By Ayodele Faboya , Mavis Abada and Ibiyemi Ajiboye
1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions?
The most common forms of private equity (“PE”) transactions in Nigeria have traditionally been leveraged buyouts (by way of share or asset acquisitions), and expansion/growth capital. The market has, however, seen an uptick in venture capital (“VC”) and bolt-on acquisitions in the last couple of years, particularly in the fintech space.
Despite the worsening macro-economic indices (the National Bureau of Statistics (“NBS”) in fact reported that the investment inflow in 2022 was at its lowest in six years), PE transactions in Nigeria maintained an upward trajectory in 2022, with investor activity in sectors ranging from telecommunications, banking, waste management (recycling), financial services, fintech, information technology, oil and gas, and projects, amongst others. In 2022, 320 deals worth US$5.7 billion were recorded in the aforementioned sectors. Seed/Series funding and Venture rounds were the most popular, with 86 deals valued at US$886.3 million and 37 deals valued at US$50 million, respectively. Notably, the fintech sector recorded the highest deals valued at US$777.3 million. Whilst Q1 2023 showed a dip in activity, largely due to the uncertainties around the elections as well as foreign exchange (“FX”) liquidity challenges, market indices suggest a rally, post elections, and increased investor confidence.
1.2 What are the most significant factors currently encouraging or inhibiting private equity transactions in your jurisdiction?
Factors encouraging PE investor activity in Nigeria include: large population size, growing consumer demographics and increasing regulatory clarity – via restructuring of the oil and gas sector under the Petroleum Industry Act of 2021; operational reformation of the landscape for financial technology by the Central Bank of Nigeria (“CBN”); reform by the competition commission by the introduction of various guidelines and guidance notes, thus bringing certainty to mergers and acquisitions (“M&A”) and antitrust processes; recognition of PE-friendly corporate structures such as the LPs and LLPs by the Companies and Allied Matters Act of 2020 (“CAMA”); and increased governance flexibility with single member and single director companies, amongst others. In addition, the Federal Government’s Ease of Doing Business Initiative (“EoDBI”) with the aim to improve the business climate in Nigeria has driven the enactment of the Business Facilitation (Miscellaneous Provisions) Act, 2022 (“BFA”), which amends principal business-related provisions in legislations such as the CAMA, the Financial Reporting Council Act, Foreign Exchange (Monitoring and Miscellaneous Provisions) Act (“FEMMA”), Investment and Securities Act (“ISA”), Nigerian Investment Promotion Commission Act (“NIPC Act”), Nigerian Oil and Gas Industry Content Development Act, National Office for Technology Acquisition and Promotion Act amongst others. The enactment of the Nigerian Start-up Act 2022 creates a favourable business environment for startups by providing incentives and developing an ecosystem for startups to thrive.
From a tax perspective, tax reform also continues to be targeted at encouraging investment. The Finance Act 2021 designates Real Estate Investment Trust Scheme (“REITS”) and Unit Trusts as pass-through vehicles for tax purposes, to encourage investment through those asset classes, while the Finance Act 2019, had earlier introduced exemptions to Excess Dividend Tax rule, to avoid double taxation. The Venture Capital Incentives Act, whilst not new, has recently re-entered the spotlight as it provides significant tax incentives in relation to start-up investments. The dispute resolution framework also continues to evolve with the Lagos Court of Arbitration emerging as the highest ranked court of arbitration in Africa, in a study by White & Case and the Queen Mary University of London. A revised Arbitration and Mediation Act has also recently been passed by the legislature and is expected to improve the seamlessness of the arbitration process in Nigeria.
Despite the overall positive outlook, the general global trend of rising inflation, geopolitical risks and other fiscal pressures continue to be a hindrance and to influence the way transactions are executed. For instance, there has been an increasing shift to debt and quasi-equity transactions, as investors attempt to hedge their risks. It is also expected that more investment activities will be witnessed following the 2023 Nigerian general elections.
Regulatory-wise, regulatory bottlenecks as well as steep fees for regulatory approvals (sometimes running into hundreds of millions) continue to be an issue. Additionally, the Finance Act 2021 removed the exemption of share transfers from capital gains tax, imposed excise duty on non-alcoholic, carbonated, and sweetened beverages (aimed at discouraging excessive consumption of beverages associated with excess sugar-related illnesses), and increased the Tertiary Education Tax to 2.5%, amongst others; it remains to be seen how these changes will impact deal structuring going forward.
1.3 Are you seeing any types of investors other than traditional private equity firms executing private equity-style transactions in your jurisdiction? If so, please explain which investors, and briefly identify any significant points of difference between the deal terms offered, or approach taken, by this type of investor and that of traditional private equity firms.
Angel investors, family offices, institutional investors such as sovereign wealth funds and development finance institutions, and more increasingly, VC firms, execute PE-style transactions across the value chain, with VCs and Angel Investors focusing on start-ups, whilst family offices and institutional investors are more interested in growth-stage investments. We have seen an increase in PE/VC partnerships – for instance the Verod-Kepple Africa Ventures; as well as in co-investments. This has allowed PE firms to broaden their investment appetite by leveraging on the expertise that VC firms have in early-stage valuation/investment. There has also been increased focus on crowdfunding as alternative financing, particularly with the introduction of the SEC Rules on Crowdfunding. However, given that only micro, small and medium-sized enterprises can raise funds under the SEC Crowdfunding Rules and the maximum that can be raised is NGN 100 million, we do not view crowdfunding, as currently structured, as a viable alternative. It remains an area to be watched though, with Obelix, a SEC-regulated Crowdfunding Intermediary, fundraising NGN 100 million for three small and medium- sized enterprises (“SMEs”) in just 10 days earlier this year.
Some of these alternative financing sources can take longer-term positions than the traditional PE firms with five to seven years’ investment lifespan. The VC and HNI investments are also characterised by reduced due diligence investigations and speed of execution.
2. Structuring Matters
2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction?
Transactions are typically structured as bilateral acquisitions implemented via an offshore-registered special purpose vehicles (“SPVs”), which act as the holding company for a chain of portfolio companies. As noted earlier, worsening macroeconomics, election uncertainty, and risk management concerns have also recently led to an increase in quasi-equity and debt transactions or equity/debt combinations.
In early-stage investments, there is also increasing acceptance of the use of standard form agreements such as Simple Agreements for Future Equity (“SAFEs”), for convenience and flexibility.
2.2 What are the main drivers for these acquisition structures?
Main drivers for acquisition structures remain: control; profit maximisation; tax efficiency for investors and/or the post-acquisition group; FX liquidity issues; risk mitigation; exit prospects and ease of exit, lender requirements; and, in certain cases, sector-specific regulatory requirements, such as local content restrictions.
2.3 How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)?
The equity capital structure for equity contributed by PE investors typically consists of a combination of one or more of ordinary share capital, shareholder loans (which may be convertible), and preference shares.
Management equity is usually structured as ordinary shares, usually subsidised in the form of sweat equity or management incentive scheme, although there are cases in which management will inject capital.
Carried interest is typically dealt with as part of the fund formation and structuring and does not typically form part of the equity structuring at the portfolio company level. Management incentives tied to performance or returns for the PE investor at exit are, however, common.
2.4 If a private equity investor is taking a minority position, are there different structuring considerations?
The structuring considerations are the same as those outlined in question 2.2 above. The measures put in place to achieve control will, however, differ, as transaction documentation and constitutional documents, will typically be required to entrench standard minority protections, including prescriptions as to voting and quorum arrangements, information and access rights, rights to appoint key management team, membership and nomination rights in boards and committees of the target company, board members’ and shareholders’ rights (including those that translate into veto rights) in certain key decisions.
Such restrictions may also have an impact on transaction approvals, as minority protections that are deemed to confer an ability to materially influence the policy of the target will trigger control thresholds pursuant to the Nigerian antitrust commission, Federal Competition and Consumer Protection Commission (“FCCPC”) regulations and bring such transaction under its purview.
2.5 In relation to management equity, what is the typical range of equity allocated to the management, and what are the typical vesting and compulsory acquisition provisions?
The range of equity allocated to management is between 5–10%; however, this usually varies from transaction to transaction and is generally lower in larger transactions. Provisions in the transaction documents may provide for compulsory acquisition triggers tied to whether a management officer holding equity is a good leaver or a bad leaver. Also, vesting triggers typically include achievement of key performance indicators, successful exits, or length of service.
2.6 For what reasons is a management equity holder usually treated as a good leaver or a bad leaver in your jurisdiction?
In Nigeria, a management equity holder is regarded as a good leaver where his/her employment is terminated by reason of retirement, death, or disability, and regarded as a bad leaver where the employment is terminated on the grounds of breaches such as fraud, specified grounds of misconduct, other criminal or civil offences.
3. Governance Matters
3.1 What are the typical governance arrangements for private equity portfolio companies? Are such arrangements required to be made publicly available in your jurisdiction?
These arrangements are usually set out in the shareholder agreement or other investment agreement. Typical governance provisions include board and committee nomination and composition, appointment and removal of management team, quorum for board and shareholder meeting, information and access rights, veto rights and reserved matters, and shareholding control rights, amongst others.
There is no requirement for the governance arrangements set out in transaction documents to be made publicly available. Whilst disclosure of such documents to the regulator may be required in connection with obtaining regulatory approvals or notifications, (including antitrust and sector-regulatory approvals), other than the summary of the transactions, which might be published by such regulator, confidential transaction details including any governance arrangement will typically not be published.
However, the constitutional documents (memorandum and articles of association) of the portfolio companies are public documents. Critical governance arrangements/provisions (board composition, quorum, notice period, etc.) that are typically included in the articles of association are thus matters of public record.
3.2 Do private equity investors and/or their director nominees typically enjoy veto rights over major corporate actions (such as acquisitions and disposals, business plans, related party transactions, etc.)? If a private equity investor takes a minority position, what veto rights would they typically enjoy?
PE investors and nominee directors are usually conferred with veto rights as part of the governance arrangement for decisions on acquisitions and material disposals, mergers, capital raise (debt or equity), business plans, related party transactions, appointment and removal of auditors, incentive arrangement for the management team, amongst others.
The above are the typical veto rights taken by PE investors with a majority and minority shareholding interest of at least 15% and above for private or unlisted public companies. For shareholding interest below 15% in private companies (which is unusual for PE transactions), there are rarely veto rights available to the PE investor.
3.3 Are there any limitations on the effectiveness of veto arrangements: (i) at the shareholder level; and (ii) at the director nominee level? If so, how are these typically addressed?
The contractual agreement of parties (including veto rights) will generally be respected. This is, however, subject to statutory restrictions. Any veto arrangements that prescribe a lower threshold than that prescribed by the CAMA and the constitutional documents of portfolio companies cannot be enforced. Similarly, the CAMA prescribes minority shareholder rights that may be invoked notwithstanding existing veto arrangements. Section 343 of the CAMA specifically sets out acts in respect of which a minority shareholder may bring an action to restrain a controlling shareholder from abusing its dominant position. These include: entering into any transaction that is illegal or ultra vires; purporting to do by ordinary resolution any act that by its articles of association or the CAMA requires to be done by special resolution; any act or omission affecting the applicant’s individual rights as a shareholder; committing fraud on either the company or the minority shareholders; where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or to minority shareholders; where the directors are likely to derive a profit or benefit or have profited or benefitted from their negligence or from their breach of duty; and any other act or omission, where the interest of justice so demands.
In addition to the foregoing, Section 353 and Section 354 of the CAMA also allow a minority shareholder to bring a petition to the court on the grounds that: the affairs of the company are being conducted in a manner that is oppressive, unfairly prejudicial to, or unfairly discriminatory against a member or members, or in a manner that is in disregard of the interests of a member or members as a whole; or that an act or omission was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory to a shareholder or shareholders.
Also, at the director nominee level, every director stands in a fiduciary relationship towards the company and is expected to observe utmost good faith towards the company in any transaction with it or on its behalf and act in the best interest of the company. This is so even when such a director is acting as the agent of a particular shareholder; specifically, a director is not to fetter his/her discretion to vote in a particular way. The statutory duties and fiduciary relationship imposed on directors are not relieved by any provisions in the articles of association or any contract.
In addition to the foregoing, Nigerian law does not recognise weighted or non-voting shares.
Parties can protect the enforceability of veto arrangements by ensuring that critical veto arrangements are included in the articles of association (to the extent permissible in the CAMA); equally considered at shareholders’ level (to avoid fettering directors’ discretion), and in line with applicable law.
3.4 Are there any duties owed by a private equity investor to minority shareholders such as management shareholders (or vice versa)? If so, how are these typically addressed?
PE investors may owe contractual duties and obligations to minority shareholders such as management shareholders arising from and as agreed in relevant investment agreements. Statutorily, a PE investor owes no direct statutory duties or obligation to any other shareholder; however, the CAMA, other applicable laws, and constitutional documents of portfolio companies confer individual rights on every shareholder (e.g., right to notice, dividends, voting rights, etc.) and provide mandatory rules for management and operation of companies. Non-compliance with these by a company (through a controlling/majority shareholder) will provide any shareholder with a cause of action. Please refer to question 3.3 above.
In addition, relevant corporate governance codes require the protection of rights of all shareholders including minority shareholders’ rights.
3.5 Are there any limitations or restrictions on the contents or enforceability of shareholder agreements (including (i) governing law and jurisdiction, and (ii) non-compete and non-solicit provisions)?
Generally, Nigerian courts will recognise and enforce the provisions of shareholder agreements based on the principle of contractual autonomy of parties. However, there are instances where the enforceability of the provisions of a shareholder agreement will be subject to mandatory provisions of applicable Nigerian law, such as highlighted under question 3.3 above. In this regard, only damages for breach of agreement may be the most successful outcome of an enforcement action.
With regard to governing law, Nigerian courts will generally enforce parties’ choice of law. However, where the choice of law is a foreign law, the courts have held that such foreign law must not be unreasonable, absurd, or capricious and must have some relationship to and be connected with the realities of the agreement. Choice of foreign law will not be applied in domestic subject matters such as tax, environment, antitrust, management and operation of corporations, etc. Similarly, based on precedents, courts will generally respect parties’ choice of jurisdiction, save for where it is considered an attempt to oust the jurisdiction of the Nigerian courts over a matter or there are strong reasons to suggest that justice would not be done (considering such factors as the jurisdiction where evidence is available, parties’ choice of law, the connection of the court to the parties, contractual limitation period, procedural advantage by either party, enforcement of judgment, etc.).
Non-compete and non-solicitation provisions are equally enforceable subject to terms imposed by appropriate competition and consumer protection laws in respect of non-compete provisions. For instance, the Federal Competition and Consumer Protection Act, 2018 (“FCCPA”) limits non-compete provisions to a period of two years, and prohibits any provision that would operate to prevent, restrict, or distort competition.
3.6 Are there any legal restrictions or other requirements that a private equity investor should be aware of in appointing its nominees to boards of portfolio companies? What are the key potential risks and liabilities for (i) directors nominated by private equity investors to portfolio company boards, and (ii) private equity investors that nominate directors to boards of portfolio companies?
The CAMA and corporate governance codes have specific qualifications and requirements to be satisfied prior to appointing any nominee/person to the board of a Nigerian company. These range from mental ability, age, absence of fraudulent acts, to bankruptcy status. In addition, certain sectors, such as financial services, require minimum qualifications and regulatory approval for persons nominated as directors. There are also restrictions on multiple directorship positions and dual role, e.g., licensed financial institutions are most times required to separate the role of a chief executive officer and chairman on the board. This is also a general restriction in most codes of corporate governance. In addition, the BFA places a restriction on the number of public companies a person can act as director for and provides that the required numbers of independent directors in a public company shall be at least one-third of the size of its board.
As highlighted in question 3.3 above, directors have statutory (fiduciary) duties to the company. A breach of any of the statutory duties can result in personal liabilities for such a director. In addition, certain regulations, like the CBN Administrative Sanctions Regime applicable to banks and OFIs, impose specific liability (both civil and criminal) on directors of the company for specific breaches.
For PE investors, liabilities of its nominated director will not be imputed to it. However, by agreement, the shareholders may agree for a nominating shareholder to be liable for loss incurred by its nominee director.
3.7 How do directors nominated by private equity investors deal with actual and potential conflicts of interest arising from (i) their relationship with the party nominating them, and (ii) positions as directors of other portfolio companies?
A director’s statutory duties and fiduciary relationship with the company trumps his/her obligation to a nominating shareholder and directors must always act in the best interest of the company.
Where a director occupies more than one directorship position, he/she must not derogate from his/her statutory duties and fiduciary relationship with each company. Such director is not to use the property, opportunity or any information derived during his/her management of one company for the benefit of the other company. In anticipation of conflict of interest from multiple directorships, the Nigerian Code of Corporate Governance and sector-specific codes generally discourage multiple directorships and require disclosure where they exist.
Typically, where either actual or potential conflict of interest arises, the affected director is expected to disclose and, where applicable, recuse himself from voting on such transaction.