Prior to the enactment of the Companies and Allied Matters Act No.3 of 2020 (CAMA 2020), investors in Nigeria were limited to the use of companies limited by shares, general or limited partnerships or private trusts as investment vehicles. The implication of this was that investors could only enjoy the benefits unique to only one type of vehicle such as limited liability (only applicable to a company) or tax transparency and structural flexibility (only applicable to a partnership).
Although the limited liability partnership (LLP) structure was, at one time, available in Lagos State under the Partnership (Amendment) Law of Lagos State 2009, its use was limited by it being a product of state law. As such, key national legislation governing investments did not recognise LLPs. These legislation include the old Companies and Allied Matters Act Cap C.20 LFN 2004 (the old CAMA), the Investments and Securities Act, 2007 and related regulations by the Corporate Affairs Commission (CAC) and the Securities and Exchange Commission (SEC).
Post-CAMA 2020
With the enactment of CAMA 2020, investors in Nigeria are able to merge the benefits of a company limited by shares and a partnership as a result of Part C, Section 746, of CAMA 2020 providing for a LLP as a body corporate with separate legal personality and with perpetual succession.
|
|
“Where the partnership is an LLP, there is the additional advantage of having a separate legal entity, limited liability for its members and perpetual succession” |
|
|
CAMA 2020 in its Part D, Section 795, has also made more specific and elaborate provisions for a limited partnership (LP) than was the case in the old CAMA. The old CAMA made provisions for a ‘business name’ which could be a partnership. However, business names were only registrable with CAC under certain conditions, such as where the name does not consist of the actual names of the partners and were not restricted to partnerships. The old CAMA did not, therefore, specifically regulate the creation and management of partnerships. This was because the Nigerian constitution made partnerships a matter for state legislation.
The legal framework for a partnership, therefore were laws passed by state legislature such as the Partnership Law of Lagos State, or the UK Partnership Act of 1890 which was applicable to some states in Nigeria as a statute of general application – a colonial era mechanism by which UK laws passed before 1900 became automatically applicable to Nigeria.
Pros and cons of companies and partnerships as investment vehicles
Generally, in structuring investments, investors would usually opt for the investment vehicle which offers the most advantages that align with their investment objectives.
A private limited liability company has the following advantages:
It has a legal personality separate from the members;
It has perpetual succession;
Its shares are transferable;
The liability of its members is limited to their capital contributions; and
Greater access to capital and skills.
The disadvantages of a private limited liability company include that:
It is relatively more formal, rigid and can be expensive to establish with regards to minimum capital requirements;
It is not tax efficient because it is subject to corporate tax in addition to the personal income tax of the owners; statutory minimum capital requirements could also increase tax exposure in the form of duties payable on its instruments and which are assessed based on the value of the capital;
Relatively higher incidence of the economic problem of principal-agent ownership as a result of ownership being separated from management – control is in the hands of those who have no stakes in the company,
Relatively higher exposure to regulations; and
The process of dissolution is cumbersome.
On the other hand, the advantages of partnerships are that:
They are easy to form, less formal and flexible;
Ownership and control are usually combined and enables quicker decision-making;
Privacy of affairs combined with limited external regulation;
Lenient audit requirements and tax efficiency – no tax on corporate income tax as only personal income or partners are payable; and
Termination of partnership is not cumbersome.
The disadvantages of partnerships include that:
There is no separate legal personality;
In the absence of a partnership agreement, the death or exit of a partner terminates the partnership; and
Except in the case of LLPs, the liabilities of members or some classes of members are unlimited.
Private equity firms, venture capital investors, asset managers and other investment firms in Nigeria most commonly structured their fund vehicles as LPs. This structure protected investors from liability and offered the structural flexibility and tax efficiencies of a partnership. Most investors in Nigeria however preferred to register offshore LPs, perhaps due to a relatively uncertain legal framework for LPs in Nigeria. As noted above, there was no definitive national law for an LP. Although there are references to LPs in SEC regulations, such references did not define specific attributes or principles applicable to LPs.
LLP or LP
In considering the options of an LLP, LP or company limited by shares as an investment vehicle in Nigeria, what distinguishing factors arising from the new provisions of CAMA 2020 are relevant to an investor?
Limited liability, legal personality and perpetual succession
Generally, an LP has no independent corporate legal existence distinct from that of its partners. This is because partnership is generally based on the law of agency, with each partner becoming an agent of both the partnership and the other partners. Where the partnership is an LLP, there is the additional advantage of having a separate legal entity, limited liability for its members and perpetual succession.
In considering the options of an investment vehicle, the principle of limited liability is common to both LPs and LLPs but does not apply equally to the two structures. The liability of the general partner in an LP (usually the fund or asset manager) for the debts and obligations of the partnership is unlimited. In an LLP, Section 766 (3) and (4) of CAMA 2020 expressly provide that any contractual or other obligation of the LLP is solely that of the LLP and its liabilities shall be satisfied out of the property of the LLP.
Furthermore, the historical legal principle is that a limited partner may lose the limited liability protections if such a partner became involved in the day-to-day management of the fund or asset (now codified by Section 806 of CAMA 2020). On the other hand, a partner in an LLP does not lose the limited liability protection by becoming involved in the management of the partnership.
However, it should be noted that Section 750 of CAMA 2020 imposes a personal liability on a ‘designated partner’ in an LLP for any statutory penalties against the LLP for non-compliance with the law. A designated partner is specifically required by CAMA 2020 to ensure compliance with the provisions of the act or the partnership agreement. However, this form of liability is distinguishable from the liability for debts and obligations borne by a general partner. This is because the liability of a designated partner, being the statutorily appointed compliance officer, is a risk that is within the control of the designated partner and therefore can be mitigated.
The LLP structure therefore offers greater limited liability protection for the partners than those of an LP.
An LLP, having the attribute of perpetual succession, could also offer more as an investment vehicle for transgenerational wealth. Before now, transgenerational investments – whether for families in respect of descendants or businesses in respect of employees – were typically made subject of private trusts. Persons inheriting assets or income in an LLP may enjoy more statutory protection and control over the affairs of the LLP than beneficiaries under a trust.
Partners as agents of each other
The general rule is that the partners of an LP are deemed to be agents of both the partnership and the other partners. This is because Section 808 of CAMA 2020 provides that the Partnership Act 1890, a colonial relic incorporated as law in many states in Nigeria, is applicable to LPs registered in Nigeria. Section 5 of the Partnership Act 1890 provides that every partner is an agent of both the partnership and other partners for the purpose of the business of the partnership. In the states where the UK Partnership Act 1890 no longer applies, the state legislature has enacted partnership laws that are mostly based on the provisions of the UK law.
In the case of an LLP, Section 765 provides that a partner is an agent of the LLP but not of the other partners. This adds an extra layer of protection to a partner in an LLP against any unlawful activity of the other partners.
Contribution to partnership
The contribution required to be made by a partner in an LP is different from that required to be made by a partner in an LLP. By Section 795(4), each limited partner shall at the time of entering the partnership contribute either capital or property to the partnership. On the other hand, by Section 770 (1) the contribution of a partner in an LLP may consist of tangible, intangible, movable, immovable property or other benefit to the LLP, including money, promissory notes, other agreements to contribute cash or property, and contracts for services performed or to be performed.
Thus, whereas the contribution of a partner in an LP must be in form of either cash or property, the contribution of a partner in an LLP may be any other benefit such as time, resources, personal skills or services. The converse to this advantage is that it may raise questions as to valuation, both for purposes of initial contributions and in the distribution of income.
Investment liquidity
The capital contribution made by a partner in an LLP is more easily converted to cash than those of a partner in an LP. Section 763 of CAMA 2020 provides that an exiting partner of an LLP (or a successor-in-title in the case of death) is entitled to the amount equal to the partner’s capital contribution or a share of the net profits of the LLP.
The converse is the case for a partner of an LP. Section 795 (5) of CAMA 2020 provides that a limited partner cannot draw out or receive back the partner’s contribution while the partnership continues to exist. Where the partners draw on the contribution during the life of the partnership, such limited partner becomes liable for the debts and obligations of the partnership up to the amount drawn.
In practice, LPs resolve this limitation by typically structuring the investments of the partners as a debt rather than a contribution (or making the contribution a token sum).
Number of partners
CAMA 2020 does not provide a limit to the number of partners in an LLP but provides for a minimum of two partners. By Section 795 of CAMA 2020, an LP cannot have more than 20 partners. An LLP therefore can pool more investors than an LP.
Winding up and dissolution
The provisions for winding up and dissolution of an LP are not elaborate. By Section 806 (3), except otherwise ordered by the court, the affairs of an LP shall be wound up by the general partners. This implies that the court may be involved in the winding up of an LP. It does not however disclose the circumstances under which an application may be made to the court to wind up an LP.
This is not the case for an LLP. By Section 789, the winding up of a LLP may be either voluntary or by the court. Section 790 outlines six grounds under which an LLP may be wound up by the court. This provides clarity and protects against arbitrary actions of any partner.
Implication of registration – wider range of lawful activities
By Section 756, the implication of registration of an LLP is that it can sue and be sued in its name, it can acquire, own, hold and develop or dispose of property, whether movable or immovable, tangible or intangible. An LLP may have a common seal and it can do and suffer such other acts and things as bodies corporate may lawfully do and suffer. This is not the case for an LP.
Transfer of rights
By Section 774 (1), unless otherwise provided in the LLP agreement, the rights of a partner to a share of the profits and losses of a LLP and to receive distributions in accordance with the LLP agreement are transferable either wholly or in part. This provision allows for the transferability of rights in an LLP in the same way obtainable in limited liability companies.
|
|
“By Section 795 of CAMA 2020, an LP cannot have more than 20 partners. An LLP therefore can pool more investors than an LP” |
|
|
Although this comes with restrictions in that by Section 774 (3), the transfer of a right does not, by itself, entitle the transferee or assignee to participate in the management or conduct of the activities of the LLP, or grant access to information concerning the transactions of the LLP, nonetheless this will be an attraction for investors who may want to exit the partnership and sell their stake in it.
This provision on transfer of rights is not ordinarily available to an LP. It should be noted, however, that the structuring of investments as debt to the LP also enables the transferability of debt in accordance with the legal principles applicable to property.
Statutory filings and disclosure requirements
By Section 772, an LLP is required to maintain a proper financial and accounting system. This includes the maintenance of proper books of accounts, statements of accounts and solvency and conduct of periodic audits.
By Section 773, an LLP is required to file its annual returns. These finance control measures will be a source of attraction for prospective partners who may want to know the state of affairs of the partnership and reduces information asymmetry. It also serves as a source of comfort to non-active partners who can monitor the growth and performance of the partnership.
Caveat
For all its benefits, an LLP may be potentially limited unless an investor exercises some basic precaution. CAMA 2020 devolves many issues to the partnership agreement. While this is an advantage by the nimbleness it offers to investors, it also creates a need for a careful negotiation of terms to ensure proper risk allocations and protections for investors. A non-exhaustive list of key headline terms to consider carefully are:
Valuation principles and mechanisms – of non-cash contributions and any future reward or incentive scheme for partners including bonuses and fees;
Management and day-to-day control in order to ensure the limited liability principle does not create a moral hazard on the part of management;
Number of partners; and
Appointment (and rotation?) of designated partners.
A growing trend for investors
The LLP structure was traditionally the preferred mode for firms in the (professional) services sector. However, it has increasingly become attractive as the investment vehicle for private equity and venture capitals firms or other investors generally. LLPs enable investors to take advantage of the benefits of limited liability applicable to companies and the tax transparency and structural flexibility of a partnership structure.
Unlike a limited liability company, LLPs will not be subject to corporate tax as only the personal income of the partners from the LLP will be taxable. Also, unlike a general or limited partnership, the liability of all the partners is limited to their individual contributions irrespective of a partner’s involvement in management of the partnership. LLPs can also enjoy flexibility in their structuring as Section 762 of CAMA 2020 allows the partners to determine their mutual rights and duties by agreement between the partners or between the LLP and the partners.
While some jurisdictions have sought to limit the use of LLPs as investment vehicles, no clear reason has emerged for this reluctance in those jurisdictions.
Further reforms
With the coming into effect of the CAMA 2020, further legislative reforms may be needed to harmonise the various investments laws in Nigeria in line with CAMA 2020.
The consolidated Rules and Regulations of the Securities and Exchange Commission (the Rules), for instance, may require amendment to acknowledge the new legal entities created nationally by CAMA 2020. Specifically, Rule 555 of the Rules stipulates that a mandatory provision of a partnership agreement is that a fund provider shall be a limited or non-active partner. The provisions of CAMA 2020 has clearly expanded the limits of a partnership structure for investments through the creation of the LLP structure.
Click here to read all the chapters from IFLR's Africa Market Makers 2021
Chukwubuike Onwuzurumba
Partner
Oake Legal
T: +234 1 453 6900
Chukwubuike Onwuzurumba is a partner at Oake Legal, where he leads the firm’s dispute management and resolution practice group, and is a key member of the firm’s project development and finance practice group.
Chukwubuike has deep knowledge, experience and understanding of privately financed infrastructure projects in Africa. He has worked on electric power transactions in Africa exceeding 6500MW in capacity and $1 billion in deal size, representing a client base that includes private equity firms, multinational engineering, procurement, and construction (EPC) companies, upstream/downstream oil and gas operators, financing syndicates and regulatory bodies.
Chukwubuike is a graduate of the University of Nigeria and has a LLM in law and economics from Queen Mary University of London.
Chrysolyte Egonu
Associate
Oake Legal
T: +234 1 453 6900
Chrysolyte Egonu is an associate at Oake Legal, where he is a member of the firm’s capital markets, dispute resolution and M&A practices.
Chrysolyte advises clients in diverse industries on transactions involving investments and divestments, structuring and receiverships, corporate, commercial and financing arrangements. He is reputed for developing effective and efficient transaction and advisory strategies that reduce exposure while achieving the best obtainable outcomes for clients.
Chrysolyte is a graduate of the University of Nigeria.
