There has been significant change in the legal framework and market practice for mergers and acquisitions in Nigeria in recent times and more change is expected. Worthy of note is the new regulatory regime for mergers and acquisitions heralded by the passage of the Federal Competition and Consumer Protection (FCCP) Act in 2019 (the Act). The Act repealed sections 117 – 130 of the Investments and Securities Act, 2007 (ISA), stripping the Securities and Exchange Commission (SEC) of its regulatory powers over mergers and acquisitions in Nigeria and creating a new commission with powers to, among other things, regulate mergers and acquisitions in the country. The FCCP Act empowers the FCCP Commission to review all mergers and business combinations in order to ensure that they do not impede or distort the market or stifle competition. The oversight extends to mergers between non-Nigerian entities that result in a change of control of a Nigerian business.
The ISA did not provide clear rules on foreign mergers resulting in change of control of a Nigerian business. As such, parties to such mergers did not typically seek the approval of the SEC, although in certain instances, parties would notify the SEC, particularly in the cases where the merger would have required notification to the SEC if it was being conducted by Nigerian entities or where a Nigerian public company was involved. In contrast, sections 2(3)(d) and 92(1)(a) of the Act extends the FCCPC Commission's oversight to foreign mergers that result in a change of control (directly or indirectly) of a Nigerian business or asset.
Prior to November 2019, the provisions of the rules and regulations of SEC (SEC Rules) applied to all merger transactions. This is because the FCCP Commission and SEC had issued a joint advisory and guidance note on May 3 2019 stating that the SEC Rules will guide the process for obtaining approval for mergers pending the issuance by the FCCP Commission of its own rules in this regard. The FCCP Commission issued the Guidelines on Simplified Process for Foreign to Foreign Mergers with Nigerian Component (the Guidelines) in November 2019. The Guidelines only apply to foreign mergers with a Nigerian component.
Four pillars
The Guidelines have four key components: a simplified/standard approval process; a notification threshold/requirement; an application fee; and an expedited process.
There is a simplified approval procedure for foreign mergers with Nigerian component. The intention behind the Guidelines is to simplify the process for obtaining the FCCP Commission's approval in relation to foreign mergers with a Nigerian component. The documentation required to support an application for approval is significantly less than is prescribed by the SEC Rules for obtaining approval to purely local mergers. The documents specified in the Guidelines include:
an information memorandum showing the effect of the transaction on the Nigerian market;
the merger transaction document(s);
audited financial statements for the financial year immediately preceding the notification;
an executive summary of the transaction for publication by the FCCP Commission;
a power of attorney granting authority to the relevant Nigerian representative(s) to undertake the necessary filing with or notification to the FCCP Commission; and
non-confidential summary of the merger to be published by the FCCP Commission.
This documentation requirement is significantly less than required for local mergers, for which applicants must, in addition to the documents listed above, also submit draft financial services agreement(s) with the merging parties and their financial advisers; signed and notarised consent letters of directors and parties to the merger; list of claims and litigation of the merging parties; and draft proxy forms for each of the merging parties.
Regarding the notification threshold, the FCCP Commission has issued a Notice of Threshold for Merger Notification further to section 93(4) of the Act (the Threshold Notice). The Threshold Notice requires notification of a merger to be given to the FCCP Commission prior to its implementation where: the combined annual turnover of the acquiring undertaking and the target undertaking in, into or from Nigeria is at least N1 billion (approximately $2.78 million); or the annual turnover of the target undertaking in, into or from Nigeria equals or exceeds N500 million. Mergers below these thresholds do not require prior notification to the FCCP Commission unless a notification is specifically required by the FCCP Commission. S 167 of the FCCP Act, defines a target as: "an undertaking, which as a result of a merger, the whole or part of whose business would be directly or indirectly controlled by an acquiring undertaking or would directly or indirectly transfer control of the whole or part of its business to an acquiring undertaking".
Given that the thresholds are denominated in naira, the currency exchange rate plays a key role in determining where a foreign merger with Nigerian component requires the prior approval of the FCCP Commission. The Threshold Notice requires turnover in foreign currencies to be converted to naira at the prevailing exchange rate determined by the Central Bank of Nigeria. In view of the recent "adjustment" of the naira against the US dollars, some of the transactions which would have fallen below the notification threshold as at March 2020 will now be classified as a large merger under the Threshold Notice, and will therefore require the prior approval of the FCCP Commission.
The Guidelines prescribe fixed and variable fees for the processing of applications for approval depending on the nature of the merger. The fixed fee portion is a welcome development, when juxtaposed against the graduated processing fees prescribed by the SEC Rules. The SEC Rules prescribed fees that were fully based on the value of the transaction or the assets being acquired.
The fee applicable to transactions involving undertakings with a combined turnover of N1 billion and above is N3 million or 0.1% of the combined turnover, whichever is higher. A fixed application fee of N2 million will be paid where the annual turnover of the target undertaking in, into or from Nigeria equals or exceeds N500 million. The parties are not required to pay a separate filing fee, in addition to the processing fee and the fee for an expedited process, if applicable (see below). This is again in contrast to an application for approval to a local merger where the parties pay both filing and processing fees as prescribed by the SEC Rules.
The Guidelines also introduced an expedited procedure option for parties. Under this option, the FCCP Commission is expected to conclude its review of the transaction and issue a decision within 15 days of application. The time starts to run from submission of all documents required by the Guidelines. This procedure requires payment of an expedited procedure fee of N5 million, in addition to the relevant processing fee. Applications under this procedure are considered more quickly than the standard procedure which will typically take 60 days to complete. Where adequate documentation is not submitted under the expedited procedure, and a notice of deficiency is issued by the FCCPC Commission, the application will be moved to the standard applications list and will no longer be processed under the expedited procedure.
Monitoring foreign mergers
In March 2020, the FCCP Commission released its draft Merger Review Regulations (the Draft Regulations). The Draft Regulations seek to provide a regulatory framework for the review of mergers, including foreign mergers with a Nigerian component.
The Draft Regulations seek to expand the provisions of section 92(1) of the FCCP Act in relation to foreign mergers with a Nigerian component. Paragraph 9 of the Draft Regulations defines foreign mergers requiring the approval of the FCCP Commission to include a merger that will occur purely as a result of a transaction involving undertakings wholly domiciled outside Nigeria, if it has a local component materiality, such as having subsidiaries in Nigeria. This is notwithstanding that such a merger does not attain the turnover requirement prescribed by the Threshold Notice. As stated earlier, a transaction is notifiable where it meets the prescribed threshold requirement. Where a merger does not satisfy this condition, there should be no requirement to notify the FCCP Commission except in the case of a small merger that, in the opinion of the FCCP Commission, can lessen competition.
The Draft Regulations also provide for the appointment of a local legal representative to aid with the notification process on behalf of the parties to a transaction. It has been suggested that this provision should be expanded to include financial advisers, as was applicable under the SEC Rules.
Welcome development
The Guidelines are novel and are a welcome development. They address the uncertainties that had hitherto surrounded the treatment of local mergers or business combination that result from foreign mergers.
It is our expectation that the provision of the Draft Regulations, which seeks to expand the provisions of the FCCP Act by requiring the approval of the FCCP Commission for foreign mergers with material local component notwithstanding the combined turnover, will be amended to align with the provision of the Act to ensure uniformity.
Kenechi Ezezika
Partner, OAKE Legal
Lagos, Nigeria
Tel: +234 (1) 453 6900
Kenechi Ezezika heads the OAKE Legal's M&A, capital markets, corporate and investments, and governance, reporting and compliance practices. She is widely recognised for her astuteness, practicality and ability to deliver excellent legal advice and support. She routinely leads acquisition and divestment engagements, including cross-border acquisitions, handling preliminary deal structuring through to post-completion support. She has led several notable M&A and capital market transactions. She has extensive experience advising clients on financing arrangements, corporate restructuring and joint-ventures, as well as on a wide range of commercial transactions and governance and compliance matters.
Kenechi advises a wide range of diverse clients including local and international entities and multinationals. She is also affiliated with several NGOs.
Kofoworola Toriola
Associate, OAKE Legal
Lagos, Nigeria
Tel: +234 818 376 8745
Kofoworola Toriola provides general legal advisory, regulatory and company secretarial services, as well as compliance and transactional support, on corporate and commercial transactions. He also provides finance and property law advice to various clients in diverse industries. Kofoworola has advised on several M&A transactions in various industries including agriculture, banking and health and fitness.