Mergers & Acquisitions Under The Investments & Securities Act 2007

2009

Odujinrin & Adefulu

Church House

1st

Floor

29, Marina, Lagos

Mergers & Acquisitions under the

Investments & Securities Act 2007

Mergers & Acquisit ions under the Investments & Securit ies Act 2007

By Dr. Adeoye Adefulu

1. INTRODUCTION

The Investments and Securit ies Act (“new ISA”) was passed into law in June

2007. The Act was enacted to repeal the Investments and Securit ies Act 1999

(“old ISA”) and to establ ish the Securit ies and Exchange Commission (the

“Commission” or “SEC”) as the apex regulatory authority for the Nigerian

capital market as well as regulation of the market to ensure the protection of

investors, maintain fair, eff ic ient and transparent market and the reduction of

systemic risk. The new ISA introduces a number of new provisions in a wide

variety of areas. This paper shal l crit ical ly examine the provisions of the new

ISA in relat ion to mergers in comparison with those of the old ISA. The paper

shal l attempt to highl ight the substantive differences and comment on the

potential impact of these differences on merger transactions in Nigeria.

This is especial ly important in the l ight of the recent recent upheaval in the

Nigerian banking industry1 and the Central Bank of Nigeria’s (“CBN”)

expressed intentions to effectively put 5 “troubled” banks up for sale2.

Under the old ISA, the M & A provisions were contained in part XI with a

total of 24 sections whereas, in the new ISA, they are contained in part XII

with a total of 35 sections. Whilst the take-over section of the Act

substantial ly remains the same, a sweeping range of changes have been

1 The Centra l Bank of Niger ia recent ly injected capita l into 5 banks and dismissed the executive management of those inst i tut ions.

2 See “Sanusi: I prefer sale of f ive troubled banks”, <http://thenationonl ineng.net/web2/art ic les/15103/1/Sanusi-I-prefer-sale-of-f ive-troubled-banks/Page1.html> and “CBN Unfolds Mergers, Acquis i t ions Plans For Ai l ing Banks”, http://www.businessdayonl ine.com/index.php?option=com_content&view=art ic le&id=4746:cbn-unfolds-mergers-acquis i t ion-plans-for-ai l ing-banks&cat id=1:latest-news&Itemid=18.


made in relat ion to the merger provisions. It may be r ightly presumed that

these changes are an offshoot of the recent spate of merger transactions

aris ing out of the recapital isation process in the banking and insurance

industries, which signal led some of the ineff ic iencies that existed under the

previously untested regime.

2. MERGER THRESHOLDS

The most signif icant inclusion to the new Act is the creation of thresholds

and categories of mergers (See S. 120). Under the said section, the

Commission shall from time to t ime prescribe –

a) a lower and an upper threshold of combined annual turnover or

assets, or a lower and an upper threshold of combinations of

turnover and assets in Nigeria, in general or in relat ion to specif ic

industr ies, for purposes of determining categories of mergers;

b) a method for the calculat ion of annual turnover or assets to be

appl ied in relat ion to each of the prescribed thresholds.

It states further in subsection (2) that, for the purpose of this part of the Act

–

a) “a small merger” means a merger or proposed merger with a value

at or below the lower thresholds establ ished in terms of subsection 1

(a);

b) “an intermediate merger” means a merger or proposed merger with

a value between the lower and upper thresholds establ ished in terms

of subsection1 (a); and

c) “a large merger” means a merger or proposed merger with a value

at or above the upper threshold establ ished in terms of subsection 1

(a).

Pending the t ime the Commission prescribes the thresholds referred to in

subsection (1) of this section, the lower threshold shal l be N500, 000, 000


(f ive hundred mil l ion naira), whi le the upper threshold shal l be N5, 000, 000,

000 (f ive bi l l ion naira).

3. CONSIDERATION OF MERGERS

Under the provisions of the old ISA, the Commission may only approve a

merger appl ication where it is unl ikely to cause a substantial restraint of

competit ion or tend to create a monopoly in any l ine of business enterprise

(section 99(3)). The provisions of the new ISA are more robust in relat ion to

competit ion considerations. Under section 121, when considering a merger

appl ication, the Commission is required to init ial ly determine whether or not

the merger is l ikely to substantial ly prevent or lessen competit ion. The

determination that a merger is l ikely to substantial ly prevent or lessen

competit ion is not a total barrier to a merger. Where such a f inding has been

made, the Commission is required to determine:

1. whether or not the merger is l ikely to result in any technological

eff ic iency or other pro-competit ive gain, which wil l be greater than,

and off-set the anti-competit ive effects;

2. whether the merger can be justif ied on substantial publ ic interest

grounds. (section 121(1b) ( i) & (i i)).

It should be noted that sub-section 3 of the same section provides the publ ic

interest grounds which must be considered, which include the effect of the

merger on employment and the abi l i ty of national industr ies to compete in

international markets. Further sub-section 2 indicates the factors which the

Commission may take into consideration in determining whether or not a

merger is l ikely to substantial ly prevent or lessen competit ion.

After the anti-competit ion factors are taken into consideration, the

Commission is also required to determine whether al l shareholders are fair ly,


equitably and similarly treated and given suff ic ient information regarding the

merger (section 121(1d)).

After the Commission makes its init ial determination, it may grant an

approval in principle to the merger and direct the merging companies to make

an appl ication to the court to order separate meetings of shareholders of the

merging companies in order to get their concurrence to the proposed merger.

If a majority representing not less than three quarters in value of the shares

of members being present and voting either in person or proxy at each of the

separate meetings agree to the scheme, the scheme shal l be referred to the

Commission for approval.

4. MERGER PROCEDURES

Under the old ISA, there was a blanket provision as to the procedure for

mergers irrespective of size. However, under the new ISA, each merger

threshold has its own clearly set out procedure.

SMALL MERGERS

A party to a merger of this nature is not required to notify the Commission of

the merger unless the Commission specif ical ly requires it to do so and the

merger may be implemented without approval unless required to notify the

Commission. However, a party to a small merger may voluntari ly notify the

Commission of the merger at any t ime.

It should be noted that within 6 months after a small merger has commenced

implementation, the Commission may require the part ies to the merger to

notify the Commission in the prescribed form and manner if in the opinion of


the Commission, the merger may substantial ly prevent or lessen competit ion

or cannot be justif ied on publ ic interest grounds. At this point, no further

steps can be taken to implement the merger unti l i t has been approved or

condit ional ly approved. These provisions may present diff icult ies in practice.

For example, it is unclear how the Commission would become aware of the

merger before its consummation if i t is not notif ied. It may be suggested that

the reasoning behind these provisions was so as not to total ly exclude small

mergers from the supervision of the Commission. However as currently

worded, it is unl ikely to achieve that purpose.

The Commission is entit led to not more than 60 working days (20 working

days in the f irst instance and an extension of up to 40 working days) in total

to consider the approval of a small merger. Where the Commission has not

notif ied the part ies within that period, it is deemed to have granted its

approval to the merger.

If the merger is approved by the Commission, the part ies shal l apply to the

court for the merger to be sanctioned and when so sanctioned, the same

shall be binding on the companies. The court may by the order sanctioning

the merger or by the subsequent order make provision for any or al l of the

fol lowing matters:-

1. the transfer to the transferee company of the whole or any part of the

undertaking and of the property or l iabi l i t ies of any transferor

company;

2. the al lotment or appropriat ion by the transferee company of any

shares, debentures, pol ic ies or other l ike interests in that company

which under the compromise or arrangement are to be al lotted or

appropriated by that company or for any person;

3. the continuation by or against the transferee company of any legal

proceedings pending by or against any transferor company;


4. the dissolution without winding up of any transferor company;

5. the provision to be made for any persons who in such manner as the

court may direct, dissent from the compromise or arrangement;

6. such incidental, consequential and supplemental matters as are

necessary to secure that the reconstruction or merger shal l be ful ly and

effectively carried out.

It should be noted that in making an order which includes the dissolution of a

company, the court must be satisf ied that adequate provision has been made

for employees of the company to be dissolved.

INTERMEDIATE AND LARGE MERGERS

A party to an intermediate or a large merger must notify the Commission of

that merger in the prescribed form and manner. Under this head, the primary

acquir ing company and the primary target company shal l each provide a copy

of the notice contemplated above to any 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. Part ies to mergers of this nature shal l not implement the

merger unti l i t has been approved, with or without condit ions by the

Commission.

INTERMEDIATE MERGERS

Within 20 working days after al l parties to an intermediate merger have

fulf i l led al l their notif ication requirements in the prescribed manner and form,

the Commission after having considered the merger in terms of section 121,

may issue a cert if icate in the prescribed form, approving the merger,

approving the merger subject to any condit ions or prohibit ing implementation

of the merger. However, the Commission may extend the period for

considering the proposed merger by a single period not exceeding 40 days


and in that case, it shal l issue an extension cert if icate to any party who

notif ied it of the merger. If upon the expiration of the 20 days provided

above or the extension period, the Commission has not issued a cert if icate

referred to above, the merger shal l be deemed as having been approved

subject however to revocation as provided by S. 127 of the new Act. The

Commission shal l thereafter publ ish a notice of the decision in a gazette and

issue written reasons for the decision if i t prohibits or condit ionally approves

the merger or requested to do so by a party to a merger.

LARGE MERGERS

After receiving notice of a large merger, the Commission shal l refer the

notice to court and within 40 working days after al l part ies have fulf i l led al l

the prescribed notif ication requirements, forward to the court a statement,

whether or not implementation of the merger is approved, approved subject

to any condit ions or prohibited.

5. COMMENTS ON MERGER PROCEDURE

The review of the merger provisions of the new ISA suggests that the Act was

drafted with the intent of simplifying the merger process. However, the

inelegant wording of the Act, in addit ion to the poor structuring of its

sections and sub-sections create an ambiguous posit ion which is l ikely to

engender confusion or lead to unintended consequences. Some of these

issues are discussed below:

1. Whilst it appears that the intention of the draftsman was to l imit the

notif ication and reporting requirements for small mergers, it does not

expl ic it ly provide for the procedure to be fol lowed in small mergers

without SEC notif ication. For example section 121(4) provides for an


application for a court-ordered meeting of shareholders to be made by

the merging entit ies on the direction of SEC. There is no expl ic it

provision for an appl ication for a court-ordered meeting of

shareholders made independently of SEC. Addit ional ly, under section

122(6) the merging part ies may only apply for a court sanction “if the

merger is approved by the Commission”.

2. The approval t iming provisions also create an absurdity. In the

circumstances where SEC notif ication is required for a small merger

and in al l cases of an intermediate merger, the Commission may take

up to a total of 60 working days to issue its approval or otherwise.

However in the case of large mergers, SEC may only take up to 40

working days. In the f irst part, 60 working days is a signif icantly long

period for approval of the consummation of a small merger. Secondly,

it defies logic that a large merger, which theoretical ly should take

more t ime to investigate, is granted a shorter t ime for approval.

3. In addit ion, the Act leaves the process for completion of a large and

intermediate merger si lent. Whilst section 122(6) expl ic it ly states what

should happen after the approval of a small merger (a court sanction),

no such provisions exist for large and intermediate mergers. It would

have been sensible for the provisions of section 122(6) to have been

included in a general section such as section 121 to al low its

appl icabi l i ty to al l the merger types.

6. OTHER PROVISIONS

In addit ion to the procedure for merger provisions discussed above, the new

ISA has granted new powers to SEC to break up a company. Under section

128, where the Commission determines that the business practice of a

company substantial ly prevents or lessens competit ion, it may order the

break-up of the company into separate entit ies, in such a way that its

operations do not cause a substantial restraint of competit ion in its l ine of


business or in the market. These provisions grant the Commission powers

which are tradit ional ly held by an Anti-Competit ion Commission. In the

absence of such a commission in Nigeria, there is value in this power being

held by an entity such as SEC, however, it would have been expected that the

Act would have included more substantive provisions regarding the use of

this power by the Commission, so as to avoid any appearance of abuse.

7. TAKEOVER PROVISIONS

The ISA 2007 requires that a takeover bid be made where a person holds 30

percent or more of the voting r ights of a company or where persons acting in

concert hold a minimum of 30% but not more than 50%, with intentions to

acquire more.3 A takeover bid may only be made after an authority to proceed

has been granted by the Commission4. An appl ication for an authority to

proceed, must give part iculars of the proposed bid and contain such

information and be accompanied by documents or reports as prescribed by

regulation5. The Commission is required by law to keep the contents of any

appl ication or accompanying documents confidential6. In considering whether

to grant an authority to proceed, the Commission is required to have regard

only to the l ikely effect on the economy of Nigeria and on any Federal

Government pol icy on manpower and development7.

3 Sect ion 131, ISA 2007.


5 Sect ion 134(2), ISA 2007. It is useful to note that the current SEC Rules do not contain detai ls of the information or accompanying documentat ion. Indeed the exposure draft of the new proposed rules does not address this issue either.

6 Sect ion 134(5), ISA 2007.

7 Sect ion 134(6), ISA 2007.


Where an authority to proceed has been granted by the Commission, an

offeror may prepare a takeover bid, which must be registered with the

Commission8. Upon registration of a takeover bid by the Commission, the bid

may be despatched by the offeror. The takeover bid must be dispatched

concurrently by the offeror to: i) each director of the offeree company; i i)

each shareholder of the offeree company; i i i) the Commission9.

The ISA 2007 also makes provisions with respect to the process of a bid offer

and how to deal with the issue of dissenting shareholders.

8. FINAL COMMENTS

The new M & A provisions appear to indicate an intention to create a less

tedious and a more competit ion oriented merger process. They do however

raise considerable ambiguities, which may have a negative effect on M & A

transactions in Nigeria. Indeed, the M & A provisions have not yet been

signif icantly chal lenged. If the plans of the CBN regarding the f ive “troubled”

banks are brought into fruit ion, it would indeed test the strength of these

provisions.

This Note is for general purposes and guidance only and should not be regarded as legal or professional advice. Any questions, comments or clarifications may be directed to:

Dr. Adeoye Adefulu

Odujinrin & Adefulu

29, Marina, Lagos

[email protected]

mobile: +2348022240888



Mergers & Acquisitions Under The Investments & Securities Act 2007

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