Topical Legal Practice Developments in Nigeria
Perhaps, the most topical developments in Nigerian merger legal practice have been in the threshold for merger control and in litigation seeking to restrain mergers from going forward. The Nigerian merger control regulator, the Securities and Exchange Commission (“SEC”), has lowered the threshold for the size of transactions subject to prior merger notification and review to the equivalent of £1mm, and now insists on reviewing acquisitions of as little as 30% of the shares issued by a company once the £1mm threshold is passed. This means that the SEC will get burdened with a large number of relatively small deals which ideally it should not be concerned with.
There have been in the past several years a number of attempts by aggrieved minority shareholders to restrain in the courts companies going through statutory mergers approval procedures. These attempts, usually based on allegations of procedural impropriety and non-disclosure to courts before which schemes of merger have been filed, have largely been unsuccessful. The implication of the courts’ decisions in this area appears to be that the merger wishes of the majorities of shareholders who may have voted for mergers will be respected although monetary compensation for the dissentients may well be available. However, the last word has not yet been heard on many of the disputes as there are several pending appeals and as yet very few appellate decisions.
Opportunities for Dealmakers
Opportunities for dealmakers have increased in some respects and been diminished in others. Opportunities have increased to the extent that mergers have now become increasingly common outside the two traditional areas of global multinational industrial companies and financial institutions. There are far more mergers of companies in, for example, the Nigerian-controlled food products and oil and gas sectors than there were fifteen years ago.
To the extent that many of the parties to mergers today are Nigerian-controlled and use Nigerian financiers, the opportunities for foreign dealmakers are perhaps not as great as they could have been. However, as the larger Nigerian businesses expand into markets outside Nigeria, they will need more foreign dealmakers for their activities in those markets than they currently do.
Fifteen years ago most mergers concluded in Nigeria involved a single global multinational industrial parent combining its Nigerian subsidiaries. The mergers of Unilever and Nestle entities readily come to mind here. Such mergers were motivated in large part by the aims of achieving improved economies of scale, in effect amending the shareholding percentage of a multinational in one of its subsidiaries where its majority shareholding may have become marginal, and enjoying organisational efficiencies.
Because the mergers of that era were mergers of related companies, the emphasis in the legal work involved was on the regulatory elements of actually concluding a merger rather than on “due diligence” and contractual negotiations and documentation. Lawyers have had to do deeper work on “due diligence” and contractual negotiations, and therefore have developed better skills, in the more recent spate of merger deals in the financial services sector. These deals have been driven primarily by bank and other financial sector-regulatory changes calling for financial institutions to increase their capital. To comply with these regulations, several smaller banks have had to merge with larger banks with the deals to be completed within tight deadlines.
Today, there are many mergers that involve neither global multinationals nor financial institutions. Mergers driven by the aim of growing business locally have become common, perhaps most notably in the consumer (especially food) products and oil and gas sectors. As these mergers have grown in size and number, the level of sophisticated legal work to support them has also grown. The indications are that the level of merger activity in these sectors will continue to grow.
It remains to be seen how far recent regulatory changes in the local shipping (“cabotage”) and oil and gas (“local content”) regimes will increase the level of mergers and acquisitions activities in those sectors. New rules in the sectors give locally-owned businesses preferences, and sometimes exclusive entitlement, to certain areas of business in the sectors. It had been thought that, to seize the improved opportunities, we would see the more successful local players merging with each other and buying out the weaker foreign-controlled players.
There has been some merger activity in this respect but not much. Major foreign players have in many instances sought and obtained exemptions from the cabotage and local content regimes on the basis that the locally-controlled alternatives to their customers lacked capacity. Several local players have simply sought and got larger debt financing or sold non-controlling equity stakes to raise money to pursue the new opportunities. There is now every possibility that the new rules will not lead to significantly greater merger activity in these sectors.
Some of the fiscal aspects of merger law will need to be made clearer in the years ahead. The law is favourable to the extent that there is no capital gains tax on either (a) transfers of shares or (b) transfers of assets in exchange for shares where the company transferring the goods gets dissolved as part of the merger process. However, for now there is still a great deal of regulatory discretion on the tax law relating to the commencement and cessation of businesses on mergers, and much of the impact of VAT and state (as distinct from Federal) land transfer tax law is as yet untested in the courts. Law suits and law reform in these areas is to be expected in the years ahead.
Prof. Gbolahan Elias was called to the Nigerian Bar in 1981 and the New York Bar in 1990. He is a Senior Advocate of Nigeria (Nigerian QC equivalent) and one of the three equity partners in G. Elias & Co., a leading Nigerian business law firm with a bias for corporate and financial work.
He was an associate at Cravath, Swaine and Moore, the leading New York corporate law for, from late 1989 to mid-1993. “Exim” banks both in Nigeria, Africa and beyond feature frequently in his practice in Lagos.
He studied law at Oxford University and has that University’s BA MA BCL and D. Phil degrees, both the BA and BCL with first-class honours. Over the years he has served on several Nigerian committees to reform the law on trusts, pensions, petroleum and shipping.
Mena Eremutha is an associate at G. Elias & Co. She studied law at Igbinedion University Okada, Edo State and was called to the Nigerian Bar in 2009. She has participated in several merger transactions that the firm has advised on.
Gbolahan Elias & Mena Eremutha can be contacted at email@example.com or alternatively by calling +2341 2806970-1.