Olapeju Badmus Law Graduate of Olabisi Onabanjo University Nigeria
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Mergers and Acquisitions for Dummies: The Situation under Nigerian Law

Copyright © 2021 By Olapeju Badmus

Introduction

It is frustrating to buy a car only for it to break down on every trip you embark on. This causes you to invite a mechanic who might suggest you change the engine, brake pads or radiator; anything to make the car work to your satisfaction. The same also applies in the corporate world. Sometimes a company will not thrive in the economy or amongst its competitors as the directors and shareholders would expect it to. As a result, the stakeholders of the company are forced to look inwards or outwards as the case maybe, to discover what the problem might be and come up with strategies to improve the performance of the company. The implementation of the strategy is known as Corporate Restructuring.

What is Corporate Restructuring and its Importance?

Corporate restructuring is the internal or external repositioning of a company to mitigate economic loss. It is important in every company for the following reasons:

1. To make more profit for the company.
2. To increase the company’s visibility in the market.
3. To prevent or curb a recession in the company’s finances.
4. To maintain the company’s corporate identity by surviving economic difficulty.
5. To exterminate excess shares that are no longer represented by the company’s assets by negotiating with the company’s creditors.

What are the Forms of Corporate Restructuring?

It has been stated above that corporate restructuring can be done internally or externally. Internal restructuring is adopted when a company is in debt but has no intention to be wound up. Methods of internal restructuring include buy out, arrangement on sale, arrangement and compromise, increase of share capital, share capital reduction, share consolidation and reconstruction, downsizing, conversion and re-registration. These are options available for companies that intend to remain a going concern.

On the other hand, external restructuring involves the company and other third parties. External options in corporate restructuring include mergers, acquisition, take-overs, management buy-in, purchase and assumption. That said, mergers and acquisitions are forms of external corporate restructuring.

Meaning of Merger and Acquisition

Merger is the collaboration of two different entities or companies to evolve into a joint corporate entity. The companies can either acquire a new identity or retain the identity of one of the companies when merged. Merger is the amalgamation of the undertakings (assets) or any part of the undertakings or interests of two or more companies.

Acquisition occurs when a larger company (known as the acquiring company) purchases all or substantial interest of a smaller company (the acquired company). The smaller company ceases to exist or becomes a subsidiary of the larger company and its asset automatically belongs to the larger company.

What are the Benefits of Mergers and Acquisitions as a form of Corporate Restructuring?

The following are the benefits of adopting merger or acquisition as a form of corporate restructuring:

1. The collaboration of two companies brings about an increase in production capacity.
2. A company that has no access to the necessary technology to boost its production may merge with another company that is more equipped, to enhance profit.
3. Merging with another company helps a company that lacks the requisite personnel with technical or managerial skills to achieve its corporate objective.
4. Merger or acquisition brings about increased market share and economic growth.
5. Merger or acquisition keeps a company in business in the event of stringent policies by the government. For example, Banks in Nigeria were forced to merge when the Central Bank of Nigeria directed banks to increase their capital base from 2 billion to 25 billion Naira in 2005.

Laws that Govern Mergers and Acquisitions

The major law governing merger and acquisition in Nigeria Is the Federal Competition and Consumers Protection Act (FCCPA) section 165 of the Act repealed sections 118 to 128 of the Investment and Securities Act which hitherto had provisions guiding merger. Section 118(1) of the Act provides that,

“Notwithstanding anything to the contrary contained in the other enactment, every merger, acquisition or business combination between or among companies shall be subject to prior review and approval of the commission.”

The commission referred to in the above is the Securities and Exchange Commission (SEC) which is the regulatory body of Investment and Securities Act. SEC grants pre-merger consent, it approves mergers and determines the consequence or effect of merger, whether it would give rise an unhealthy competition.

Other laws governing merger and acquisition in Nigeria include the Companies and Allied Matters Act (CAMA), Bank and other Financial Institution Act (BOFIA) and Investment and Securities Act (2007) amongst all others.

Legal Procedure for Mergers and Acquisitions in Nigeria

Merger and Acquisition are forms of corporate restructuring. There is a laid down procedure provided for by the Federal Competition and Consumer Protection Act (FCCPC) 2019 Consolidated Rules for merger. However, the procedure depends solely on the type of merger which exists in two categories; the small merger, and the large merger. The determinant of these categories of merger is the value of the combined assets of the merging companies which is determined by the federal competition and consumer protection commission

Procedure for Obtaining Small Mergers

Section 95 of the Federal Competition and Consumers Protection Act provides for the procedure for small mergers.

1. For a small merger, the parties are not required to notify the Federal Competition and Consumer Protection Commission of a pre-merger notice. (FCCPC)
2. FCCPC will consider the merger within twenty days of the notification FCCPC may extend the time within which it has to consider the merger by a single period not exceeding 40 business days.
3. FCCPC notifies the parties of its approval or conditional approval or even refusal after a thorough consideration of the merger by the virtue of section 95(8) of FCCPC
4. The merger is deemed approved if FCCPC does not notify the parties of its decision at the expiration of the twenty or forty working days.
5. FCCPC publishes its decision in the Gazette or its reasons for a refusal or conditional approval.
6. The parties apply to the court for the merger to be sanctioned if approved. Once it has been sanctioned, the merger becomes binding on the companies.

Procedure for Obtaining Large Mergers

This can be found in section 96 of the Federal Competition and Consumer Protection Act:

1. The Board of Directors of the companies that want to merge passes a separate resolution for merger.
2. A pre-merger notification is forwarded to FCCPC for review with the following documents;
(i) A complete merger Notification Form.
(ii) A letter of intent containing the signatures of the merging companies.
(iii) The board resolution.
(iv) A letter appointing a financial adviser.
(v) A letter evidencing the fact that there was no objection by Corporate Affairs Commission (CAC) or Central Bank of Nigeria (CBN).
(vi). The companies’ audited account for a period of five years before the application of the merger.
(vii). The merging companies’ Memorandum and Article of Association
3. The companies inform the registered Trade Unions representing a substantial number of its employees or the employees, of the Merger notification.
4. FCCPC grants an approval after an evaluation and consideration and directs the merging companies to apply to the Federal High Court to order separate meetings of shareholders of the merging companies to get an agreement of the proposed merger.
5. A special resolution of the majority representing not less than three-quarters of the shares of members who were present and voted, either in person or by proxy is passed at the separate court-ordered meetings to approve the merger.
6. Return to court to sanction the merger.
7. Both companies apply to FCCPC for formal approval with the following documents;
(i) 2 signed copies of the merger scheme documents.
(ii) Extract of the minutes of the court-ordered meeting evidencing the approval of the merger scheme which has been signed by the director and secretary.
(iii) The resolution passed at the court-ordered meeting.
(iv) Scrutineer’s report that shows votes for and against the schemes.
8. FCCPC carries out a post-merger inspection three months after the approval by the commission. The purpose of this is to ascertain the merging companies’ level of compliance with the provision of the scheme documents.

Challenges of Mergers and Acquisitions in Nigeria

Merger and Acquisition (M & A) generally brings about a new company. The purpose of this form of corporate restructuring is generally to prevent a company from declaring bankrupt or to survive a competitive market. While this approach may be good, it is not without its challenges. Four major issues will be discussed below.

1. Loss of Employment

M & A as a form of corporate restructuring often leads to downsizing, the merging companies usually retain staff with the best talent while the others are rendered redundant. This also results in a change in leadership positions and the staff are sometimes reassigned new roles that they were not accustomed to. Losing staff as a result of M & A could also result in a substantial drain of knowledge and efficiency in the workplace.

2. Poor International Relations

80% of M & A deals involve companies that have branches in more than one country. Hence, companies are exposed to foreign markets and business laws that they have little or no experience in. The language barriers and cultural differences also affect the company’s performance across the borders.

3. Communication Challenges

Oftentimes, M & A occur without warning or communication with the employees. When the merger occurs, it leaves the staff groping for answers as regards why the companies are merging, the effect of the merger and other concerns. Failure of the top-tier management to provide answers to questions that the employees don’t voice out creates distrust, feeling of betrayal and fear of loss of employment which will, in turn, lead to lower employee engagement and a high rate of employee turnover. The merging companies hereby suffer financial loss. Especially because two different companies with different corporate cultures and work ethics are coming together.

4. Targeting the Wrong Company

The merging or acquisition of the wrong companies may result in economic disaster within a space of two years. Economic disaster here connotes financial loss or the winding up of the company. It is often caused by failure to conduct due diligence on the targeted company or the acquiring company.

In the banking sector, M & A sometimes cause the large institution created to deviate from providing loans and other retail-oriented services to small businesses as new opportunities to provide services for large capital market participants would exist. Small banks are eliminated, thus precluding small enterprises from easy access to banking services.

The principle of ‘whatever drags, gets dirty’ should not apply to merger and acquisition. It is not a procedure that should be rushed or the company faces the risk of economic disaster. Companies that intend to adopt this method of corporate restructuring must conduct due diligence.

Conclusion

Conclusively, merger and acquisition is a form of corporate restructuring resorted to by companies for the purpose of economic survival, better leadership, diversification of products inter alia. Most importantly, it is adopted when the company still desires to remain a going concern. Merger and acquisition are governed by the Investment and Securities Act, Securities and Exchange Commission Rules and Companies and Allied Matters Act. These statutes provide a codified procedure of obtaining merger, any other method outside the laws contained in the statutes will be rendered a nullity.

Copyright © 2021 By Olapeju Badmus

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