Nigeria: Private Equity Laws And Regulations Nigeria 2022

1. Overview

1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions?

The most common forms of private equity (“PE”) transactions in Nigeria have traditionally been leveraged buyouts (by way of share or asset acquisitions), and expansion/growth capital. The market has, however, seen an uptick in venture capital (“VC”) and bolt-on acquisitions in the last couple of years, particularly in the fintech space.

In spite of the worsening macro-economic indices, PE transactions in Nigeria have been on an upward trajectory, with investor activity in sectors ranging from telecommunications, banking, financial services, information technology, oil and gas, and projects, amongst others. In 2021, Nigeria reportedly received about US$904 million in investment inflow into tech-focused start-ups alone, representing close to 50% of total tech investment in start-ups across Africa. Also, data compiled by the Nigerian Investment Promotion Commission (“NIPC”) covering Q1 2021 to Q1 2022 reflects a rough estimate of US$22 billion in investment inflow to Nigeria.

1.2 What are the most significant factors currently encouraging or inhibiting private equity transactions in your jurisdiction?

Factors encouraging PE investor activity in Nigeria include: large population size, growing consumer demographics and increasing regulatory clarity – via restructuring of the oil and gas sector under the Petroleum Industry Act of 2021; operational reformation of the landscape for financial technology by the Central Bank of Nigeria (“CBN”); reform by the competition commission by the introduction of various guidelines and guidance notes, thus bringing certainty to mergers and acquisitions (“M&A”) and antitrust processes; recognition of PE-friendly corporate structures such as the LPs and LLPs by the Companies and Allied Matters Act of 2020 (“CAMA”); and increased governance flexibility with single member and single director companies, amongst others. From a tax perspective, tax reform also continues to be targeted at encouraging investment. The Finance Act 2021 designates Real Estate Investment Trust Scheme (“REITS”) and Unit Trusts as pass-through vehicles for tax purposes, to encourage investment through those asset classes, while the Finance Act 2019, had earlier introduced exemptions to Excess Dividend Tax rule, to avoid double taxation. The Venture Capital Incentives Act, whilst not new, has recently re-entered the spotlight as it provides significant tax incentives in relation to start-up investments. The dispute resolution framework also continues to evolve with the Lagos Court of Arbitration emerging as the highest ranked court of arbitration in Africa, in a study by White & Case and the Queen Mary University of London. A revised Arbitration and Reconciliation Act has also recently been passed by the legislature and is expected to improve the seamlessness of the arbitration process in Nigeria.

Despite the overall positive outlook, the general global trend of rising inflation, geopolitical risks and other fiscal pressures continue to be a hindrance and to influence the way transactions are executed. For instance, there has been an increasing shift to debt and quasi-equity transactions, as investors attempt to hedge their risks. It is also expected that as the 2023 Nigerian general elections draw closer, the market will witness the customary pause caused by increased insecurity and political uncertainty.

Regulatory-wise, regulatory bottlenecks as well as steep fees for regulatory approvals (sometimes running into hundreds of millions) continue to be an issue. Additionally, the Finance Act 2021 removed the exemption of share transfers from capital gains tax, imposed excise duty on non-alcoholic, carbonated, and sweetened beverages (aimed at discouraging excessive consumption of beverages associated with excess sugar-related illnesses), and increased the Tertiary Education Tax to 2.5%, amongst others; it remains to be seen how these changes will impact deal structuring going forward.

1.3 Have you observed any long-term effects for private equity in your jurisdiction as a result of the COVID-19 pandemic? If there has been government intervention in the economy, how has that influenced private equity activity?

The COVID-19 pandemic changed the manner in which PE deals were traditionally executed and whilst we are beginning to see some return to physical engagement, it appears that the market has embraced the flexibility and cost-effectiveness of pandemic period executions. The increased use of technology in PE transactions – use of virtual data room, online conferencing for negotiations and meetings, signing of documents electronically, etc. – have come to stay.

In terms of risk appetite and mitigation, there has also been a slight shift, with more risk-averse financing structures, such as convertible debt, being adopted. More pronounced, however, has been the shift in sector focus with a surge in tech-based sector investments, including fintech, agritech, mobility tech, and edutech, as well as e-commerce and logistics. 

Government intervention in the Nigerian economy has come in varying forms. In a bid to cushion the impact of COVID-19, the CBN introduced credit support intervention, some of which include: (i) the NGN100 billion credit support intervention for the health sector; and (ii) the NGN50 billion target credit facility for households and SMEs, etc. 

With respect to its fiscal outlook, Nigeria, in 2021, raised about US$4 billion in Eurobonds to boost its foreign reserves and stabilise the wild swings in the exchange value of the Naira, and adjusted the value of the Naira twice in 2021 from NGN379 to NGN411 and subsequently to NGN413.49 against the US Dollar. However, the pressure from negative trade balance, decline in diaspora remittances, dwindling capital inflow, and drop in crude export, amongst others, are persistently mounting pressure on the exchange rate. Furthermore, in May 2022, the CBN raised interest rates from 11.5% to 13.5%. These policy measures have had a short-term stabilising effect on the Nigerian investment landscape generally. However, it remains to be seen how long the government is able to buoy investor confidence in the immediate and long-term future.

1.4 Are you seeing any types of investors other than traditional private equity firms executing private equity-style transactions in your jurisdiction? If so, please explain which investors, and briefly identify any significant points of difference between the deal terms offered, or approach taken, by this type of investor and that of traditional private equity firms.

Angel investors, family offices, institutional investors such as sovereign wealth funds and development finance institutions, and more increasingly, VC firms, execute PE-style transactions across the value chain, with VCs and Angel Investors focusing on start-ups and seed capital, whilst family offices and institutional investors are more interested in growth-stage investments. There has also been increased focus on crowdfunding as alternative financing, particularly with the introduction of the SEC Rules on Crowdfunding. However, given that only MSMEs can raise funds under the SEC Crowdfunding Rules and the maximum that can be raised is NGN100 million, we do not view crowdfunding as currently structured, as a viable alternative. It remains an area to be watched though, with the first set of crowdfunding platform registrations only just nearing completion.

Some of these alternative financing sources are able to take longer-term positions than the traditional PE firms with five to seven years' investment lifespan. The VC and HNI investments are also characterised by reduced due diligence investigations and speed of execution.

2. Structuring Matters

2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction?

Transactions are typically structured as bilateral acquisitions implemented via an offshore-registered special purpose vehicles (“SPVs”), which act as the holding company for a chain of investee corporate entities. As noted earlier, worsening macroeconomics, election uncertainty, and risk management concerns have also recently led to an increase in quasi-equity and debt transactions or equity/debt combinations. 

In early-stage start-ups, there is also increasing acceptance of the use of standard form agreements such as Simple Agreements for Future Equity (“SAFEs”), for convenience and flexibility.

2.2 What are the main drivers for these acquisition structures?

Main drivers for acquisition structures remain, including: control; profit maximisation; tax efficiency for investors and/or the post-acquisition group; foreign exchange (“FX”) liquidity issues; risk mitigation; exit prospects and ease of exit, lender requirements; and, in certain cases, sector-specific regulatory requirements, such as local content restrictions.

2.3 How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)?

The equity capital structure for equity contributed by PE investors typically consists of a combination of one or more of ordinary share capital, shareholder loans (which may be convertible), and preference shares. 

Management equity is usually structured as ordinary shares, usually subsidised in the form of sweat equity or management incentive scheme, although there are cases in which management will inject capital. 

Carried interest is typically dealt with as part of the fund formation and structuring and does not typically form part of the equity structuring at the portfolio company level. Management incentives tied to performance or returns for the PE investor at exit are, however, common.

2.4 If a private equity investor is taking a minority position, are there different structuring considerations?

The structuring considerations are the same as those outlined in question 2.2 above. The measures put in place to achieve control will, however, differ, as transaction documentation and constitutional documents, will typically be required to entrench standard minority protections, including prescriptions as to voting and quorum arrangements, information and access rights, membership and nomination rights in boards and committees of the target company, board members' and shareholders' rights (including those that translate into veto rights) in certain key decisions.

Such restrictions may also have an impact on transaction approvals, as minority protections that are deemed to confer an ability to materially influence the policy of the target will trigger control thresholds pursuant to the Nigerian antitrust commission, Federal Competition and Consumer Protection Commission (“FCCPC”) regulations and bring such transaction under its purview. 

2.5 In relation to management equity, what is the typical range of equity allocated to the management, and what are the typical vesting and compulsory acquisition provisions?

The range of equity allocated to management is between 5–10%; however, this usually varies from transaction to transaction and is generally lower in larger transactions. Provisions in the transaction documents may provide for compulsory acquisition triggers tied to whether a management officer holding equity is a good leaver or a bad leaver. Also, vesting triggers typically include achievement of key performance indicators, successful exits, or length of service.

2.6 For what reasons is a management equity holder usually treated as a good leaver or a bad leaver in your jurisdiction?

In Nigeria, a management equity holder is regarded as a good leaver where his/her employment is terminated by reason of retirement, death or disability, and regarded as a bad leaver where the employment is terminated on the grounds of breaches such as fraud, specified grounds of misconduct, other criminal or civil offences.

3. Governance Matters

3.1 What are the typical governance arrangements for private equity portfolio companies? Are such arrangements required to be made publicly available in your jurisdiction?

These arrangements are usually set out in the shareholder agreement or other investment agreement. Typical governance provisions include board and committee nomination and composition, appointment and removal of management team, quorum for board and shareholder meeting, information and access rights, veto rights and reserved matters, and shareholding control rights, amongst others.

There is no requirement for the governance arrangements set out in transaction documents to be made publicly available. Whilst disclosure of such documents to the regulator may be required in connection with obtaining regulatory approvals or notifications, (including antitrust and sector-regulatory approvals), other than the summary of the transactions, which might be published by such regulator, confidential transaction details including any governance arrangement will typically not be published.

However, the constitutional documents (memorandum and articles of association) of the portfolio companies are public documents. Critical governance arrangements/provisions (board composition, quorum, notice period, etc.) that are typically included in the articles of association are thus matters of public record.

3.2 Do private equity investors and/or their director nominees typically enjoy veto rights over major corporate actions (such as acquisitions and disposals, business plans, related party transactions, etc.)? If a private equity investor takes a minority position, what veto rights would they typically enjoy?

PE investors and nominee directors are usually conferred with veto rights as part of the governance arrangement for decisions on acquisitions and material disposals, mergers, capital raise (debt or equity), business plans, related party transactions, appointment and removal of auditors, incentive arrangement for the management team, amongst others. 

The above are the typical veto rights taken by PE investors with a majority and minority shareholding interest of at least 15% and above for private or unlisted public companies. For shareholding interest below 15% in private companies (which is unusual for PE transactions), there are rarely veto rights available to the PE investor.

3.3 Are there any limitations on the effectiveness of veto arrangements: (i) at the shareholder level; and (ii) at the director nominee level? If so, how are these typically addressed?

The contractual agreement of parties (including veto rights) will generally be respected. This is, however, subject to statutory restrictions. Any veto arrangements that prescribe a lower threshold than that prescribed by CAMA and the constitutional documents of portfolio companies cannot be enforced. Similarly, the CAMA prescribes minority shareholder rights that may be invoked notwithstanding existing veto arrangements. Section 343 of CAMA specifically sets out acts in respect of which a minority shareholder may bring an act to restrain an action by a controlling shareholder from abusing its dominant position. These include: entering into any transaction that is illegal or ultra vires; purporting to do by ordinary resolution any act that by its articles of association or CAMA requires to be done by special resolution; any act or omission affecting the applicant's individual rights as a shareholder; committing fraud on either the company or the minority shareholders; where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or to minority shareholders; where the directors are likely to derive a profit or benefit or have profited or benefitted from their negligence or from their breach of duty; and any other act or omission, where the interest of justice so demands.

In addition to the foregoing, Section 353 and Section 354 of CAMA also allow a minority shareholder to bring a petition to the court on the grounds that: the affairs of the company are being conducted in a manner that is oppressive, unfairly prejudicial to, or unfairly discriminatory against a member or members, or in a manner that is in disregard of the interests of a member or members as a whole; or that an act or omission was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory to a shareholder or shareholders.

Also, at the director nominee level, every director stands in a fiduciary relationship towards the company and is expected to observe utmost good faith towards the company in any transaction with it or on its behalf and act in the best interest of the company. This is so even when such a director is acting as the agent of a particular shareholder; specifically, a director is not to fetter his/her discretion to vote in a particular way. The statutory duties and fiduciary relationship imposed on directors are not relieved by any provisions in the articles of association or any contract.

In addition to the foregoing, Nigerian law does not recognise weighted or non-voting shares.

Parties can protect the enforceability of veto arrangements by ensuring that critical veto arrangements are: included in the articles of association (to the extent permissible in CAMA); equally considered at shareholders' level (to avoid fettering directors' discretion); and in line with applicable law.

3.4 Are there any duties owed by a private equity investor to minority shareholders such as management shareholders (or vice versa)? If so, how are these typically addressed?

PE investors may owe contractual duties and obligations to minority shareholders such as management shareholders arising from and as agreed in relevant investment agreements. Statutorily, a PE investor owes no direct statutory duties or obligation to any other shareholder; however, CAMA, other applicable laws, and constitutional documents of portfolio companies confer individual rights on every shareholder (e.g., right to notice, dividends, voting rights, etc.) and provide mandatory rules for management and operation of companies. Non-compliance with these by a company (through a controlling/majority shareholder) will provide any shareholder with a cause of action. Please refer to question 3.3 above

In addition, relevant corporate governance codes require the protection of rights of all shareholders including minority shareholders' rights.

3.5 Are there any limitations or restrictions on the contents or enforceability of shareholder agreements (including (i) governing law and jurisdiction, and (ii) non-compete and non-solicit provisions)?

Generally, Nigerian courts will recognise and enforce the provisions of shareholder agreements based on the principle of contractual autonomy of parties. However, there are instances where the enforceability of the provisions of a shareholder agreement will be subject to mandatory provisions of applicable Nigerian law, such as highlighted under question 3.3. In this regard, only damages for breach of agreement may be the most successful outcome of an enforcement action.

With regard to governing law, Nigerian courts will generally enforce parties' choice of law. However, where the choice of law is a foreign law, the courts have held that such foreign law must not be unreasonable, absurd, or capricious and must have some relationship to and be connected with the realities of the agreement. Choice of foreign law will not be applied in domestic subject matters such as tax, environment, antitrust, management and operation of corporations, etc. Similarly, based on precedents, courts will generally respect parties' choice of jurisdiction, save for where it is considered an attempt to oust the jurisdiction of the Nigerian courts over a matter or there are strong reasons to suggest that justice would not be done (considering such factors as the jurisdiction where evidence is available, parties' choice of law, the connection of the court to the parties, contractual limitation period, procedural advantage by either party, enforcement of judgment, etc.).

Non-compete and non-solicitation provisions are equally enforceable subject to terms imposed by appropriate competition and consumer protection laws in respect of non-compete provisions. For instance, the Federal Competition and Consumer Protection Act, 2018 (“FCCPA”) limits non-compete provisions to a period of two years, and prohibits any provision that would operate to prevent, restrict or distort competition.

3.6 Are there any legal restrictions or other requirements that a private equity investor should be aware of in appointing its nominees to boards of portfolio companies? What are the key potential risks and liabilities for (i) directors nominated by private equity investors to portfolio company boards, and (ii) private equity investors that nominate directors to boards of portfolio companies?

The CAMA and corporate governance codes have specific qualifications and requirements to be satisfied prior to appointing any nominee/person to the board of a Nigerian company. These range from mental ability, absence of fraudulent acts, to bankruptcy status. In addition, certain sectors, such as financial services, require minimum qualifications and regulatory approval for persons nominated as directors. There are also restrictions on multiple directorship positions and dual role, e.g., licensed financial institutions are most times required to separate the role of a chief executive officer and chairman on the board. This is also a general restriction in most codes of corporate governance. 

As highlighted in question 3.3, directors have statutory (fiduciary) duties to the company. A breach of any of the statutory duties can result in personal liabilities for such a director. In addition, certain regulations, like the CBN Administrative Sanctions Regime applicable to banks and OFIs, impose specific liability (both civil and criminal) on directors of the company for specific breaches. 

For PE investors, liabilities of its nominated director will not be imputed to it. However, by agreement, the shareholders may agree for a nominating shareholder to be liable for loss incurred by its nominee director.

3.7 How do directors nominated by private equity investors deal with actual and potential conflicts of interest arising from (i) their relationship with the party nominating them, and (ii) positions as directors of other portfolio companies?

A director's statutory duties and fiduciary relationship with the company trumps his/her obligation to a nominating shareholder and directors must always act in the best interest of the company. 

Where a director occupies more than one directorship position, he/she must not derogate from his/her statutory duties and fiduciary relationship with each company. Such director is not to use the property, opportunity or any information derived during his/her management of one company for the benefit of the other company. In anticipation of conflict of interest from multiple directorships, the Nigerian Code of Corporate Governance and sector-specific codes generally discourage multiple directorships and require disclosure where they exist. 

Typically, where either actual or potential conflict of interest arises, the affected director is expected to disclose and, where applicable, recuse himself from voting on such transaction.

4. Transaction Terms: General

4.1 What are the major issues impacting the timetable for transactions in your jurisdiction, including antitrust, foreign direct investment and other regulatory approval requirements, disclosure obligations and financing issues?

The major issue that typically impacts transaction timelines relates to regulatory approvals and/or wait periods. For instance: merger control approvals from the FCCPC may take between four and 18 weeks depending on the classification of merger/scope of filing, barring any bureaucratic delays; approvals from the Securities and Exchange Commission (“SEC”) may take between six and eight weeks; approvals from the CBN may take between 12–16 weeks; approvals from the Nigerian Exchange Group (“NGX”) may take between one and two weeks; approvals from the National Insurance Commission may take between 10–12 weeks; and approvals from the Nigerian Communications Commission may take between four and six weeks. Often, these approvals are also contingent on having obtained a prior approval or require notice or wait periods, thus further lengthening time periods. Other factors that typically cause transaction delays include delays with raising transaction financing or conducting due diligence. Transactions can be completed fairly quickly where they are not complex, involve parties and professional advisers with sector expertise, network and compliant/organised targets (with up-to-date and available records), and require few or no regulatory approvals.

4.2 Have there been any discernible trends in transaction terms over recent years?

In recent times, particularly post-COVID-19, there is a trend towards a risk-based approach to due diligence. PE investors are also increasingly taking a minority stake in the first instance, with terms allowing them to increase their stake as events pan out. Transactions are being increasingly structured as a mix of equity and debt or quasi-equity as PE investors attempt to de-risk these transactions in response to foreign currency volatility, global macro-economic and other challenges. In addition, with the COVID-19 pandemic bringing to fore the impact that certain unforeseen contingencies can have on investee companies and their underlying businesses, there has been increased attention paid to Material Adverse Change/Effect (“MAC”/“MAE”) clauses, liquidation preferences and the extent of the potential impact on and protection for the governance and financials of investee companies and the investment at large. Deferred consideration structures are also being more creatively packaged in the form of earnouts, etc., rather than the traditional escrow structures.

5. Transaction Terms: Public Acquisitions

5.1 What particular features and/or challenges apply to private equity investors involved in public-to-private transactions (and their financing) and how are these commonly dealt with?

Challenges prevalent in public-to-private acquisitions include:

1. regulatory consents and authorisations required for such transactions, including the cost and the timing for obtaining same;
2. the cost of the transactions as well as the funding structure (for example a public-to-private transaction is usually more costly where a leveraged buy-out structure is used);
3. shareholders' voting/approval (i.e., minority shareholders engagement/management); and
4. employee and employee associations interests.

Deal timing, due diligence, transaction structure/documentation, and consideration (all-cash offer, part-cash/part-equity, escrow, etc.) are other hurdles to surpass. To navigate these issues effectively, parties tend to engage the respective regulators at the beginning of the transaction to discuss structure and transaction exigencies. Furthermore, parties sometimes adopt transaction structures that assure transaction certainty, such as a scheme of arrangement. The quality of advisers engaged by the parties and the pricing of the deal also assist in mitigating completion risks. Finally, public to private transactions generally entail extensive stakeholder engagement across the diverse interests particularly minority shareholders and employees.

5.2 What deal protections are available to private equity investors in your jurisdiction in relation to public acquisitions?

Generally, aside from the specific issues that may be uncovered upon carrying out detailed due diligence, PE investors typically protect themselves by adopting deal structures that isolate investee liabilities. A number of the protections are negotiated directly with the selling shareholder(s) and include representations and warranties, indemnities, the use of escrow structures, the use of custodian arrangements, deferred consideration, insurance, participation rights, information rights, break fees, exclusivity, etc.

6. Transaction Terms: Private Acquisitions

6.1 What consideration structures are typically preferred by private equity investors (i) on the sell-side, and (ii) on the buy-side, in your jurisdiction?

Cash structures have been traditionally preferred by both buy and sell sides, with the locked box structure being the most commonly adopted structure. There is, however, a recent push for a completion accounts consideration structure by buyers, which may not be unrelated to the trend towards red flag due diligence. Share swaps representing a portion of the consideration are also not uncommon, particularly where the expertise rests on or the brand is associated with the seller. Earnout arrangements are also being increasingly proposed and adopted in primary acquisitions (i.e., from founder/managers).

6.2 What is the typical package of warranties / indemnities offered by (i) a private equity seller, and (ii) the management team to a buyer?

PE sellers will typically push back on anything but fundamental warranties – title, capacity, authority and pre-closing tax liabilities – and may insist that founders/managers provide any business warranties required. This is, however, subject to negotiation, and it is not unusual for a buyer to push back and to elicit business warranties from PE sellers, particularly where they have a controlling stake. Management who are “founder/managers” are typically required to and do provide both fundamental and business warranties. It is, however, unusual for the management team in its capacity as management simpliciter to offer warranties.

6.3 What is the typical scope of other covenants, undertakings and indemnities provided by a private equity seller and its management team to a buyer?

This is subject to negotiation but would usually be expected to include interim period undertakings as to actions between signing and completion, undertakings as to “no-leakages” (for locked box transactions), undertakings to cooperate in relation to regulatory filings, and in certain circumstances, information undertakings. Generally, PE sellers will resist any covenants or undertakings creating restrictions on their capacity to freely invest in competing businesses, whilst founder/managers would typically expect to be required to give such covenants. 

Seller indemnities are commonplace, although PE sellers will typically push for the buyer to price most of the risk in, and thus seek to limit the scope of those indemnities. Please refer to question 6.5.

6.4 To what extent is representation & warranty insurance used in your jurisdiction? If so, what are the typical (i) excesses / policy limits, and (ii) carve-outs / exclusions from such insurance policies, and what is the typical cost of such insurance?

Taking out representations and warranties insurance is not common in Nigeria, although it has been utilised in some deals by offshore PE investors and is increasingly being considered a risk mitigant, particularly for larger transactions. The cost is, however, quite high, and the time implications (from a due diligence perspective) can also be discouraging. Standard exclusions include known risks identified during the due diligence, fraud or misrepresentation, tax liabilities, consequential losses, environmental matters, AML/CFT compliance, amongst others. Other than fraud-related exclusions, parties are typically able to negotiate to price in excluded risks. Policy limits, typically, are in line with what has been agreed in the SPA.

6.5 What limitations will typically apply to the liability of a private equity seller and management team under warranties, covenants, indemnities and undertakings?

Exiting PE investors and management typically seek to contract out of statutory time limitations by inserting limited periods by which claims can be made (usually between six and 24 months, for non-tax warranties). Other limitations include floors/materiality threshold and de minimis claim levels (individual and aggregate), caps on financial exposure, knowledge and materiality qualifiers, disclosures and liabilities being on a several (pro rata) basis.

6.6 Do (i) private equity sellers provide security (e.g., escrow accounts) for any warranties / liabilities, and (ii) private equity buyers insist on any security for warranties / liabilities (including any obtained from the management team)?

PE buyers will usually insist on security where the seller is not considered creditworthy or claims might otherwise be difficult to redeem (for example, an individual, trust or SPV entity, or entity domiciled in an “unfriendly” jurisdiction). PE sellers and management will usually push back on providing security; subject to the considerations stated above; however, security that might be provided includes retention amounts in escrow, security over founder/manager shares (where their exit is not total), and (in rare cases) personal guarantees. Some institutional buyers such as infrastructure and other funds are also tending towards requesting bank guarantees to secure investments in infrastructure-based portfolio companies.

6.7 How do private equity buyers typically provide comfort as to the availability of (i) debt finance, and (ii) equity finance? What rights of enforcement do sellers typically obtain in the absence of compliance by the buyer (e.g., equity underwrite of debt funding, right to specific performance of obligations under an equity commitment letter, damages, etc.)?

Comfort in relation to availability of debt and equity funding may be provided by way of (i) escrow of committed funds (this was traditionally the primary form of security but is becoming less common), (ii) evidence of “certain funds” in the form of signed debt term sheets, (iii) equity commitment letter from the sponsor/parent (particularly where an SPV is utilised by the buyer), (iv) comfort letters in respect of debt financing from reputable third-party lenders, and, in fewer cases (v) letters of credit. Ultimately though, reliance is usually given to the reputation and financial standing of the buyer, and such evidence may not be required where the buyer is reputable and of good standing, in which case the seller may choose to rely on appropriate financial capacity warranties in the SPA. 

Seller remedies will typically lie in damages and, where negotiated, reverse break fees.

6.8 Are reverse break fees prevalent in private equity transactions to limit private equity buyers' exposure? If so, what terms are typical?

Reverse break fees are not historically prevalent in the Nigerian market but are becoming more common as buyers shy away from traditional protections such as escrow, and where sellers have committed time and resources to the deal.

7. Transaction Terms: IPOs

7.1 What particular features and/or challenges should a private equity seller be aware of in considering an IPO exit?

A PE seller should be aware of exit timing, regulatory requirements, the cost of effecting the initial public offering (“IPO”), the valuation of shares following changes in share capital and the underwriting of shares not taken up. Furthermore, political risks, the macroeconomic conditions in the country, including the weakening of the Naira and shortage of foreign currency, and impacts of the pandemic on businesses may also pose challenges to a PE seller considering an IPO exit.

7.2 What customary lock-ups would be imposed on private equity sellers on an IPO exit?

Pursuant to the provisions of the NGX Rulebook, promoters and directors of companies intending to undertake an IPO and list on any board of the exchange must hold a minimum of 50% of their shares in the company for a minimum period of 12 months from the date of listing and will not directly or indirectly sell or offer to sell such securities during the said period. Accordingly, PE sellers on an IPO exit will be required to comply with this provision of the NGX Rulebook, unless the requirement is waived by the NGX. Furthermore, agreements regarding the lock-up period and other management/transitional matters are usually entered into between the PE sellers and the listed company. PE sellers usually seek to avoid or minimise this requirement.

7.3 Do private equity sellers generally pursue a dual-track exit process? If so, (i) how late in the process are private equity sellers continuing to run the dual-track, and (ii) were more dual-track deals ultimately realised through a sale or IPO?

The most common exit process in Nigeria is secondary sales to trade buyers. However, it is not uncommon for PE sellers to pursue dual-track exit process. A PE seller may continue to run a dual-track deal until it binds itself to a particular exit process (i.e., either a sale or an IPO). For instance, the terms of acceptance of a binding offer in respect of a sale transaction may preclude the PE seller from exploring other exit options. Given the drought of IPOs in the Nigerian market in recent years, it can be garnered that PE sellers who considered/pursued dual-track routes ultimately exit through sales.

7.4 Do private equity sellers seek potential mergers with SPAC entities as an alternative to an IPO exit? What are the potential market and legal challenges when considering a “de-SPAC” transaction?

Although the use of special purpose acquisition companies (“SPAC”) entities as an alternative to an IPO exit has been on an increasing rate in the global scene, it is not generally the marketplace for PE sellers as a form of exit in Nigeria given the lack of regulatory framework for same. The SEC and the NGX, in an attempt to provide the requisite regulatory framework, recently published exposure drafts of proposed rules on SPACs. Furthermore, the lack of specific regulatory framework constitutes a major challenge when considering a “de-SPAC” transaction in Nigeria. In the interim, we expect that any “de-SPAC” transaction that is contemplated prior to the issuance of specific regulations will be implemented in accordance with the existing legal framework for mergers applicable in Nigeria.

8. Financing

8.1 Please outline the most common sources of debt finance used to fund private equity transactions in your jurisdiction and provide an overview of the current state of the finance market in your jurisdiction for such debt (particularly the market for high-yield bonds).

Debt finance for PE transactions has traditionally been by way of external debt/leverage provided by syndicate banks, institutional financiers and a range of alternate credit providers. Credit support instruments and mezzanine financing are also common sources of debt finance. Less common, but still applicable sources for PE investors include commercial papers, loan notes, bonds and investment in relatively high-yield instruments including treasury bills.

8.2 Are there any relevant legal requirements or restrictions impacting the nature or structure of the debt financing (or any particular type of debt financing) of private equity transactions?

Nigerian law guarantees the ability to repatriate principal and/or interest on foreign loans outside Nigeria utilising the official FX market, subject to having obtained an electronic certificate of capital importation from a CBN-authorised dealer when the original equity investment or loan capital is inflowed into Nigeria. This has given investors the ability to structure their capital inflow in accordance with their objectives/risk appetite. Nigeria also does not have specific thin capitalisation rules, although the Finance Act 2019 introduced interest deductibility restrictions, restricting interest deductibility to 30% of EBITDA. Excess interest can also only be carried forward for five years, and we expect that this will have an impact on equity/debt mixes.

In addition, CAMA expanded the scope of exceptions to the rule against financial assistance by Nigerian companies, thus granting parties greater flexibility in capital structuring.

8.3 What recent trends have there been in the debt-financing market in your jurisdiction?

The market has seen an increase in debt financing in the oil and gas and telecoms sectors, with the international oil company (“IOC”) divestments and expansion of telecoms infrastructure. There have also been a number of restructurings as borrowers struggle to repay in the wake of the COVID-19 pandemic. Borrowers searching for cheaper debt have also led to a number of refinancings. Documentation wise, a number of banks are resorting to short form documentation to reduce legal costs.

The issuance of commercial papers is also replacing equity and primary market debt issuance with over NGN150 billion in CPs listed on the FMDQ Exchange in Q1 of this year.

9. Tax Matters

9.1 What are the key tax considerations for private equity investors and transactions in your jurisdiction? Are off-shore structures common?

The overriding tax focus for PE investors is the need to mitigate tax leakage, and to the extent possible, ensure that structures are flow-through in nature. More specific considerations include:

1. Available tax incentives. Some of the tax reliefs available in Nigeria include double taxation relief – investors in countries with which Nigeria has a double taxation treaty enjoy tax reliefs of up to 2.5%, and exemption of capital gains tax (“CGT”) from business reorganisations or transfers of assets within a group in the course of reorganisations, subject to a one-year minimum holding requirement.
2. Taxes payable in connection with the investment, including taxes/charges payable in relation to the capital invested, taxes payable on the income or capital gains received on the investment or goods or services supplied in respect thereof, such as withholding tax on income, CGT, and value-added tax.
3. Applicable corporate income taxes.
4. Taxes payable for perfection of security/transaction documents such as stamp duties, and registration fees.
5. Transfer-pricing-related risks. Where there are transfer pricing-related risks, the relevant tax authorities may flag the transaction and subject it to tax adjustments, which may increase the tax exposure of the investors in the transaction.

Offshore structures are common to minimise tax exposures and benefit from double taxation reliefs.

9.2 What are the key tax-efficient arrangements that are typically considered by management teams in private equity acquisitions (such as growth shares, incentive shares, deferred / vesting arrangements)?

Management teams will usually be exposed to tax on two fronts – personal income tax at a proportional graduating scale, with rates ranging from 7–24% payable in respect of income received from the investment; and transfer taxes/CGT at 10% in relation to management's participation in equity growth through partial exits. 

There is no tax exposure to management at the point of acquisition of its equity whether upfront or by way of deferred/vesting arrangements, nor are there any special waivers or incentives in relation to management disposals. Management may be able to obtain some tax relief by structuring returns on equity interests as service-linked gratuity payouts, although this is not common. The Finance Act 2020 also exempts compensation for loss of office up to NGN10 million from capital gains tax.

9.3 What are the key tax considerations for management teams that are selling and/or rolling over part of their investment into a new acquisition structure?

The primary consideration would be to avoid triggering transfer taxes in relation to the transfer, particularly for roll-overs, given that no gains will actually come into their hands at this point. For business reorganisations involving disposal or transfer of shares in a Nigerian company, 10% CGT applies except where the share disposal proceeds are: (i) reinvested within the same year of assessment, in the acquisition of shares in the same or other Nigerian company; or (ii) the share disposal proceeds, in aggregate, are less than NGN100 million in any 12 consecutive months, provided that the person making the disposal shall render appropriate returns to the Federal Inland Revenue Service (“FIRS”) on an annual basis. Partial reinvestment will attract CGT proportionately. Re-investment offshore (as is often the case with management roll-overs) will not, however, attract this concession (except any of the other exemptions applies). (It may nonetheless be possible to engage the FIRS in the case of roll-overs, with a view to clarify that the same is simply an exchange of shares and therefore any transfer of shares ought to be exempted from CGT). This is a relatively new development and it is interesting to see how the market will respond.

9.4 Have there been any significant changes in tax legislation or the practices of tax authorities (including in relation to tax rulings or clearances) impacting private equity investors, management teams or private equity transactions and are any anticipated?

The Finance Act of 2021 took effect on January 1, 2022. Below are the relevant changes that pertain to PE transactions in Nigeria:

• CGT at 10% is chargeable on the disposal of shares worth NGN100 million or above in any 12 consecutive months, except where such proceeds are reinvested in the shares of any Nigerian company.
• FIRS may assess tax on the turnover of a foreign digital company involved in transmitting, emitting, or receiving signals, sounds, messages, images, or data of any kind, including e-commerce, app stores, and online adverts. Such companies are also obliged to charge, collect, and remit VAT to FIRS.
• FIRS may assess Non-Resident Companies (“NRCs”) with a digital significant Economic Presence (“SEP”) in Nigeria to tax on a fair and reasonable percentage of their turnover attributable to the SEP, in the instance where there is no assessable profit, or the assessable profit is less than what is to be expected from that type of business or cannot be ascertained. Based on the current rules, NRCs with a SEP on digital services are to file their tax returns on the normal/actual profit basis, that is, in line with the applicable statutory provisions on submission of corporate income tax returns.
• A restriction has now been placed on the claim of capital allowances on a Qualifying Capital Expenditure (“QCE”) to the extent that such asset is employed in generating taxable profits. Also, for small and medium-sized companies, any unabsorbed capital allowances at the end of a tax year are to be deemed fully absorbed in such year. Based on this amendment, capital allowances claimable on QCE utilised for generating taxable and non-taxable income shall be prorated such that only the portion relating to taxable income should be allowable as tax relief. However, full relief should be granted where the proportion of non-taxable income does not exceed 20% of the company's total income.
• Extension of the coverage of the reduced minimum tax rate of 0.25% by one year, to include the financial year 2021. As such, a company can elect to apply the reduced minimum tax rate to any two consecutive years between January 1, 2019 to December 31, 2021.
• Companies in the upstream sector are mandated to comply with VAT, regardless of the turnover amount, as the exemption provided in Section 15(2) of the VAT Act is no longer applicable to them.
• Companies engaged in educational activities are now subject to corporate income tax, regardless of whether such activities are of a public character.
• A science and engineering levy of 0.25% of profit before tax is payable by companies engaged in banking, mobile telecommunication, ICT, aviation, maritime, and oil and gas with a turnover of NGN100 million and above.

10. Legal and Regulatory Matters

10.1 Have there been any significant legal and/or regulatory developments over recent years impacting private equity investors or transactions and are any anticipated?

Yes. The last few years have seen a plethora of regulatory interventions, particularly in the financial services sector and in competition and merger control. Some of such developments include:

• Amendments to regulatory capital for microfinance banks and insurance companies, which spawned a number of M&A in the sector in 2020 and 2021.
• The release of the Merger Review (Amended) Regulations, 2021 by the FCCPC hot on the heels of the Merger Review Regulations and Merger Review Guidelines released in 2020.
• Regulatory focus on contracts or relationships in restraint of trade and market dominance abuse, through the issuance of the Restrictive Agreements and Trade Practices Regulations, 2021 and the Abuse of Dominance Regulations, 2022, by the FCCPC.
• Expansion of investment options for PFA “dry powder” through the release of the National Pension Commission's Operational Framework for Co-Investment by Pension Fund Administrators, 2022 (historically, one of the asset classes with the lowest allocation by PFAs has been PE).

Tax reforms via the Finance Acts of 2019–2021 have also impacted PE investment, particularly exemptions to the excess dividend tax rule. (Please also refer to the response to question 9.4.)

10.2 Are private equity investors or particular transactions subject to enhanced regulatory scrutiny in your jurisdiction (e.g., on national security grounds)?

100% foreign ownership of Nigerian businesses is permitted under Nigerian law, except in certain sectors where local content, such as in shareholding or makeup of workforce, is mandated by law. Some of these sectors include shipping, aviation, oil and gas, private security, broadcasting, and advertising, amongst others. Also, investing in the production of certain goods (e.g., arms and ammunitions, narcotic drugs, military or paramilitary wear, etc.) is strictly prohibited by law for Nigerians or foreigners.

10.3 How detailed is the legal due diligence (including compliance) conducted by private equity investors prior to any acquisitions (e.g., typical timeframes, materiality, scope, etc.)?

This is relative to several factors, such as the scope of the transaction, nature and size of target, parties' objectives, and timelines of the transaction, amongst others. Key areas typically covered include the corporate structure, regulatory compliance, material contracts, debt and security, employment issues, intellectual property and other assets, insurance, tax and litigation profile. The market has seen an increasing shift to high-level red flag due diligence, although, in our experience, the more complex/larger transactions still adopt the granular approach.

The timeframe for legal due diligence may take between two and six weeks, depending on the scope of the due diligence and the availability of records, and accessibility to external regulatory and third-party records or confirmations.

10.4 Has anti-bribery or anti-corruption legislation impacted private equity investment and/or investors' approach to private equity transactions (e.g., diligence, contractual protection, etc.)?

Yes. Legislation impacting PE investment includes the CAMA, the Money Laundering (Prevention and Prohibition) Act 2022, the Terrorism (Prevention and Prohibition) Act 2022 and the CBN's Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria Regulations (AML/CFT Regime). Contractual provisions on AML/CFT compliance have become more robust and typically extend to compliance with international requirements, such as the UK Bribery Act and the American Foreign Corrupt Practices Act.

Compliance/KYC/Integrity due diligence is also a more common phenomenon in PE transactions.

10.5 Are there any circumstances in which: (i) a private equity investor may be held liable for the liabilities of the underlying portfolio companies (including due to breach of applicable laws by the portfolio companies); and (ii) one portfolio company may be held liable for the liabilities of another portfolio company?

Generally, a shareholder in a limited liability company only bears liability to the extent of shares in his/her interest paid or yet to be paid. Nigerian law generally respects the concept of separate corporate legal personality, and it is only under limited circumstances that the courts would lift a corporate veil so that a director or a company may be considered liable for the acts of another company. Circumstances where executive management, designated officers of the company or the board of directors may be held responsible and sanctioned, include offences under the CBN Administrative Sanctions regime, which stipulates penalties for senior management and in some cases, members of the board, in addition to the company. Also, in the case of unlimited companies, the liability of the members for the debt of the company is unlimited.

11. Other Useful Facts

11.1 What other factors commonly give rise to concerns for private equity investors in your jurisdiction or should such investors otherwise be aware of in considering an investment in your jurisdiction?

One of the major obstacles for PE investment in Nigeria is the infrastructure deficit, which impacts the operations, profitability and ability to scale portfolio companies. However, the Infrastructure Corporation of Nigeria (touted as “Nigeria's Infrastructure Game Changer) debuted in February 2022. Infracorp was established with a start-up funding of NGN1 trillion for the construction of critical infrastructure projects to help accelerate growth in the country by originating, structuring, executing and managing end-to-end bankable projects. Its funding is expected to grow to NGN15 trillion; and assets will be managed by four independent asset managers with an impressive record in infrastructure development. Infracorp is promoted by the CBN, Africa Finance Corporation and the Nigeria Sovereign Investment Authority.

In addition to providing co-investment opportunities to PE investors, it is expected that the activities of Infracorp will have a positive effect on the market and ultimately the economy.

Nigeria also ratified the African Continental Free Trade Area Agreement (“AfCFTA”) with effect from January 1, 2021; whilst gains have been slow to yield, it is expected that once properly implemented, the same will address the restrictions that have made it difficult to scale regionally.

Acknowledgments

The authors would like to thank Azeezah Muse-Sadiq (Partner, Capital Markets, Competition and Tax law practice), Akorede Folarin (Private Equity; who provided invaluable support in research), Emmanuel Onyeabor (Tax), Adetayo Talabi (Litigation and ADR), Tinuade Oyewole (Corporate Commercial), Chiedozie Ndubuisi (Capital Markets), and Oluwatoba Oguntuase and Jesutooni Ajiboye (Practice Support), for their contributions to this chapter.

Originally published by The International Comparative Legal Guide

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.