Many times, corporate entities are faced with myriads of challenges which may prompt them to have synergies with other corporate entities. Such synergies have become crucial to them for certain reasons: (1) the threat of being outdone by their competitors; (2) a dearth of expertise needed to meet the increasing demands of the corporate world; (3) the growth of technology necessitating an expanded base; or (4) the demands of what some may call “regulatory strangulation” requires the existing corporate entities to fuse their businesses with others (as we have seen recently in Nigeria). As a result, companies are now increasingly deciding to pursue fusion as a corporate strategy. The process of a company fusing with another is what we generally refer to as a merger.
Despite prevailing global economic growth concerns, corporate entities still look to mergers as a key step for expansion and consolidation, whether within their jurisdiction of operation or outside. For example, a 2016 report by Deloitte shows that 75% of companies in the worlds’ largest economies still pursued foreign companies for the purpose of consolidation in 2015. Thus, the global mergers and acquisitions volume topped $4.7trillion in 2015, while those of 2014 topped $3.4 trillion. The Nigerian business landscape is no stranger to mergers. We have in the past seen the merger of Unilever Nigeria Ltd and Lever Brothers Nigeria Plc. in the 90s and the well-publicised mergers of several banks in the banking consolidation era of 2004 and 2005 and many other mergers.
A merger is a process where two previously autonomous companies combine to form another company under the common control of a new company comprising of all or a substantial number of the shareholders of both companies. A merger may be referred to as an “amalgamation” because it involves the fusion or absorption of one or more set of corporate rights into another. This is the tenor of the definition provided by the Section 119 of the Investments and Securities Act 2007 (ISA) and Rule 421 of the Security and Exchange Commission’s Rules and Regulations 2013 (SEC Rules 2013).
Mergers and Acquisitions, any difference?
Very closely related to a merger is an acquisition. However, there is a difference between an acquisition and a merger. An acquisition is the direct or indirect control over the assets of the acquired company by the acquiring company or entity. But in a merger, the separate shareholding in the combined company will be spread between the shareholders of the two companies – more of a fusion. Sometimes the distinction is a question of degree of control or might of one of the companies. If the dominant company makes a share-for-share exchange for a target company of roughly the same size, it is essentially a merger. If the dominant company is larger than the target company, then the transaction is more of an acquisition.
Types of Mergers
Mergers could either be a horizontal, vertical, or conglomerate merger. A merger is horizontal when it involves two or more companies in the same line of business. An example is a merger between two or more pharmaceutical companies. It is vertical when it is between two companies in complimentary businesses. An example is a company into timber processing and a furniture maker. While a conglomerate merger is a merger between two or more companies in different lines of businesses. For example, a sugar processing company and a cement manufacturing company.
Why Do Companies Merge?
Some reasons why companies merge or have to merge have already been stated in the opening paragraph. But there are several more reasons. It could be that the merging companies are trying to meet with the demands of statutory regulation as we saw amongst the banks and insurance companies in Nigeria in 2005 and 2009. The merging companies could also be trying to diversify their operations as well as their market reach. This is mostly the case in conglomerate mergers. The merging entities could as well be seeking to increase their productive capacity, improve output, and reduce long-term cost. We saw this in the oil industry in Nigeria in 2014 and 2015. Companies may also decide to go into a merger due to lack of required expertise in key aspects of their business. Another reason may be to achieve capital market quotation. A private company desirous of been quoted on the Nigeria Stock Exchange (NSE) but unable to meet Listing or Dealing Member requirements may decide to merge with a public company to meet its desired end. This list is inexhaustible as companies could merge for various other reasons.
Regulatory Framework for Mergers in Nigeria
The first and probably most crucial regulator is the Securities and Exchange Commission (SEC) established by ISA. Section 118(1) of ISA provides for the prior review and approval of SEC for mergers and any other form of business combination.
As a result of the above provision, SEC performs a very ubiquitous role in the merger process. In fact the regulatory ambit of SEC over merger was widened by the SEC Rules 2010. Before the 2010 Rules, SEC’s regulatory focus was on mergers between entities incorporated under Part A of the Companies and Allied Matters Act (CAMA). But after the 2010 Rules, SEC’s approval is required for mergers between partnerships and federal government-owned agencies. This requirement has been maintained in SEC Rules 2013.
In regulating and granting approvals for mergers, SEC must have its duties under section 121 ISA in mind. One of these duties relates to investigating a merger for any likely infractions of anti-competition requirements. SEC will not approve any merger that is likely to cause substantial restraint of competition or will create a monopoly. This is very important especially in horizontal mergers–merger between companies in the same line of business. There is currently a competition bill before the National Assembly. If the bill becomes law, a new regulatory body will also have oversight over mergers for the purpose of preventing anti-competition practices and monopolies. SEC will have to take its duty under section 121 ISA more seriously.
In terms of resolving disputes concerning mergers, the Federal High Court is the constitutionally enabled court. The Federal High Court handles matters with respect to companies management and regulation in Nigeria. The Constitution gives the Federal High Court exclusive jurisdiction with respect to matters on the operation of the CAMA; operation of companies; and any legislation replacing CAMA. So it is the Federal High Court that makes orders for the holding of a meeting by the shareholders of the merging entity to consider the merger scheme and also sanctions the merger scheme. The Court also deals with any objections to the merger scheme. The Federal High Court’s powers over merges is provided in section 7(1)(c)(i) of the Federal High Court Act (which for our purpose is on all fours with section 251(1)(e) of the CFRN).
Resolutions, sanctions, and related corporate documents are usually filed with the Corporate Affairs Commission (CAC). Parties will need to deregister dissolved companies at the CAC.
The Nigerian Stock Exchange (NSE) is relevant where quoted companies are involved because they are required to meet NSE’s Listing Rules. If the merging companies or one of the companies is a bank, the Central Bank of Nigeria (CBN) becomes interested as well.
The consent of certain other regulatory bodies is required for merging companies who are in regulated businesses. For example, mergers involving a company licenced to carry on business in the power sector require the consent of the Nigerian Electricity Regulatory Commission to undergo a merger.
Classes and Thresholds for Mergers
The procedure for merger is determined by the threshold under which the merger falls. By the provision of section 120 of ISA, there are three classes and thresholds for merging companies in Nigeria–small, intermediate, and large mergers. The threshold that determines each class has continued to evolve since 2007 as the table below shows:
|SN||Class of Merger||Threshold under ISA 2007||Threshold under SEC Rules 2010||Threshold under SEC Rules 2013|
|1||Small merger||Below N500million||Below N250million||Below N1billion|
|2||Intermediate merger||Between N500million and N5billion||Between N250million and N5billion||Between N1billion and N5billion|
|3||Large merger||Above N5billion||Above N5Billion||Above N5billion|
Merger thresholds are measured by an aggregation of the combined assets or turnover of the companies involved. While the threshold for large mergers has remained the same over the years, thresholds for small and intermediate mergers have seen upward and downward adjustments.
Regulatory Procedure for Mergers in Nigeria
Before now, there was no requirement to notify SEC of a small merger. This is by virtue of section 120 of ISA. But under the new SEC Rules, parties to a small merger are required to inform SEC after concluding the merger scheme. It is arguable whether SEC can make rules that deviate from the provisions of the Act.
Some practitioners hold the view that it may be prudent for the parties to a small merger to inform SEC of its proposed merger even from the outset. This will minimize or completely avoid any potential regulatory risks that would have been involved in a situation where parties to the merger have already concluded the merger process. Though from a practical angle, since parties would like to streamline the process as much as possible and avoid regulatory bottlenecks, many will prefer to avoid notifying SEC of a small merger from the outset.
As it applies to a small merger, when a holding company acquires shares “solely for the purpose of investment”, it does not need to notify SEC. How the test of “solely for investment” operates can be sometimes hazy. But where the investing entity will have voting rights, the holding company will most likely require SEC’s approval. In this case, the rights of the holding company under the Share Purchase Agreement should be broadly construed.
The process for a merger can be summarized as follows:
- Parties agree to merge in principle, after conducting necessary due diligence;
- File a merger notification for evaluation with SEC. This is where notice is required (as in an intermediate or large merger). Rule 426(1) of SEC Rules states the requirements of contents of a merger notification report;
- File an application in the Federal High Court seeking an order to convene a court-ordered meeting. At the court-ordered meeting, the shareholders of the merging entities will consider the scheme and resolve by special resolution for or against the scheme. The merging parties must each provide a copy of the merger scheme to any registered trade unions or representatives of its employees. For example where it involves a company in the oil and gas sector, the scheme must be made available to PENGASSAN (Petroleum and Natural Gas Senior Staff Association of Nigeria) and NUPENG (Nigeria Union of Petroleum and Natural Gas Workers);
- Following the shareholders’ resolution at the court-ordered meeting, the parties will file with SEC a formal application for approval of the merger. SEC is to consider the notification within 20 days of the submission of the notification or it may extend the period within which it will consider the merger by a single period not exceeding 40 working days in which case it must issue a Certificate of Extension. It is at this point SEC applies the anti-competition test as required by section 121 of the ISA to ensure that the merger does not result in any substantial lessening of competition or create a monopoly in the relevant industry. SEC then approves unconditionally, approves subject to conditions, or prohibits the merger with reasons. Its reasons are to be gazetted.
- Comply with post-approval requirements such as newspaper publication of the approval and making necessary filings at CAC.
It is apt to note that even after the completion of the merger, SEC has power to still break up the merger when for example it finds out that the business practice of the ‘new’ entity substantially lessens competition or is in conflict with public interest.
Nigeria is perhaps sub-Sahara Africa’s biggest merger market. Despite the current economic conditions, the market has still attracted deals especially as oil and gas companies struggle to remain afloat in the wake of low oil prices and companies in the financial services sector look for ways to diversify their portfolio. Despite these, it is clear that the decline of foreign investors’ appetite in Nigerian equities due to forex conditions and government policies will impact on the volume of merger deals this year.
Regulators such as SEC must continue to play their role in a way that helps streamline deals. For example, SEC should make public the principles and conditions it uses to determine whether a particular merger or proposed merger does not encourage competition. Although if the Competition Bill is passed into law, a Competition Commission will be responsible for carrying out the anti-competition test, regulatory clarity is still required.
The broadening of SEC’s oversight to mergers amongst partnerships is quite interesting. It must have been informed by the growing trend of private equity firms setting up as partnerships with huge investment portfolios and diversities of interests. In Nigeria’s challenging and exciting market, investors always have their eyes open.
Y. D. Amakiri practices and advises on corporate and commercial transactions in Nigeria
 A version of this article was originally written in February and July 2013 as a series of five short articles with the title: “Defining the Frontiers of Mergers and Acquisitions in Nigeria”. I decided to update and make over the initial. One of the reasons for the revision, is the release of SEC’s consolidated Rules in late 2013 and the amendments it sought to introduce. Also, this updated version focuses only on mergers as against discussing both mergers and acquisitions together. The divestment and acquisitions in the oil and gas industry and the acquisitions in the financial services (Skye Bank-Mainstreet, Heritage Bank-Societe-Generale, AXA-Mansard Insurance), telecoms sector (MTN-Visafone, Helios Towers) and FCMG (Vitafoam-Vono, BUA pasta), has also informed my decision to treat acquisitions separately in another article.
See also an article by the Wall Street Journal here: http://www.wsj.com/articles/broken-deals-rein-in-a-strong-m-a-market-1420155330
 Act No. 29 of 2007.
 “Partnership” is defined in Rule 421 as a voluntary relationship existing between two or more persons to carry on business as co-owners and share in the profit and loss.
 Rule 422 of the SEC Rules.
 Rule 424(1)(b) of the SEC Rules 2013.
 Albeit this is not a regulatory but contractual requirement.
 Section 122 of the ISA.