New Act breeds uncertainty

Author: | Published: 1 Jul 2008
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The new Investments and Securities Act (ISA) came into force on June 25 2007 and repealed the 1999 Act. The definition of "companies" for the purposes of mergers and acquisition under the Act is more extensive. Section 100(7) of the 1999 legislation provides that "company", where used in the section, does not include any company other than a company within the meaning of the Companies and Allied Matters Act (CAMA). On the other hand, Section 117 of the new Act provides a wide definition of companies for the purposes of amalgamation provisions. It provides that "company without prejudice to the provisions of the CAMA ... means any body corporate and includes a firm or association of individuals". In effect, the new Act now seeks to regulate mergers of firms and associations of individuals. Specifically, Section 118 of the new legislation extends the application of the Act to mergers, acquisitions and business combinations by partnerships.

In total, the new Act introduced new provisions particularly in the areas of mergers and acquisitions. It brings about certain fundamental but unclear changes to M&A procedures in Nigeria, which are discussed below.

Varied requirements

Under the new Act, a merger transaction can be categorised as a small merger, an intermediate merger, or a large merger.

For the purposes of determining categories of mergers, the Act prescribes thresholds based on either a combination of assets and turnover or combined annual turnover or assets. Until the Securities and Exchange Commission (SEC) prescribes other thresholds, Section 120(4) of the new Act stipulates the sum of N500 million (about $4.2 million) as the lower threshold, and N5 billion (about $42 million) as the upper threshold. The SEC is also empowered to prescribe a method for the calculation of annual turnover or assets to be applied in relation to each of the prescribed thresholds.

A small merger is one with a value at or below the lower threshold; an intermediate merger is a merger with a value between the lower and the upper threshold; while a large merger is one with a value at or above the upper threshold.

Although the SEC is yet to prescribe any other thresholds, the introduction of categories and thresholds for merger transactions under the new Act is a departure from the previous legislation, which required that every merger (irrespective of size) must be approved by the SEC, and therefore required parties to comply with the tedious and often expensive procedure provided by the law (which included several court applications, and publication of a court order in a gazette and national newspapers).

Under the new Act, however, each merger category has its own determined procedure and varying approval requirements; unfortunately, some of the procedures are not very clear.

Small mergers

Parties to a small merger are not required to notify the SEC and may implement the merger without approval unless the SEC expressly requires notification. The Act, however, provides that the SEC may, within six months after a small merger is commenced, require the parties to notify it of the merger where it forms the opinion that the merger could substantially prevent or lessen competition or cannot be justified on the grounds of public interest.

But how will the SEC form this opinion when it does not require prior compulsory notification of the transaction and does not have details or information about whether the transaction will substantially lessen or prevent competition? If the merger has been concluded, will the SEC still require notification from the parties, and can the transaction be effectively unwound if it has been completed?

However, parties to a small merger may voluntarily notify the SEC of the merger even though the SEC has not requested such notification. Thus, parties that for any reason consider that their small merger may substantially prevent or lessen competition and cannot be justified on grounds of public interest should, being prudent, notify the SEC before commencing the process to avoid complications that may set in if the SEC subsequently disapproves of the transaction.

Intermediate and large mergers

Parties to an intermediate or large merger must notify the SEC before effecting the transaction. In addition, the primary acquiring company and the primary target company must each provide a copy of the notice to any trade union that represents a substantial number of its employees, to the employees concerned, or to representatives of the employees concerned if there are no registered trade unions. Unlike a small merger, parties to an intermediate or large merger shall not implement the merger until the SEC's approval has been obtained.

It appears from the foregoing that under the new Act, it is only mergers that could have a substantive impact on the parties' industry, which will come within the purview of SEC regulation, and not every merger transaction. Although the Act provides that the SEC has the power to prescribe the method of valuation for assets and turnover in relation to each threshold, it does not clearly give the SEC the powers to consider each merger and independently determine whether it qualifies as small, intermediate or large. It appears that the parties can by themselves using the prescribed threshold and any method of valuation provided by the SEC decide the category of merger the transaction comes under.

The introduction of thresholds and categories into the merger process will be more meaningful if the SEC is specifically empowered to determine whether a transaction qualifies as a small merger or not; this will ensure that parties do not evade the provisions of the law.

Furthermore, the provision that the threshold will be determined based on either a combination of assets and turnover or a combined annual turnover or assets may lead to some inconsistencies and arbitrariness. What will be the effect if by the combination of turnover and assets the merger qualifies as a large merger, but by combined annual turnover or assets it qualifies as a small or intermediate merger? Will the parties opt for the former?

Fair treatment

In reviewing a proposed merger, the ISA 2007 now requires that the SEC first considers and determines whether or not the proposed merger is likely to substantially prevent or lessen competition. Where the SEC determines that the proposed merger is likely to substantially prevent or lessen competition, then it will consider mitigating factors, such as whether:

  • There will be any technological efficiency or other pro-competitive gain, which is not likely to be obtained if the proposed merger is prevented, and from which the efficiency or gain will be greater than and outweigh the effects of preventing or lessening competition.
  • The merger can be justified on grounds of substantial public interest after taking into consideration factors such as the effect the merger will have on the particular industrial sector or region; employment issues; the ability of small businesses to become competitive; and the ability of Nigerian industries to compete in international markets.

The SEC must also consider whether all shareholders are fairly, equitably and similarly treated and given enough information regarding the merger.

After making these assessments, the SEC may grant an approval-in-principle to the merger, and direct the merging companies to make an application, by originating summons, to the Federal High Court to order separate meetings of the shareholders of the merging companies to obtain a separate shareholders' approval-in-principle of the proposed merger.

The new legislation has widened the scope of the factors to be considered by the SEC before granting an approval for a merger. Under the previous legislation, the SEC was only required to consider if an acquisition is likely to cause a substantial restraint of competition or tend to create a monopoly. It is hoped that the SEC can effectively, promptly and objectively consider all of the issues specified in the Act before granting an approval for a merger.

Courts get smaller role

The previous legislation provided for a three-step merger procedure under which the role of the court was predominant. Firstly the company was required to obtain the approval of the court to convene a shareholders' meeting where the approval of the members for the merger must be obtained. Secondly, the merger was referred to the SEC for approval. Thirdly, upon obtaining the final approval of the SEC, parties to the merger were required to obtain an order of the court sanctioning the merger.

In giving the order sanctioning the merger, the court had powers to transfer (among other things) the whole or any part of the undertaking and of the property or liabilities of any transferor company and such incidental, consequential and supplemental matters as were necessary, to ensure that the reconstruction or merger shall be fully and effectively carried out.

Under the new ISA, the role of the courts in a merger process appears to have been significantly reduced. In a small merger, for example, unless the parties are required by the SEC to notify it of the merger, the Act does not provide that the parties must obtain a court sanction. This seems to suggest that the merger becomes binding once the parties contractually agree to its terms.

This raises a question. In a merger transaction where the order of the court is obtained, all the assets and liabilities of the transferor company are transferred to the transferee without any further act or deed. In the absence of a court order sanctioning the merger, will the agreement entered into by the parties transfer title to all assets, including real properties? Will the parties be faced with the challenge of perfecting title to property? Under Nigerian law, ownership of land is vested in the governor of the state where the land is situated. The governor is empowered to grant an individual a maximum of 99 years' leasehold interest. The consent of the governor is therefore required before the leasehold can be transferred by an individual. This process is often a long and tedious one. It is not required when a court order sanctioning the merger and transferring the assets has been obtained.

However, where SEC approval is required and obtained in a small merger, Section 122 of the new Act provides that the parties shall apply to court to sanction the merger for it to become binding and effective. In an intermediate merger, Section 125 is silent about the need to obtain a court order sanctioning the merger. In a large merger, Section 126 of the Act provides that the SEC shall notify the court upon receiving a notice for a large merger, and shall forward its approval or otherwise to the court within 40 days of the parties fulfilling all notification requirements.

Clearly, the Act does not provide that a court sanction should be obtained with respect to large and intermediate mergers. Does this imply that the court sanction must be obtained even though it is not expressly stated in the Act? On one hand, it can be argued using the expressio unius est exclusio alterius rule of interpretation that to the extent that the Act does not require the parties to obtain a court sanction in respect of large and intermediate mergers, it has therefore eliminated the requirement. On the other, it can be argued that the exclusio rule sometimes does not reflect the intent of the legislator and the exclusio is often the result of inadvertence or negligence on the legislator's part.

It has been argued that the court does not fast track the merger process and that a merger transaction should be contractual without the unnecessary delays occasioned by the courts. The role of the court in sanctioning a merger deal goes beyond just issuing an order. The court is required to confirm that the provisions of the statute have been complied with and also to ensure that the interest of the minority is not being overridden. Again, in the absence of a court order sanctioning the merger, parties will be faced with the problem of perfecting title to assets transferred pursuant to the merger. It is hoped that the SEC will issue rules and regulations to clarify this.

More power to SEC

Section 127 of the Act provides that the SEC may revoke its approval or conditional approval of a small, intermediate or large merger if:

  • The approval was based on incorrect information obtained by a party to the merger.
  • The approval was obtained by deceit.
  • The company concerned in the merger has breached an obligation attached to the approval.

The SEC's power to revoke any merger is unreserved and is not barred by any time limit stipulated under the Act. This power given to the SEC is a creation of the new Act. Under the previous law, the SEC had no such powers, and the merger became binding and effective upon the parties obtaining a court order to that effect.

The question is, where the merger transaction has been completed, can the SEC still validly revoke its approval? Will the SEC take into consideration the interest of companies' shareholders when revoking the approval? Where a court order has been obtained, will the court revoke its order sanctioning the merger? Can the transaction be effectively unwound? Should there not be a time limit regarding when the SEC can revoke its approval?

Not welcome

The Act requires the SEC to grant an approval to the parties within 40 working days (in the case of a large merger) and 20 working days (for small and intermediate mergers) of the SEC receiving the prescribed notice from the parties. Furthermore, the new Act provides that in the case of intermediate or small mergers where the SEC does not grant its approval within the prescribed period of 20 working days or the maximum extended period allowed under the Act, the merger shall be deemed approved subject to the powers of the SEC to revoke its approval. This is unlike the previous legislation where there was no time limit for the SEC to grant its approval.

Although this new requirement is to ensure that the SEC acts expeditiously, there is still an ambiguity in the calculation of the time limit. The Act does not stipulate whether this period starts to run from the initial notice to the SEC when the approval-in-principle is obtained, or from the period after the shareholders have approved the transaction and the parties have applied to the SEC for final approval. Considering that the company requires at least 21 days' notice to convene a meeting of the shareholders after the approval-in-principle has been obtained, it is not likely that the 20 working days (in the case of a small or an intermediate merger) will start to run from the date of the initial notice to the SEC.

In conclusion, ordinarily the introduction of a new ISA ought to be a welcome development in the Nigerian capital markets. Such a new law should be an improvement on previous statute, seeking to bridge identified statutory and regulatory gaps and incorporating appropriate ratios of critical judicial pronouncements.

As regards its provisions, it seems that although the new Act sought to simplify the merger procedure, it has created more problems rather than solving those identified under the previous legislation. Under the old law, it had been identified that the lack of distinction between small and large transactions discouraged growth by mergers or acquisition among small and medium-scale enterprises; those companies considered the process cumbersome and expensive. Also, under the former law, it appeared that any merger or acquisition regardless of size and significance was subject to SEC approval. In trying to solve and clarify these issues, the new law, by its lack of clarity and attention to detail, has further complicated them.

It is hoped that the SEC will remedy the problems highlighted here in addition to other problems associated with the new Act. The merger provisions in the new Act remain untested, but it is hoped that the first merger transaction effected pursuant to the Act will provide clarity on how the provisions will be applied.

Author biography

Azeezah Muse-Sadiq

Banwo & Ighodalo

Muse-Sadiq is an associate in the law firm of Banwo & Ighodalo, a leading corporate and commercial practice in Nigeria. Her core practice areas include corporate finance, mergers and acquisitions, capital markets, banking and finance, foreign investment and divestment, and project finance.

Muse-Sadiq has advised several leading Nigerian and international clients on capital markets, corporate finance and M&A deals, as well as banking and securitisation transactions. She is a graduate of the University of Lagos, Nigeria and has been called to the Nigerian Bar.