Yinka Edu and Ozofu 'Latunde Ogiemudia of Udo Udoma & Belo-Osagie assess the regulatory landscape for mergers and acquisitions in Nigeria
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Investment and Securities Act (ISA) and the Rules and Regulations issued by the Securities and Exchange Commission (SEC Rules) govern M&A in Nigeria. The Securities and Exchange Commission (SEC) is responsible for reviewing and approving M&As. Where the target is listed on the Nigerian Stock Exchange (NSE), the listing rules may be relevant.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The ISA and the SEC Rules regulate takeovers and they are enforced by the SEC. Section 131 of the ISA sets out the conditions that will trigger a requirement to make a mandatory takeover offer (MTO) and where such conditions occur, the SEC will usually give the acquiring party three months to make the MTO and can impose administrative sanctions for non-compliance.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Friendly acquisitions are achieved by means of a negotiated buy-out, a scheme of arrangement (scheme), a merger or a takeover bid (which may be voluntary or mandatory).
Nigerian law does not provide a framework for hostile acquisitions.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
The structure for an acquisition will usually depend on the shareholding of the target company, and the disposition of the shareholders of the target.
Where the shares are closely held, the acquisition could be easily and quickly achieved through a negotiated buy-out between the acquirer and the controlling shareholders. Where the shares are more widely held, the acquisition could be by means of a scheme or a takeover bid. Under the terms of a scheme, shareholders representing not less than 75% of those present and voting must approve a resolution for the acquisition of their shares by the acquirer at a specified price. If approved, all the shareholders are bound, whether they voted for or against the scheme. By contrast, under the takeover bid, each shareholder chooses whether or not to tender its shares to the acquirer. While institutional investors tend to take an active view of their investments and will consider and respond to a takeover bid, this is not perceived as being true of retail investors.
Where an acquirer is able to acquire more than 30% of the issued share capital of a public company by a negotiated sale or a scheme, this will trigger an obligation to make an MTO to the remaining shareholders of the company.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
This will depend on the means by which the acquisition is to be carried out, and whether any approvals are required. From the point at which a bidder is chosen the acquisition could take from one to three months. Where the acquisition is for a majority interest in the target company, the SEC is responsible for carrying out a merger control review to ensure that the transaction will not have an impact on competition in the relevant industry. The NSE must be notified and its consent obtained if the transaction involves a bulk trade of listed shares. These approvals can impact the timing for completion of the transaction.
The question of how long the deal is open to competing bids depends on the structure of the acquisition. A takeover bid is required to remain open for at least 21 days and could remain open for up to 35 days.
An acquisition by way of a scheme or a merger can usually be completed within three months.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
With the exception of a takeover bid (in relation to the price offered to shareholders), there are generally no restrictions on the price or the form of the consideration and this is usually determined by the valuation of the target and the negotiations between the sellers and the bidders.
In a scheme, in order to be attractive, the price will usually be a mark up on the price at which the shares of the target are trading on the floor of the NSE.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
In order for an acquirer to be entitled to squeeze out minority shareholders under a takeover bid, 90% of the shares that were the subject of the bid must have been tendered. For the purposes of this threshold, the shares already held by the acquirer are not included. Once a scheme has been approved by the relevant percentage of shareholders, all other shareholders of the target will be bound by the scheme and can be squeezed out.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Yes. The takeover rules require that shareholders of the same class be treated equally by a buyer; they should be given the same information and offered the same price for their shares. If the acquirer purchases shares of the target in the market at a price that is higher than the price offered under the takeover offer, the bid price will be deemed to have been amended accordingly.
The takeover bid document must disclose the number of shares which the offeror and its affiliates already hold in the target. Any existing agreement or arrangement between the offeror and any of the directors of the target which is connected to, or dependent on the takeover offer must be disclosed.
In relation to schemes, the new NSE Rules prohibit a party that is interested in a transaction from voting on any decision in relation to that transaction.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
The ISA requires an offeror to make adequate arrangements to ensure that the funds required to pay for any shares that are tendered under a takeover offer are available. The SEC would, therefore, expect to see clear evidence that the relevant funds are available in the form of bank statements or audited financials of the acquirer or a bank guarantee issued by a reputable bank.
It is possible to make an offer subject to certain conditions, for instance, the offer can be made conditional on the acquirer receiving a specified minimum level of acceptances.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
The consent of the Board of the Federal Inland Revenue Service must be obtained for every merger and asset transfer in Nigeria.
There is no capital gains tax on the transfer of shares and this makes an acquisition by means of a transfer of shares more tax efficient than the transfer of the target's assets.
3.2 Are there special considerations in cross-border deals?
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
There is no provision in the ISA or SEC Rules for anti-takeover defences. However, the most effective ways in which a company could seek to prevent a takeover would be to limit access to information such as information about the target company itself or its shareholders. It is also not clear whether it will be possible to complete a takeover bid if the board of the target company does not issue a directors' circular.
4.2 How do targets use anti-takeover defences?
4.3 Is a target required to provide due diligence information to a potential bidder?
4.4 How do bidders overcome anti-takeover defences?
4.5 Are there many examples of successful hostile acquisitions?
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
It is unusual for a Nigerian target to provide break fees.
In relation to takeover bids, the listing rules of the NSE provide that no offer may be conditional on the payment of compensation for loss of an offer. Where such a payment is proposed, it must be disclosed.
The target could require an acquirer to continue to hold a minimum amount of equity in the target for a specified period. Lock-up arrangements that restrict the ability of the target or certain key shareholders to enter into discussions with future bidders for an agreed period of time are not uncommon.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the anti-trust notification thresholds in your jurisdiction?
The provisions of the ISA and the SEC Rules empower the SEC to determine whether any merger, acquisition or business combination is likely to substantially prevent or lessen competition.
Mergers are divided into three categories: small mergers; intermediate mergers; and, large mergers. Both intermediate and large mergers are subject to prior review and approval by the SEC. A small merger is where the combined assets or turnover of the merging companies is less than N1 billion ($5 million). In relation to intermediate and large mergers, a pre-merger notification is required to be filed at the SEC.
An acquisition for a majority interest in a company is subject to the prior review and approval of the SEC, except where the acquisition is in a private or an unlisted public company with assets or turnover below N500 million.
6.2 When will transactions falling below those thresholds be investigated?
Within six months of a small merger being completed, the SEC may require the parties to notify it of the merger if, in the SEC's opinion: (i) the merger may substantially prevent or lessen competition; or (ii) the merger cannot be justified on public interest grounds.
Following its investigation, the SEC may approve the small merger, prohibit it from being completed, or declare that the merger is prohibited if it has been completed.
6.3 Is an anti-trust notification filing mandatory or voluntary?
The pre-merger notification filing is mandatory for intermediate and large mergers. Parties to a small merger may voluntarily notify the SEC of the merger at any time.
The notification is mandatory for acquisitions involving companies with assets or turnover above N500 million
6.4 What are the deadlines for filing, and what are the penalties for not filing?
The pre-merger notification must be filed before the merger is concluded. For acquisitions involving companies with a turnover of more than N500 million, the SEC must be notified before the acquisition is completed. Failure to comply could attract a penalty of N100,000 and N5,000 for every day of default.
6.5 How long are the anti-trust review periods?
For an intermediate merger, the SEC review must be completed within 20 working days although the SEC may extend this period by 40 working days. The SEC's review period for large mergers is 40 working days.
6.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
The obligation to notify the SEC of, and obtain its approval for, intermediate and large mergers is absolute. This is also the case for acquisitions even if the transaction may not have any local competition effect.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
In certain sectors such as banking and insurance, the prior approval of the relevant regulator is required for transactions involving the acquisition of shares or voting rights that exceed certain thresholds.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
In Nigeria, the principal laws which regulate corruption and similar offences are: the Corrupt Practices and other Related Offences Act (CPA); the Criminal Code Act (CCA); and, the Economic and Financial Crimes Commission Act (EFCC Act) .
7.2 What are the potential sanctions and how stringently have they been enforced?
Any person who is convicted under the CPA for corruptly receiving any property for himself or for another, in relation to his acts or omissions in his official capacity is liable to imprisonment for seven years. The CCA also contains similar provisions and penalties. Similar penalties apply for concealing a crime or frustrating the investigation of any suspected crime of corruption. Sanctions imposed under the EFCC Act include the forfeiture of assets and the freezing of bank accounts.
There has been some degree of criticism by the Nigerian public that these sanctions have not been effectively enforced against public and government officials.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
Please see 8.2.
8.2 What are the key recent M&A developments in your jurisdiction?
The new rules published by the SEC in May 2014 introduced exemptions to the MTO regime, the most notable of which is that there is no requirement to make an MTO where an ailing company undertakes a private placement which results in a strategic investor acquiring more than 30% of the voting rights of the company.
The new NSE Rule which prohibits a party that is interested in a transaction from voting on any decision in relation to that transaction reflects the desire of the NSE to protect minority rights and entrench global best practice in Nigeria.
The NSE recently implemented a five-year exemption from value added tax on stock market transaction fees, which has reduced the cost of transactions for potential acquirers.
First published by our sister publication IFLR magazine. Take your free trial today.
Udo Udoma & Belo-Osagie
About the author
Yinka Edu is a partner in the firm's banking, finance and capital markets and M&A teams. She has been involved in several mergers and acquisitions in Nigeria and advises on cross-border acquisitions both in relation to Nigerian companies wishing to acquire businesses in other African countries, as well as advising foreign institutions seeking to acquire local entities. She has advised on several mergers in the banking industry, including the combined merger and tender offer by Standard Bank of IBTC Chartered Bank. More recently, in 2014, she advised on the acquisition transaction involving a share exchange, by which Lafarge's Nigerian and South African assets were consolidated in a Nigerian listed holding company, Lafarge Africa, and the resulting tender offer to the remaining shareholders of Ashakacem. She also advised the Carlyle Group on its recent acquisition of a significant minority interest in Diamond Bank through a rights issue on the Nigerian Stock Exchange.
Ozofu 'Latunde Ogiemudia
Udo Udoma & Belo-Osagie
About the author
Ozofu 'Latunde Ogiemudia is a partner in the firm's corporate advisory, private equity and M&A teams. She has advised several private equity investors and development finance institutions on their investments in the Nigerian telecommunications, banking, insurance, manufacturing and consumer goods sectors. In 2014, she was part of the team that advised Seven Energy International on its acquisition of the East Horizon gas pipeline from the Oando Group. She jointly led the team that advised Consol Glass Proprietary (a South African glass manufacturing company) on its acquisition of a controlling interest in Glassforce and was part of the team that advised the Carlyle Group on its acquisition of a significant minority interest in Diamond Bank through a rights issue on the Nigerian Stock Exchange.