The New Regime For Mergers and Acquisitions Under CAMA 2020
The New Regime For Mergers and Acquisitions Under CAMA 2020
Mergers and Acquisitions (“M&A”) are a veritable source of business combinations in any thriving economy. They are arguably the most famous external corporate restructuring tools employed by companies globally to achieve growth and maximize profitability.
Naturally, therefore, with a new corporate law practice regime in place with the signing into law of the Companies and Allied Matters Act (“CAMA”) 2020 by President Muhammadu Buhari on 7th August 2020. It is not far-fetched that companies and corporate restructuring (M&A) practitioners alike are looking on interestedly to see where and how the new Act affects the M&A landscape in Nigeria and consequently their business plans.
NEW PROVISIONS AFFECTING M&A
1) Pre-emptive Rights of Shareholders (Right of First Offer and Refusal)
As against the regime under the old Act, the new Act no longer mandates private companies to restrict the transfer of their shares. But they may, subject to the provisions of the articles of association, still do so by providing that:
a. assets of the company valued at 50% of the total value of its assets shall not be sold or disposed of without the consent of all the shareholders;
b. a shareholder shall not sell his shares to non-shareholders without first offering them to existing shareholders; and
c. a shareholder, or a group of shareholders acting in concert, cannot sell or agree to sell more than 50% of the shares in the company to a non-shareholder unless that non-shareholder has offered to buy the shares of the other existing shareholders on the same terms.
These provisions are intended to protect existing shareholders from unnecessary dilution and forceful acquisition through third party arrangements in Mergers and Acquisitions and Private Equity and Venture Capital. As a result, it is highly imperative that, while conducting due diligence, parties to M&A deals take cognizance of the existence or otherwise of this new statutory pre-emption rights in the articles of association of target companies.
2) Share Buyback/Repurchase
Under the extant CAMA, a company is restricted from acquiring its own shares except for rare situations such as to redeem preference shares, settle a debt, and to eliminate fractional shares. CAMA 2020 has now lifted such inhibitions. A combined reading of sections 184 to 187 now allows companies to buy back their issued shares pro-rata from existing shareholders pursuant to a court-sanctioned scheme, on the open market, or from the company’s employee stock option pool.
To do this, however, certain conditions laid down under the above sections must be met, namely: (a) the articles of association of the company must permit such acquisition; (b) there must be a special resolution of the company approving the acquisition; (c) the shares must be fully paid up; (d) the acquisition must be published in two national newspapers; (e) a declaration of solvency must be made by the directors of the company; (f) payment for the repurchase must be made from distributable profits; and (g) the company must not hold more than 15% of its issued shares as treasury shares i.e. shares reacquired from shareholders.
This new and innovative provision will prove particularly useful in enhancing Nigeria’s private equity (PE) and venture capital (VC) market as it will increase the exit options available to PE and VC investors and ease financing troubles for intending acquirers.
3) Financial Assistance to Shareholders/Prospective Shareholder’s Acquisition of Shares Now Permitted
Under CAMA 1990, it was unlawful for a company to render financial assistance to a shareholder or potential shareholder seeking to acquire shares in the company, even as an indemnity incentive to private equity investors. This restriction has now been lifted under section 183 of CAMA 2020.
Section 183(3)(e) and (f) of the Act now allow companies to render such financial assistance in the acquisition or proposed acquisition of their shares where (i) it is done pursuant to a court-sanctioned scheme of arrangement, merger, or restructuring of the company; or (ii) the principal purpose in giving the assistance is not to reduce or discharge any liability incurred by a person acquiring shares in the company or its holding company but is merely incidental to a larger purpose of the company, and the assistance is given in good faith in the interests of the company.
In addition, section 183(4) provides that a private company may render financial assistance for the acquisition of its shares, or that of its holding company if it is a subsidiary, where (a) it is approved by a special resolution; (b) the net assets of the company are not reduced or, if they are reduced, the assistance is provided from distributable profits; and (c) the directors of the company make a statutory declaration in the prescribed form before the financial assistance is provided.
4) Disclosure of Significant Control and Substantial Shareholding in Companies
Sections 119, 120, and 121 of the new CAMA have introduced new transparency provisions with regards to the ownership stake in companies.
Section 119 mandates every person with significant control over a company to, within seven (7) days of gaining such control, disclose the particulars of it in writing to the company which must, in turn, notify the Corporate Affairs Commission (“CAC”) within one month and also disclose such significant control in all subsequent annual returns filed with the CAC. The section also mandates the CAC to maintain a register of persons with significant control.
Similarly, section 120 provides that a person who is a substantial shareholder in a public company (i.e. holding – either by himself or by his nominee – shares in the company which entitles him to exercise at least five percent (5%) of the unrestricted voting rights at any general meeting of the company) is required to disclose such substantial shareholding to the company within 14 days of becoming aware of such substantial shareholding. Such a person must also disclose whether the shares are held as a beneficial owner or as a nominee of an interested person. Upon receiving notification of such disclosure or becoming aware of such substantial shareholding, the company must then notify the CAC of this fact in writing.
The New Act also provides in section 121 for what happens where a person stops being a substantial shareholder in a public company, the person must, within fourteen (14) days of becoming aware that he has ceased to be a substantial shareholder, notify the company in writing stating his name, the date he stopped being a substantial shareholder, and the reason he stopped being a substantial shareholder e.g. through a merger or an acquisition. Upon being notified of, or becoming aware of, this fact, the company must also in turn notify the CAC in writing within 14 days.
The author believes that these provisions will invariably make due diligence in mergers and acquisitions in Nigeria easier to verifying significant control in, and substantial ownership of shares of, companies. Additionally, confidentiality provisions in shareholders’ agreements may need to be revisited to require the parties to supply the necessary information to the relevant reporting company to enable it to perform its new regulatory disclosure obligations.
5) Court Sanction of Merger Schemes
Another place where the amendments introduced in the new Act will impact the M&A space is the court sanction of merger schemes provision in section 711 which admirably steps in to fill the void occasioned by the repeal of the hitherto applicable Sections 118 to 128 of the Investments and Securities Act 2007 (“ISA”) by the Federal Competition and Consumer Protection Act 2018 (“FCCPA”).
The section (section 711) provides that where under a scheme proposed for a compromise, arrangement, or reconstruction between two or more companies or the merger of any two or more companies, the whole or any part of the undertaking or the property of any company concerned in the scheme is to be transferred to another company, the court may order separate meetings of the companies affected upon application in summary by one of them.
If at each of these court-ordered separate meetings, members of the companies representing at least three-quarter in value of the share of members being present and voting either in person or by proxy agree to the merger scheme, one or more of the companies may then apply to the Court to sanction it. Naturally, this sanction of the merger scheme by the court makes it binding on the parties thereto.
The court can also, by the order sanctioning the scheme or by any subsequent order, make necessary provisions for actions/matters incidental for the merger to be “fully and effectively carried out”, for example, a) the transfer of the existing business/property/liabilities of the merging companies to the new entity; b) the allotting of shares, etc. in the new entity; c) the continuation by or against the new entity of pending legal proceedings; d) the dissolution, without winding up, of the merging entities; e) the appropriate treatment of dissenting shareholders, etc.
The introduction of this section is a truly welcome development as it fills the void left by the aforementioned repeal of the hitherto applicable sections of the ISA in an otherwise important step in merger transactions.
6) Offer for Dissenting Shareholders
Section 712 introduces the repealed section 129 of the ISA into CAMA 2020 by providing that where a scheme or contract – not being a take-over bid under the ISA – involving the transfer of shares or any class of shares in a company to another company, has, within four months after the making of the offer by the transferee company, been approved by the holders of at least nine-tenths in value of the shares of the company (other than shares already held at the date of the offer by a nominee for the transferee company, or its subsidiary), the transferee company may at any time within two months after the expiration of the said four months give notice in the prescribed manner to any dissenting shareholder that it desires to acquire its shares.
In such an instance, unless the dissenting shareholders apply to the court within one month of receiving the said notice of the offer to acquire their shares, the transferee company is entitled and bound to acquire those shares on the same terms agreed for the transfer by the approving shareholders unless the court orders otherwise.
7) Moratorium on Creditors Voluntary Winding up in a Scheme of Arrangement
Another provision of the new Act that will have an impact on M&A activities in the country is contained in Section 717. By virtue of that section, no winding up petition or enforcement action by a creditor (secured or unsecured) shall be entertained against any company that has commenced a process of arrangement and compromise with its creditors for six months, from the time that the company, by way of affidavit, provides all the relevant documents in respect of such arrangement or compromise to the Court.
Nevertheless, as the section goes on to provide for, a secured creditor may apply to the court for the discharge of the six months’ moratorium period within 30 days of getting notice of the arrangement and compromise if a) the company’s assets sought to be enforced do not form part of the assets under the arrangement and compromise; b) the company’s assets sought to be enforced are perishable goods or commodities which may depreciate or dissipate before the expiration of the six (6) months moratorium period; c) the secured creditor has commenced enforcement of the security before receiving notice of the company’s proposed arrangement and compromise; or d) the company consents in writing to the enforcement of the security within the six (6) months moratorium period. In any of those cases, the company shall, upon the approval or consent, file a further affidavit updating the court of the dissipation of the said asset.
8) Effect/Enforceability of Netting Agreements
The provisions on netting introduced into the new Act under Sections 718 to 721 will also have their own impact on M&A in Nigeria. Section 721 in particular provides that the provisions of a netting agreement are enforceable in accordance with their terms, including against an insolvent party, and, where applicable, against a guarantor or other person providing security for a party and shall not be stayed, avoided, or otherwise limited by (a) the action of a liquidator; (b) any other provision of law relating to bankruptcy, reorganisation, composition with creditors, receivership or any other insolvency proceeding an insolvent party may be subject to; or (c) any other provision of law that may be applicable to an insolvent party, subject to the conditions contained in the applicable netting agreement. In the light of this present article, the provision that a netting agreement shall not be “stayed, avoided or limited” by the provisions of any law on “reorganization” means that where a netting agreement is in place, a merger and acquisition scheme cannot be commenced or effected until the netting agreement is extinguished or discharged.
9) Jurisdiction on Mergers – the FCCPC or the CAC?
Section 849 of the new CAMA provides that two or more associations with similar aims and objects may merge under such terms as may be prescribed by regulation by the CAC. What makes this section particularly interesting – puzzling maybe? – is its significance given Sections 104 and 105 of the Federal Competition and Consumer Protection Act (“FCCPA”). Section 104 of the FCCPA provides that in all matters affecting competition and consumer protection, the Act shall override the provisions of any other law (including the new CAMA in this case).
Section 105 then goes on to provide that between the Federal Competition and Consumer Protection Commission (“FCCPC”) and any other relevant agency having similar jurisdiction under any other law, the FCCPC will have concurrent jurisdiction with and also take precedence over such other agency in matters affecting competition and consumer protection.
With regards to mergers and acquisitions, therefore, being activities that affect competition and consumer protection, irrespective of the provision under section 849 of the new CAMA, the FCCPC has the jurisdiction ahead of the CAC with regards to the terms on which mergers will be effected in Nigeria. Even more so, Guidelines issued by the FCCPC in conjunction with the Securities and Exchange Commission (“SEC”) on mergers and acquisitions will also take precedence over any regulation issued by the CAC on the same matter.
Overall, in its acclaimed bid to increase the ease of doing business in Nigeria, the new CAMA has made noteworthy changes to the corporate practice landscape in Nigeria, and especially in the mergers and acquisition subsector as highlighted in this article. Notably, the pre-emptive right of shareholders of private companies has now been codified; the avenue for share buyback and repurchase has been extended, and companies can now offer financial assistance in their acquisition.
Investors in public M&A deals are now obligated to notify companies, with companies also now obligated to notify the CAC, within a stipulated time once they become a substantial shareholder or cease to be a substantial shareholder.
The new Act also steps in to fill the void left by the repeal of Sections 118 to 129 of the Investment and Securities Act (“ISA”) 2007 by the Federal Competition and Consumer Protection Act (“FCCPA”) 2018 with respect to the sanction of merger schemes by the court and the mandatory offer to acquire the shares of dissenting shareholders.
However, one place where, in respect of M&A, the new Act caught a gaffe is its provision concerning the jurisdiction of the CAC on the terms mergers are to be effected because as against the intentions of the draftsmen, the FCCPA and FCCPC take precedence over the new CAMA and the CAC in the regulation of mergers and acquisitions in Nigeria.
Notwithstanding, irrespective of this minor shortcoming, the amendments introduced by the new Act are important to the regime for the flourishing Mergers and Acquisition transactions and the Nigerian corporate practice landscape overall.
Nevertheless, it is important to bear in mind that this article merely highlights the amendments made by the new Act to the regime for mergers and acquisitions and other business combinations in Nigeria.
Consequently, aside from the new CAMA, also (and still) relevant in the regulatory framework for mergers and acquisitions in Nigeria are other laws like the Federal Competition and Consumer Protection Act (“FCCPA”) 2018, the Investment and Securities Act (“ISA”) 2007, the Securities and Exchange Commission (“SEC”) Rules, the Companies Income Tax Act (“CITA”), the Capital Gains Tax Act (“CGTA”) and other applicable sector-specific laws and regulations like the Banks and Other Financial Institutions Act (“BOFIA”), the Petroleum Act, the National Insurance Commission (“NAICOM”) Act, etc.
These other laws still invariably apply to mergers and acquisitions transactions in Nigeria where relevant and so still also need to be considered, only in tandem with the new CAMA.
Akorede Folarin is an Associate Counsel in the Energy, Banking, and Finance Practice Group at Kevin Martin Ogwemoh Legal, Lagos. He holds an LL.B from the University of Abuja and a B.L from the Nigerian Law School. He can be reached by email at firstname.lastname@example.org or at email@example.com