THE LEGAL ASPECTS OF MERGERS AND ACQUISITION IN NIGERIA

INTRODUCTION

A company may decide to restructure its corporate outlook after its incorporation; this might either be as a result of the company’s financial state or due to depletion in the company’s economic growth.[1] Company restructuring may be internal or external. Internal restructuring options include; share consolidation; increase or reduction of share capital; arrangement and compromise under section 710 of CAMA, 2024 while external restructuring options include; Amalgamation or merger; take over; Acquisition, Arrangement on sale  and Purchase and Assumption[2]. This article focuses on Mergers and Acquisition.

MERGERS

Section 119 of Investment and Securities Act defines ‘merger’ to mean any amalgamation of the undertakings or any part of the undertakings or part of the undertakings of one or more companies and one or more bodies corporate. In simple words, a merger is the coming together of two or more companies to form a single corporate entity.

 ACQUISITION

An acquisition is an arrangement whereby one company acquires the controlling holding of shares in another company. In simple words, an acquisition occurs when one company acquires sufficient shares in another company such that it acquires control of the other company[3].  An acquisition may be initiated either by a take-over bid or by purchasing shares in the market. In most cases, the acquired company is usually a smaller company and becomes a subsidiary of the acquiring company.

OVERVIEW AND IMPORTANCE OF MERGERS AND ACQUISITION IN NIGERIA

Mergers and Acquisitions (M&A) are instrumental to corporate restructuring, enabling businesses to achieve growth, diversify, or gain competitive advantages. In Nigeria, M&A plays a significant role in the corporate landscape, particularly as companies seek to navigate a complex and competitive economy. These transactions, however, are governed by a legal framework designed to ensure transparency, protect stakeholders, and maintain competitive balance in the market.

The direct government intervention in the economy due to recapitalization in sectors like banking, insurance and aviation has led to increase in mergers in the country.

Importance of Mergers and Acquisitions in the Nigerian Economy

1. Increase in scale of production by greater specialization in plant and marketing economy through a reduction in advertising costs and distribution outlets.
2. It enhances corporate growth in the economy.
3. It boosts confidence in the market.
4. It enhances more and efficient reallocation of resources.
5. It provides a level ground for companies interested in merging regardless of their financial state.
6. It gives rise to healthy market competition thereby improving the quality of products and services delivered.[4]

LEGAL FRAMEWORK FOR MERGERS AND ACQUISITION IN NIGERIA

1. Corporate and Allied Matters Act (CAMA) 2020

The Corporate and Allied Matters Act (CAMA) is the principal law regulating companies in Nigeria[5]. Under CAMA, the legal procedures for corporate restructuring[6], including mergers and acquisitions, are clearly defined. CAMA requires companies to follow specific statutory procedures, including the passing of resolutions by shareholders, obtaining necessary approvals, and filing requisite documentation with the Corporate Affairs Commission (CAC). CAMA also provides protections for minority shareholders, ensuring that their interests are safeguarded during such transactions.

 

2. Investments and Securities Act (ISA) 2007

The Securities and Exchange Commission (SEC), established under the ISA, also plays a critical role in M&A regulation in Nigeria. SEC approval is mandatory for many M&A transactions, particularly where public companies are involved or where securities are exchanged as part of the transaction. SEC ensures that M&A transactions are conducted transparently, with proper disclosure of material information to protect investors and other stakeholders[7].

3. Federal Competition and Consumer Protection Act (FCCPA) 2018

The FCCPA established the Federal Competition and Consumer Protection Commission (FCCPC), which oversees competition and consumer protection in Nigeria. One of the core functions of the FCCPC is to regulate M&A transactions to prevent anti-competitive    practices. Section 93 (4) of the FCCPA provides that mergers above a certain threshold must be notified to the FCCPC for approval. The FCCPC evaluates M&A deals to ensure that they do not substantially lessen competition, create monopolies, or harm consumers.

4. Nigerian Stock Exchange (NSE) Rules

For companies listed on the Nigerian Stock Exchange, additional rules apply. The NSE requires listed companies to comply with disclosure obligations, including the need to announce merger or acquisition deals, provide updates to the public, and disclose relevant financial and operational information. This ensures market transparency and investor protection.

5. Bank and Other Financial Institution Act (BOFIA)

This act regulates the Central Bank of Nigeria and other financial institutions by providing general guidelines for them.

 

REGULATORY AGENCIES INVOLVED IN MERGERS AND ACQUISITIONS

1. Corporate Affairs Commission (CAC)

CAC is charged with responsibilities of issuing certification of corporate resolution, deregistration of companies dissolved.

2. Securities and Exchange Commission (SEC)

Every merger acquisition or external restructuring between or among companies shall be subject to the prior review and approval of the Commission. Approval for mergers, acquisition or external restructuring shall be given if, the Commission finds that;

1. Such acquisition, whether directly or indirectly, of the whole or any part of the equity or other share capital or of the assets of another company, is not likely to cause substantial restraint of competition or tend to create monopoly in any line of business enterprise;
2. The use of such shares by voting or granting proxies or otherwise shall not cause substantial restraint of competition or tend to create monopoly in any line of business enterprise
3. Though the contemplated merger is likely to restrain competition, one of the parties to the merger has proved that it is failing[8].

 

3. Federal High Court

Section 251 of the constitution vests in the Federal High court the powers to adjudicate issues regarding companies.

4. Nigerian stock Exchange

Nigerian Stock Exchange provides the platform in Africa for raising capital. It facilitates a thriving secondary market for trading securities and maintains a seamless flow of market information.

5. Central Bank of Nigeria(CBN)

CBN is charged with the responsibility of administering the Banks and Other Financial Institutions Act (BOFIA), 2020, with the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities, as well as the promotion of an efficient payment system.

6. Federal Competition and Consumer Protection Commission

The Commission evaluates mergers and acquisitions in Nigeria to ensure that they do not significantly diminish competition in the relevant market.

 

Categories of Mergers

There are three (3) categories of Mergers based on the threshold set by the Federal Competition and Consumer Protection Commission (FCCPC)[9], these categories are;

1. Small Merger

Section 95 (1) (a) of Federal Competition and Consumer Protection Act, 2018 classified a ‘small merger’ as a merger that does require a notification to the commission unless, within the six month period from implementation of the merger, as the commission is of the opinion that the merger may substantially prevent or lessen competition.

2. Intermediate Merger

An intermediate merger according to section 120 (1) of ISA is merger or a proposed merger with a value between the lower and upper thresholds of 500,000 and 5,000,000 respectively.

3. Large Merger

Section 120 (1) of ISA defines a large merger as a merger with a value at or above the upper threshold of 5,000,000.

Forms of Merger

There are three (3) forms of merger according to Rule 227 of SEC Rules. They include;

1. Horizontal Merger

This is a form of merger involving direct competitors i.e companies operating in the same market level and selling the same products or providing same services[10].

2. Vertical Merger

This is a form of merger involving companies with no competitive relationship. Although the companies involved operate in the same market, they do not sell products or offer services in the same market level[11].

3. Conglomerate Merger

This is a form of merger involving unrelated companies[12].

Procedures for Mergers and Acquisition under ISA and SEC Rules

1. The merging companies would first internally make a merger proposal to their separate boards to consider and approve.
2. It is encouraged that the legal representatives of the merging companies conduct due diligence exercise to determine and confirm the status of the merging companies.
3. The merging companies shall file with the Commission, a merger notification for the commission’s evaluation.
4. An application is then made to the court by any of the merging companies to sanction the scheme.
5. The court will order that all merging companies hold separate meetings with majority of its members representing not less than ¾ in value of shares of members being present and voting either in person or by proxy at each of the separate meetings.
6. Where ¾ in value of shares of members being present and voting either in person or by proxy agree to the scheme at the separate meetings, it shall be referred to the Securities and Exchange Commission (SEC) for approval.
7. Upon receiving the approval of the scheme from the merging companies, SEC shall investigate to find out if the scheme is likely to cause a substantial restraint or enable a monopoly.
8. If the merger involves transfer of shares or any class of shares in a transferor company and not less than 9/10 in the value of the shares involved, the transferee company may at any time within two months after the expiration of the four months compulsorily acquire the shares of the dissenting shareholders.
9. If SEC approves the scheme, any of the merging companies will apply to the court to sanction the scheme.
10. The merging companies are to comply with post-approval requirements[13].

 

Requirements for Merger Notification[14]

The merger notification shall be filed by submitting a report containing the following to SEC;

1. a letter of intent signed by the merging companies accompanied by board resolutions of the merging companies supporting the merger;
2. a detailed Information Memorandum of the proposed transaction including all the background studies relating to the merger, and justification for it which shall include the following:-
3. detailed information about product lines or operations of the companies;
4. a list of the major competitors in that product market and the market position or market share of each company;

• the structure and organization of the companies;

1. revenue information about the operations of the companies;
2. an analysis of the effect of the transaction on the relevant market including the post transaction market position of the merging or resultant company;
3. additional information to be disclosed/contained in an information memorandum which shall include the following:
4. State the products or services that the merging entities sell or provide in, into or from Nigeria. In addition, identify any products or services that you believe are considered by buyers as reasonably interchangeable with, or a substitute for, a product or service provided in, into or from Nigeria by parties to the merger;
5. For each identified product or service, state the geographic area (s) in Nigeria, in which the merging entities sell;
6. For each identified product or service, identify and provide contact details of the top five producers or providers in each identified geographical area with the largest estimated turnover in value, and their estimated share of the total turnover during the last financial year;
7. For each identified product or service, state the turnover in each of the identified geographical area during the last financial year;
8. For each identified product or service, identify and provide contact details for the merging entities’ five customers in each of the identified geographical area with the largest aggregate purchases in value during the last financial year;
9. The business relationship among the merging entities in terms of the products or services they sell to one another as well as the value of those products and services sold during the last financial year.

• The note shall also indicate whether the merger will involve the following:

1. Transfer of all or part of the assets, liabilities, undertakings, including real and intellectual property rights;
2. Transfer of shares or other interests.

• Where a company involved in the merger transaction claims that it is failing, the following documents shall be forwarded:

1. Financial information demonstrating that the firm will be unable to meet its financial obligations in future;
2. Information indicating that the failing firm would reasonably be expected to exit the market unless the merger is implemented.
3. The latest financial statement of the companies;
4. Certificate of the corporation of the merging companies.
5. Where a party to a small merger is required by the Commission to notify it of the merger, documents forwarded shall be the same as those required for a merger notification:
6. Extract of board resolutions of the merging companies authorizing the merger duly certified by a director and the company secretary;
7. A copy of the letter appointing the Financial Adviser(s);
8. Copy of certificate of incorporation certified by the company secretary;
9. CAC certified true copy of particulars of directors and allotment of shares;
10. Letter of no object from company’s’ regulators.(where applicable); 276 SEC Rules; June 2013
11. The audited accounts of the merging entities for the preceding five (5)years or the number of years any of the companies have been in operation if less than five (5)years;
12. Applicable merger notification fee of N50,000 (fifty thousand naira) per merging company (for intermediate and large mergers);
13. In the case of an intermediate or large merger a copy of the merger notification shall be forwarded to:
14. Any registered trade union that represents a substantial number of its employees; or the employees concerned or representatives of the employees concerned, if there are no such registered trade unions.
15. Additional information to be disclosed in the Information Memorandum includes:
16. The actual and potential level of import competition in the relevant industry;
17. The ease of entry into the industry, including tariff and regulatory barriers;
18. The level and trends of concentration and history of collusion in the relevant industry;
19. The degree of countervailing power in the market; v. The dynamic characteristics of the relevant industry including growth, innovation and product differentiation;
20. The nature and extent of vertical integration in the relevant industry; vii. Whether the business or part of the business of a party to the merger or proposed merger has failed or is likely to fail; viii. Whether the merger will result in the removal of an effective competitor;
21. Any other information that the Commission may require in respect of the Merger.
22. Merger applications may be filed by separate financial advisers (registered as an issuing house) or solicitor registered with the Commission for each of the merging companies, provided that in case of a small merger one (1) financial adviser may be used[15].

Key Legal Issues in M&A Transactions

1. Due Diligence

Before concluding M&A transaction, it is important that the merging companies conduct thorough due diligence. This process involves a detailed review of the target company’s legal, financial, and operational standing. Legal due diligence ensures that the company complies with all applicable laws, has clear title to its assets, and is free of significant liabilities. Failure to conduct comprehensive due diligence can result in significant post-transaction risks.

2. Shareholder Approval

The Securities and Exchange Commission is charged with the responsibility of ensuring that ¾ of shareholders agree to the M&A before a mergers and acquisition scheme is approved[16].

In the case of mergers, CAMA mandates that the shareholders of both merging companies pass special resolutions approving the merger. Minority shareholder protection is also a key consideration, as dissenting shareholders can object to the transaction and may be entitled to a buyout or other remedies as ordered by the court.

3. Regulatory Approvals

M&A transactions above certain thresholds must obtain approval from regulatory bodies such as the FCCPC and SEC[17]. In sector-specific industries, additional approvals from regulators like the CBN may be required. The process involved in securing these approvals can slow down the transaction, adding to the complexities of the process.

4. Contract Issues

The negotiation and drafting of M&A agreements are key legal steps in the process. It is important that M&A Agreements include representations and warranties of parties, conditions precedent and indemnities. It should also provide for Post-closing obligations, such as earn-out provisions or non-compete agreements, are also common in M&A deals. This ensures there is no ambiguity in the roles and obligations of parties in the merger.

5. Employment and Labor Considerations

When companies merge, the employees of the target company are often affected. The Nigerian labor laws, including provisions under the Labour Act, ensure that employees are treated fairly during corporate restructuring. Mergers and acquisitions may result in redundancies or changes to employment contracts, and companies must comply with these regulations to avoid labor disputes[18].

6. Tax Implications

Tax efficiency is a critical consideration in M&A transactions. Companies must consider the tax obligations arising from the transaction, including capital gains tax, value-added tax (VAT), and company income

7. Competition Law and Antitrust Concerns

FCCPC evaluates M&A transactions in Nigeria to ensure that they do not create monopolies or substantially reduce competition in the market. Companies involved in anti-competitive mergers may face penalties, and the transaction could be blocked or reversed[19].

CONCLUSION

In conclusion, mergers and acquisitions (M&A) are vital tools for corporate restructuring in Nigeria, allowing companies to enhance their growth, competitiveness, and market presence amidst a challenging economic landscape. Governed by a robust legal framework, including the Corporate and Allied Matters Act (CAMA) and the Investments and Securities Act (ISA), these transactions require careful adherence to regulatory approvals, shareholder agreements, and due diligence processes to ensure compliance and protect stakeholder interests. M&A can take various forms, including mergers, acquisitions, and amalgamations, and are categorized based on their financial thresholds, emphasizing the need for strategic planning to optimize resource allocation and market position. Ultimately, successful M&A activities can stimulate economic growth, improve market confidence, and foster healthy competition, contributing to the overall stability and development of the Nigerian economy.

[1] Corporate Law Practice in Nigeria, Samuel A. Osamolu at p. 399

[2] Ibid at p. 399-400

[3] Legal Framework on Mergers and Acquisitions  by Professor C. O Okonkwo accessed on 7^th October, 2024 at   https://www.cbn.gov.ng/out/publications/bsd/2005/legal%20framework%20for%20mergers%20%20acquisitions.pdf

[4] Corporate Law Practice in Nigeria, Samuel A. Osamolu at p.410

[5] Section 8, CAMA, 2020

[6] Section 710- 717 CAMA, 2020

[7] Section 119-130, ISA ACT, 2007

[8] Rule 423, SEC RULES 2013.

[9] Section 93 (4) Federal Competition and Consumer Protection Act, 2018

[10] Rule 421, SEC RULES, 2013.

[11] Ibid

[12] ibid

[13] Part XII of the Investment and Securities Act (ISA) No. 29, 2007, Part I of the Rules  & Regulations of the Securities & Exchange Commission 2013 (as amended)

[14] Section 426, Part I of the Rules  & Regulations of the Securities & Exchange Commission 2013 (as amended)

[15] Section 426, Part I of the Rules  & Regulations of the Securities & Exchange Commission 2013 (as amended)

[16] Part I of the Rules  & Regulations of the Securities & Exchange Commission 2013 (as amended)

[17] Section 427, Part I of the Rules  & Regulations of the Securities & Exchange Commission 2013 (as amended)

[18] Section 20, Labour Act, 1974

[19] Mergers Review Guidelines, Federal Competition and Consumer Protection Commission,2020