Synopsis On Mergers In The Nigerian Market
Editor’s Note: There is an updated version of this article. Click here to read.
There are different options available to companies wanting to engage each other in forming a stronger business organization for continuation of their object and, perhaps, to salvage a state of recession or total shut down. These options are generally referred to as ‘External Corporate Restructuring’. External Restructure of corporate bodies involves the different business arrangements and reshuffles involving more than one company. Such reorganization depends on the intent, desire and agreement between the involved bodies.
Merger is one of these options.
Mergers, according to section 119(1) of Investment and Securities Act (ISA), 2007, is any amalgamation of the undertaking or any part of the undertakings or interests of two or more companies in the undertakings of part of the undertakings of one or more corporate bodies. In other words, 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 substantial number of the shareholders of both companies. Pursuant to the ISA, the Securities and Exchange Commission (SEC) is the key regulator of mergers in Nigeria.
Forms of Mergers
Mergers could either be horizontal, vertical or conglomerate. 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 Law firms, Banks, Telecommunication Companies etc. It is vertical when it is between two companies in complimentary businesses. This form of merger operates at different levels of production at the same market in the same geographical location. For example, where a timber processing company merges with a furniture making company. Lastly, a conglomerate merger is a merger between two or more companies in different lines of businesses. For example, a clothing company and a construction company.
Types of Mergers
The SEC (Consolidated) Rules of 2013 provides for the thresholds of a merger. Merger thresholds are measured by an aggregation of the combine assets or turnover of the companies involved. The procedure for a merger is determined by the threshold under which the merger falls and by the provision of section 120 of the ISA, there are three classes and thresholds for merging companies in Nigeria. They are:
- Small Mergers: This is a merger or proposed merger with a volume at or below the lower threshold, which is 1 Billion naira.
- Intermediate Merger: This is a merger or proposed merger with a value between the lower threshold and upper threshold i.e. 1 billion- 5 billion naira.
- Larger Merger: This is a merger or proposed merger with a value at or above the upper threshold which is 5 billion naira.
Procedures for Merger:
The process of 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. Rule 426(1) of SEC Rules states the requirements of content of a merger notification report.
- Fila an application in the Federal High Court seeking an order to convene a court-ordered meeting. At this meeting, the shareholders of the merging companies 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 Union or representative of its employees.
- Following the resolution at the court-ordered meeting, the parties will file with the SEC a formal application for approval of the merger. SEC is to consider the notification within 20 days of the receipt 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. These reasons must be gazetted.
- Comply with post-approval requirements such as newspaper publication of the approval and making necessary filings at the CAC.
Note that the SEC still retains the power to break up a merger even after the completion of the merger when for example, it is found out that the business practice of the ‘new entity’ substantially lessens competition or is in conflict with public interest, these are grounds on which the SEC could refuse the mergers in the first place.
The laws regulating mergers in Nigeria is very extensive and such transactions must be undertaken in compliance with these laws so as to avoid any sanction which can be far reaching for example, imposition of administrative fines on the entities and the unwinding of the transaction.
Editor’s Note: This artcile has been updated here.