Merger And Acquisition In Nigeria: The Legal Procedure And Guidelines By ADEOLA OYINLADE

Introduction

Mergers and acquisitions (M&A) are critical strategies employed by companies to enhance their market position, achieve economies of scale, and diversify their operations. In Nigeria, these transactions have gained traction as businesses seek to navigate a competitive environment and maximize operational efficiencies. Historically, M&A activities have evolved from being predominantly foreign-driven to increasingly involving local entities.

The earliest recorded M&A activity in Nigeria dates back to 1912 with the acquisition of the Anglo African Bank by the British Bank of West Africa, leading to the establishment of First Bank of Nigeria Plc. Notable instances of M&A include the 2005 banking sector consolidation mandated by the Central Bank of Nigeria (CBN), which required banks to increase their capital base significantly. This consolidation aimed to strengthen financial institutions and enhance their capacity to support economic development.

Meaning of Merger and Acquisition

Merger

A merger means any amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate. It follows therefore that a merger is a joinder, fusion or bringing together of the businesses, clients, capital, debts and other undertakings of two or more companies. This process often involves the dissolution of the original companies, with their assets and liabilities transferred to the newly created entity. Mergers can occur on equal terms (merger of equals) or involve one company absorbing another.

Acquisition

An acquisition, on the other hand, refers to one company purchasing most or all of another company’s shares or assets, thereby gaining control over that company. Unlike mergers, acquisitions do not necessarily result in the formation of a new entity; instead, the acquired company may continue to operate as a subsidiary or be fully integrated into the acquiring firm.

Legal Framework

The legal framework governing M&A in Nigeria include:

• Companies and Allied Matters Act (CAMA) 2020: This Act outlines the procedures for mergers and requires court approval.
• Federal Competition and Consumer Protection Act (FCCPA) 2018: This Act regulates mergers to prevent anti-competitive practices and establishes the Federal Competition and Consumer Protection Commission (FCCPC) as the primary regulatory authority.
• Investment and Securities Act (ISA) 2007:  Previously governed M&A activities but has been largely superseded by the FCCPA.

Regulatory Bodies

• Securities and Exchange Commission (SEC): Oversees public M&A transactions and ensures compliance with capital market regulations.
• Federal Competition and Consumer Protection Commission (FCCPC): Regulates competition-related aspects of mergers, ensuring they do not substantially lessen competition.
• Corporate Affairs Commission (CAC):  Handles company registrations and compliance matters related to mergers.
• Federal Inland Revenue Service (FIRS):  Ensures tax compliance regarding capital gains tax during mergers.

Benefits of Mergers and Acquisitions

• Market Consolidation:  M&A activities drive market consolidation, leading to stronger and more competitive industries. By merging or acquiring, companies can eliminate competition, increase market share, and enhance their bargaining power within the industry. This consolidation is particularly evident in sectors such as banking and telecommunications, where fewer, larger players dominate the market.
• Access to new technologies and expertise:  Foreign investors frequently contribute new technology, knowledge, and global best practices to local firms when they acquire them. This transfer of information may boost operational efficiency and creativity inside Nigerian companies, allowing them to compete more successfully on both local and international levels.
• Increased Foreign Direct Investment (FDI):  M&A transactions can boost foreign direct investment in Nigeria, therefore contributing to economic development and diversification. Foreign firms entering the Nigerian market through acquisitions provide capital investment, which can lead to job creation and infrastructural development.
• Risk Diversification:  By merging with or acquiring other firms, companies can diversify their portfolios and spread risk across different markets or sectors. This is particularly important in a dynamic economy like Nigeria, where fluctuations in specific industries can pose significant risks.
• Enhanced Financial Performance:  Mergers and acquisitions can enhance financial performance by reducing costs and increasing revenue. By merging activities, businesses may decrease redundancies, maximize resources, and obtain economies of scale, eventually increasing profitability.
• Opportunities for Strategic Growth:  M&A provides organizations with strategic growth prospects that would be difficult to achieve organically. Firms can swiftly obtain access to new markets, client bases, or product lines through acquisitions, allowing for speedier expansion than constructing from the bottom up.

Types of Mergers

• Horizontal Mergers:  A horizontal merger occurs between companies that operate in the same industry and are direct competitors. The primary goal is to increase market share, reduce competition, and achieve economies of scale. Mergers in the banking sector, such as the merger between Access Bank and Diamond Bank, which aimed to consolidate their positions in the financial market is an example of horizontal merger.

• Vertical Mergers:  Vertical mergers involve companies at different stages of the production or distribution process within the same industry.These mergers aim to enhance supply chain efficiency, reduce costs, and improve product delivery. For instance, a manufacturer acquiring a supplier or distributor, common in industries such as oil and gas or manufacturing

• Conglomerate Mergers:  Conglomerate mergers occur between companies that operate in unrelated industries. The objective is to diversify business operations and reduce risk by entering new markets. For example, companies seeking to expand their portfolios by merging with firms outside their primary business areas

• Concentric Mergers: Concentric mergers involve companies that are related by technology or market but do not directly compete with each other. These mergers aim to leverage complementary resources and capabilities to enhance product offerings. For instance, a technology firm merging with a company that provides complementary services or products.

Types of Acquisitions

• Stock Acquisition: This involves purchasing a controlling interest (typically 51% or more) of another company’s shares. It can be friendly (agreed upon by both parties) or hostile (where the acquiring company seeks to take over without consent).

• Asset Acquisition: In this type, one company acquires the assets of another company rather than its shares. This method allows the acquirer to choose specific assets while leaving behind unwanted liabilities.

Procedures for Mergers

1. Initial Planning and Strategy Development

• Define Objectives: Identify the strategic reasons for the merger, such as market expansion or operational efficiencies.
• Select Target Companies: Research and identify potential merger candidates that align with your business goals.

2. Due Diligence

• Conduct Comprehensive Due Diligence: Assess the financial, legal, and operational aspects of the target company to identify risks and synergies. This includes reviewing financial statements, contracts, and compliance with regulations.

3.  Documents Required

• Merger Plan:  A comprehensive document detailing the rationale for the merger, including expected benefits, market analysis, and strategic goals.
• Minutes of Meetings:  Minutes from board meetings or shareholders’ meetings where the merger was discussed. These should reflect the decision-making process and any resolutions passed.
• Business Plans:  The most recent business plans of both merging parties, outlining their operational strategies and financial forecasts.
• Financial Statements:  Audited financial statements for the last two years for both companies to provide a clear picture of their financial health.
• Market Analysis Reports>  Reports, surveys, or studies conducted within the last two years assessing market conditions, competitive landscape, and potential for sales growth.
• Legal Documents:  Copies of relevant legal documents such as:
• Memorandum and Articles of Association (Memart)
• Certificates of incorporation
• Any agreements related to the merger (e.g., heads of terms, memorandums of understanding).

4. Determine Merger Category

• Classify the Merger: Based on combined annual turnover, determine if the merger is a:
• Small Merger: Below the threshold stipulated by the FCCPC.
• Large Merger: Above the threshold (typically one billion naira).

5. Notify the Federal Competition and Consumer Protection Commission (FCCPC)

• Notification Requirement: For large mergers, submit a merger notification to the FCCPC before implementation. This includes:
• FCCPC Form 1 (Notice of Merger)
• A non-confidential executive summary of the merger.
• Details of the merging parties, including their ownership structures and control.
• The nature of the merger and its strategic rationale.
• Relevant financial documents.
• Information on how the merger will affect competition in the market.
• The annual turnover of the merging entities
• Public companies must also notify the Securities and Exchange Commission (SEC).

• Thresholds for Notification:
• A merger is considered a large merger if the combined annual turnover of the acquiring and target companies exceeds ₦1 billion or if the target’s annual turnover exceeds ₦500 million in the financial year preceding the merger.

6. Public Consultation

• Engage Stakeholders: The FCCPC may publish the proposed merger in the Federal Gazette and invite public comments. This allows stakeholders to express their views on potential competitive impacts.

7. FCCPC Review Process

• Assessment of Competition Impact: The FCCPC reviews the merger to determine if it may substantially prevent or lessen competition.
• Approval or Conditions:  The FCCPC can approve the merger with or without conditions or prohibit it based on its findings.

8. Approval Notification

• Issuance of Approval Certificate: If approved, the FCCPC issues a certificate indicating approval, which may include specific conditions.
• Publication of Decision: The decision is published in at least two national newspapers and in the Federal Government Gazette.

9. Implementation of Merger

• Execute Merger Agreement: Upon receiving approval, proceed with executing the merger agreement and integrating operations.
• Compliance with Conditions: Ensure compliance with any conditions imposed by the FCCPC during implementation.

10. Post-Merger Compliance

• File Post-Merger Documents: Within two weeks of completion, submit necessary documents to the FCCPC, including:
• A copy of the court order sanctioning the scheme (if applicable).
• Evidence of compliance with any conditions set forth by the FCCPC.
• Reports on employee arrangements and financial adjustments.

11. Monitoring and Inspection

• Post-Merger Inspection:  The FCCPC may conduct inspections within three months after approval to ensure compliance with regulatory requirements and assess how well the new entity is performing.

Procedures for Acquisitions

• Preliminary Assessment
• Conduct a thorough analysis of the target company, including financial health, market position, and potential synergies.
• Identify strategic objectives for the acquisition.

• Engagement of Advisors
• It is important to hire financial advisors, legal counsel, and consultants to assist in due diligence and negotiations.

• Due Diligence
• Perform detailed investigations into the target’s financial records, legal obligations, operational capabilities, and market conditions.
• Assess any potential liabilities or risks involved with the acquisition.

• Valuation
• Determine the fair value of the target company using various valuation methods (e.g., discounted cash flow analysis).

• Negotiation
• Initiate discussions with the target company regarding terms of the acquisition.
• Draft a Letter of Intent (LOI) outlining preliminary terms and conditions.

• Documentation
• Prepare necessary legal documents, including:
• Share Purchase Agreement (SPA)
• Disclosure schedules
• Regulatory filings
• Ensure compliance with relevant laws and regulations.

• Regulatory Approval
• Submit required documents to regulatory bodies such as the Federal Competition and Consumer Protection Commission (FCCPC) for approval.
• Address any concerns raised by regulators during this process.

• Closing the Deal
• Finalize all agreements and complete the transaction.
• Conduct a closing meeting to execute documents and transfer ownership.

• Post-Acquisition Integration
• Implement strategies to integrate operations, cultures, and systems of both companies.
• Monitor performance and address any challenges that arise during integration.

CONCLUSION

Mergers and acquisitions are important to the economy’s proper functioning. They enable firms to gain efficiencies like economies of scale or scope, diversify risk across several activities. They also offer a means for replacing the managers of underperforming companies.

The Federal Competition and Consumer Protection Act (FCCPA) of 2018 oversees Nigerian merger and acquisition proceedings. The Act mandates that all large mergers must be notified to the FCCPC before implementation. This requirement ensures that potential anti-competitive effects are assessed prior to any merger taking place.

The FCCPC is the primary regulatory body overseeing mergers and acquisitions, replacing the Securities and Exchange Commission (SEC) for this purpose. This shift centralizes regulatory oversight, enhancing efficiency in the review process.

Companies should engage legal and financial advisors early in the M&A process to navigate regulatory complexities effectively and ensure compliance with all requirements under the FCCPA.

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.