholders better terms than it offers others. Time, volume and price terms must be the same for all target shareholders during the offer period.
7 Hostile bids
7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?
Nigerian law does not prohibit, but it does not specifically provide for, hostile takeovers. It provides for takeover bids in general and the procedure for executing the same. The fact that the directors of the target are opposed to the bid is not fatal to the bid as a matter of law.
7.2 Must hostile bids be publicised?
As stated in question 7.1, hostile bids are not specifically provided for under the law. What the law recognises is a mandatory takeover, which is generally required by law where a person or group of persons acquires a shareholding stake of between 30% and 50% in a listed company. It is a requirement for a takeover bid to be:
- advertised in at least two newspapers with nationwide circulation and on the company's website; and
- announced on the floor of the exchange on which the shares are listed or its securities are traded.
Also, the directors must send a directors' circular to each shareholder of the target and to the Securities and Exchange Commission at least seven days before the date on which the takeover bid is to take effect. The circular will:
- state the opinion or disagreement of the directors;
- state the reasons for such opinion or disagreement; and
- include particulars of any payment made to an officer or former officer of the target by way of compensation for loss of his or her office, or of any office, in connection with the management of the company or subsidiary of the target's affairs, or as consideration for or in connection with his or her retirement from any office.
7.3 What defences are available to a target board against a hostile bid?
The directors of a listed company may issue a circular to the shareholders to dissuade them from accepting a takeover bid where they perceive such acquisition to be disadvantageous to the company. The directors can also obtain an expert opinion as to the offer price, which can be included in the directors' circular. In line with global practice, in situations where the directors of the target oppose a takeover, whether actual or threatened, they have the power to make lawful decisions and take measures to increase the target's share price to ward off an undesired takeover piloted by an acquirer with a limited war chest. The case law in this regard is not yet well-developed. The directors, in erecting any defensive barriers, must be mindful of taking only actions that are lawful and consistent with their fiduciary duty to always act in the best interests of the company.
8 Trends and predictions
8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?
From a legal standpoint, the Nigerian statutes that are relevant to M&A are continually reviewed and amended in order to make them more market friendly. For example, the Companies Income Tax Act was amended by the Finance Act, 2019 to eliminate the controversial excess dividend tax rule, which was previously an impediment to M&A activity.
Furthermore, the Companies and Allied Matters Act, 2020 contains certain provisions favourable to M&A transactions which were absent from its predecessor. For example, the new statute specifically provides for:
- mergers between two unrelated companies by way of a scheme; and
- an exception to the rule on financial assistance which now allows for the provision of financial assistance pursuant to an order of the Federal High Court under a scheme of arrangement or merger.
Further refinements are needed, but it is far from certain whether any should be expected in the coming months or years. Perhaps most importantly, clearer rules are needed on:
- the minimum pricing and volumes for tender offers; and
- the scope of the exemptions from the mandatory takeover rules that have been introduced by Securities and Exchange Commission regulation.
Despite the initial setbacks experienced in the M&A market as a result of the COVID-19 pandemic, surprisingly, some major deals were completed, while others stretched into the new year, with stakeholders closely monitoring national economic indices and outlook.
The significant deals executed in 2020/early 2021 included:
- FireslandCampina WAMCO Nigeria Plc's acquisition of Nutricima's dairy business;
- Heirs Holdings' acquisition of 45% of OML 17 from Shell, Total and ENI; and
- the sale of a majority stake controlled by Neoma Africa Fund LLC (formerly Aureos Africa Fund) in C&I Leasing Plc to Peace Mass Transit Limited.
8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?
As a result of the economic challenges posed by the COVID-19 pandemic, the volatility of the international oil market, the limited access to credit available to Nigerian businesses and general commercial growth, it is expected that business combinations and acquisitions will be common in the market over the next 12 months. Struggling smaller companies may find it attractive to combine with healthier ones through M&A deals; while healthy smaller companies may find attractive the greatly increased scale that M&A deals may offer them.
In terms of legislative reforms, further refinements are expected – although not necessarily in the next 12 months – in particular to the tax, business and competition statutes. As related laws were enacted or amended in late 2020 and January 2021, it is expected that the regulators will wait and see how these new laws work in practice, and identify their strengths and weaknesses, before taking steps towards further amendments. However, some amendments to the Nigerian Stock Exchange rules and the Investments and Securities Act are expected; they are currently undergoing review.
Foreign direct investment in Nigeria is not coming under increased scrutiny or the subject of government hostility. As it stands, save for local content requirements and restricted businesses, foreign ownership of Nigerian businesses is allowed – encouraged, even – given its prospects for promoting the nation's economic growth. The existing law is friendly towards foreign investors:
- It largely allows foreign participation to any extent;
- It provides a fairly liberal work permit regime for aliens;
- It allows for the free remittance of income and capital in foreign currency; and
- It offers both statutory and constitutional protection against expropriation.
9 Tips and traps
9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?
It is important to try to have a good relationship with the regulators and professional colleagues, and to address very early on any need for third-party contractor approvals. Proper structuring and identifying the requisite approvals sufficiently early are also key.
Targets are also recommended to conduct pre-sale due diligence on themselves; and the spirit of the transaction should be properly reflected in heads of terms/letters of intent so that none of the key transaction ingredients are omitted. Early housekeeping exercises in terms of filing up-to-date returns and making other required filings are further encouraged.
It is also prudent to engage all professional advisers (tax, financial, legal) early on, rather than bringing them in at the definitive documentation stage, when it may be too late to benefit from their insights and their advice may be more obstructive than helpful.
Common potential sticking points include the scope and timing of representations, warranties, indemnities, limitations of liability and disclosure letters. This is particularly so where such representations and warranties are onerous and will have to be repeated at closing or later.
Co-Authored by Fidelis Oguche - Associate.
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.