1 Deal structure
1.1 How are private M&A transactions typically structured in your jurisdiction?
Private Merger and Acquisition (M&A) transactions are usually structured as one of the following:
- share purchase agreements;
- asset acquisition agreements; or
- schemes of merger.
Share purchase agreements and asset acquisition agreements may be completed as bilateral contracts. An asset acquisition agreement involves the partial or whole acquisition of the assets of the target by the acquirer for the eventual transfer of the target’s business.
A scheme of merger is a court-ordered transfer of the whole or part of the target to the acquirer.
1.2 What are the key differences and potential advantages and disadvantages of the various structures?
The major advantage of a private M&A using a share purchase agreement is the ease of deriving ownership and possession of assets, real property, licences and rights accruing from contracts without having to retitle, reassign or renegotiate contracts or obtain third-party consents, since the only subject of transfer is the share capital of the target. The main disadvantage of structuring a private M&A as a share purchase is that the purchaser will acquire all known and unknown liabilities attached to the shares of the target being purchased. Additionally, some minority shareholders may decline to sell where the share purchase is not mandated by a court order, and as such, may not meet the purchaser’s objectives.
The key benefit of structuring a private M&A as an asset acquisition is the limitation of the liabilities that the acquirer will be assuming upon completion, as the acquirer may elect to purchase assets with little to no exposure to risks/potential risks. The disadvantage of an asset acquisition is the rigorous post-completion process, which will typically involve:
- title re-registrations (perfections);
- contract renegotiations and assignments; and
- the procurement of third-party consents where necessary.
Private M&A transactions completed using a scheme of merger involve the transfer of all the assets and liabilities of a transferor company to a transferee company. This is subject to:
- the consent of 75% of the shareholders present and voting at a court-ordered meeting of the merging companies; and
- the sanctioning of the scheme by the court.
A scheme is seen as the most advantageous transaction structure post-completion, as the court order sanctioning the transaction automatically transfers all assets, contracts, rights and liabilities to the surviving entity.
On completion of a share purchase or asset acquisition, at least one of the parties survives the transaction. On the other hand, a merger usually ends with one or none of the entities surviving.
1.3 What factors commonly influence the choice of transaction structure?
In determining the transaction structure, parties typically consider the following factors:
- Tax implications: Most private M&A transactions structured as asset acquisitions and completed as contracts usually attract significant taxes. Such taxes include:
- capital gains tax (10% of the gains accruing from the asset transfer);
- stamp duties (at the rate of 1.5%); and
- title perfection taxes in the case of real estate assets (inclusive of consent fees, registration fees and other taxes as determined by the relevant state land registries).
- Where the transaction is structured as a share purchase, there are no stamp duties payable. Tax may be paid only in respect of:
- any additional share capital arising from a share increase; and
- more recently, capital gains tax with respect to the disposal of the shares by existing shareholders, albeit subject to certain exceptions.
- Like share purchases, private M&A transactions undertaken via a scheme of merger also attract minimal tax implications.
- Risk: Private M&A transactions structured as asset acquisitions give the acquirer the opportunity to determine the amount of risk that it will be taking on by restricting the scope of the transaction to assets with little to no liabilities, unlike share purchases or schemes of mergers.
- Regulatory approvals/post-completion filings: The regulatory approvals and post-completion filings to be made also determine the transaction structure. Asset acquisitions usually require minimal regulatory approvals and post-completion filings such as taxes and land registry approvals in respect of real estate assets. Share purchases, in contrast, require a number of regulatory approvals/post-completion filings, such as:
- anti-competition approvals/notifications;
- stamp duties;
- share transfer registrations; and
- person with significant control notifications, where applicable.
- While certain regulatory approvals are required, schemes of mergers generally require little to no post-completion filings.
1.4 What specific considerations should be borne in mind where the sale is structured as an auction process?
In a private M&A transaction structured as an auction where multiple potential buyers bid to acquire the target, the following matters should be considered:
- Confidentiality and non-disclosure: The seller is advised to ensure that all bidders sign non-disclosure agreements to maintain confidentiality of the seller’s:
- intellectual property;
- trade secrets;
- technical knowhow; and
- other confidential/sensitive information.
- Information memorandum: The seller should prepare a comprehensive information memorandum that provides comprehensive details with respect to the seller’s:
- market position; and
- growth prospects.
- Bidding rules and procedures: Bidding rules and procedures that outline the timeline, submission requirements, format and evaluation criteria for bids should be prepared by the seller. This is to ensure a level playing field for all participants and help to streamline the auction process.
- Binding and non-binding offers: Parties should consider the enforceability of initial bids to be made. Non-binding offers provide flexibility for potential buyers to refine their proposals, while binding offers create stronger commitment.
- Exclusivity and break fees: The parties should consider whether exclusivity agreements and/or break fees will be part of the auction process. Exclusivity agreements grant a chosen bidder a period of exclusivity to negotiate and finalise the transaction. Break fees provide compensation to the chosen bidder if the seller terminates the transaction without cause.
2 Initial steps
2.1 What agreements are typically entered into during the initial preparatory stage of a private M&A transaction?
The first set of documents that the parties will usually execute includes a confidentiality and non-disclosure agreements (NDAs), accompanied by a non-binding letter of intent. NDAs are typically executed in order to:
- ensure the confidentiality of the target’s:
- intellectual property;
- trade secrets;
- technical knowhow; and
- other confidential information;
- avoid public knowledge of the proposed transaction leading to loss of customer/public confidence in one or both entities; and
- inform the target of the acquirer’s commitment to complete the transaction.
Other preliminary documentation that will be executed include:
- binding term sheets;
- exclusivity agreements (to prevent parties from negotiating with third parties on similar terms/transactions); and
- cost-sharing agreements.
2.2 Which advisers and stakeholders are typically involved in the initial preparatory stage of a private M&A transaction?
At the preparatory stage, the advisers include solicitors, financial advisers, auditors, accountants and investment bankers of the acquirer and the target. Stakeholders that are usually involved in the initial stages of private M&A transactions include:
- the shareholders of the target;
- the management/board of directors of the target; and
- general and sector-specific regulators.
Key stakeholders include:
- the Federal Competition and Consumer Protection Commission;
- the Corporate Affairs Commission; and
- the Federal Inland Revenue Services.
Some sector-specific regulators include:
- the Central Bank of Nigeria (for banks and financial institutions);
- the National Insurance Commission (for insurance companies);
- the National Health Insurance Authority (for health maintenance organisations); and
- the Nigerian Communications Commission.
2.3 Can the seller pay adviser costs or is this limited by rules against financial assistance or similar?
A seller may pay adviser costs provided that such payments do not breach financial assistance rules under the Companies and Allied Matters Act. Financial assistance rules will be breached by the seller if:
- the net assets of the seller are reduced by 50% due to such payment; or
- the seller does not have any net assets.
The payment of adviser costs by the seller will not breach financial assistance rules where:
- the seller is a private company and such payment is being made for the acquisition of its own shares or as a subsidiary to a private company, provided that:
- the net assets of the seller are not reduced as a result of the payment or, where such assets are reduced, the payment is made from the seller’s distributable profits;
- payment is approved by special resolution at a general meeting; and
- the directors of the seller make a statutory declaration before making the payment;
- the payment is connected with the seller’s objectives and is made in good faith in the seller’s best interests;
- the payment is made in accordance with a court order under a scheme of arrangement; or
- a scheme of merger or restructuring has been sanctioned by the court.
3 Due diligence
3.1 What due diligence is typically conducted in private M&A transactions in your jurisdiction and how is it typically conducted?
This aims to ensure that the target is in good corporate standing and involves the conduct of corporate searches at the Corporate Affairs Commission. This involves scrutinising the target’s shareholding to ensure that the target shares are not charged or encumbered. The acquirer’s solicitors will also examine:
- the target’s legal status;
- its annual returns history;
- shareholder and director information;
- the constitutional books (memorandum and articles of association);
- the statutory books; and
- material contracts.
The acquirer will seek to examine all claims and disputes by or against the target. This aspect of the diligence is to determine the materiality of such claims, if any, on the transaction.
This typically involves investigating the target’s:
- accounting policies;
- debt portfolio; and
- financials (income statement, balance sheet and cash-flow statement).
The acquirer should appoint financial advisers, auditors and accountants to conduct this investigation of the target.
(d) Real estate
This is essential in asset acquisitions involving real estate. Real estate due diligence is conducted at the relevant state land registries. The target provides certified copies of its title deeds for verification at the land registry to ensure that there are no encumbrances over the asset.
(e) Intellectual property
This is undertaken at:
- the Trademarks Registry;
- the Patent and Design Registry; and
- the National Office for Technology Acquisition and Promotion.
This essentially involves an examination of:
- all IP assets owned by or licensed to the target with respect to registration and renewals; and
- any technology transfer agreements entered into by the target with respect to the assignment, licensing or transfer of registered IP, technical assistance and knowhow.
The target’s compliance with the tax laws must be investigated at the relevant tax authorities. The taxes that should be checked include:
- corporate income tax;
- withholding tax;
- employee compensation deductions;
- education tax;
- value-added tax; and
- Industrial Training Fund contributions.
This typically involves a review of the following with respect to the target:
- employment contracts;
- any employee stock ownership plan; and
- compliance with contributions to:
- pension funds;
- the National Housing Fund;
- the National Health Insurance Scheme;
- personal income tax;
- the Industrial Training Fund; and
- the National Social Insurance Trust Fund.
(h) Data protection
The target’s data privacy and protection policies must be reviewed to ensure compliance with relevant laws. The Data Protection Act, which was recently signed into law, is now the primary law governing the protection of personal information and data protection in Nigeria.
3.2 What key concerns and considerations should participants in private M&A transactions bear in mind in relation to due diligence?
- Regulatory compliance: Laws and regulations cut across industries and sectors and at times are duplicated. Participants are advised to ensure that the target complies with applicable laws, including corporate, tax, labour, environmental and sector-specific regulations.
- Corporate governance: An examination of the target’s corporate governance compliance policies, board composition, internal controls and articles of association should be undertaken in order to assess the effectiveness of the target’s corporate governance practices.
- Contractual obligations: The target’s material contracts should be considered, including but not limited to:
- customer agreements;
- supplier contracts;
- employment contracts;
- leases; and
- joint venture agreements.
- So too should the terms, obligations and potential risks associated with these material contracts, such as:
- change of control provisions;
- termination clauses;
- assignment clauses; and
- Financials: Scrutiny of the target’s financial statements, tax records and accounting practices is highly advised. This typically involves analysis of the following, to identify any potential financial risks or irregularities:
- historical financial performance;
- revenue sources;
- cash flow;
- debt obligations;
- contingent liabilities; and
- tax compliance.
- Disputes: All ongoing or past litigation, arbitration or regulatory proceedings involving the target must be considered. This is to help assess potential liabilities, claims or disputes that could impact the transaction or the target’s financial health.
- Data privacy and security: The acquirer is advised to review the target’s data protection and privacy practices, especially if it handles personal data. The target’s compliance with Nigerian data protection laws and any potential cybersecurity risks or breaches should be examined.
3.3 What kind of scope in relation to environmental, social and governance matters is typical in private M&A transactions?
Nigerian company law mandates the board of directors to ensure that the company has regard to the impact of its operations on the environment in the community where it carries on business operations. Private companies with more than 50 employees are further subject to climate change obligations, which include:
- establishing measures to meet Nigeria’s annual carbon emission reduction targets; and
- appointing an environmental sustainability officer to ensure compliance.
Participants in private M&A transactions must ensure that the entities involved are compliant with relevant legislation.
4 Corporate and regulatory approvals
4.1 What kinds of corporate and regulatory approvals must be obtained for a private M&A transaction in your jurisdiction?
- Regulatory approvals: One key regulatory issue in private M&As is Federal Competition and Consumer Protection Commission (FCCPC) merger approval or notification. Regulatory oversight for mergers and acquisitions in Nigeria is vested in the FCCPC by virtue of the Federal Competition and Consumer Protection Act 2018. Parties are encouraged to undertake pre-notification consultation with the FCCPC to assist in determining the course of action for M&A transactions. For small mergers (where the combined annual turnover of the acquirer and target is less than NGN 1 billion or the annual turnover of the target is less than NGN 500 million), notification of the FCCPC is not mandatory unless the FCCPC is of the opinion that such merger may lessen or prevent competition. For large mergers (where the combined annual turnover of the acquirer and target is at least NGN 1 billion or the annual turnover of the target is at least NGN 500 million), notification of and approval from the FCCPC is mandatory before implementation. Where participants are unsure of whether they need to notify/seek approval, a negative clearance application to the FCCPC is strongly advised. Furthermore, a letter of no-objection from the Securities and Exchange Commission is required. Private M&A transactions completed by a scheme of merger require an order of the Federal High Court. As mentioned in question 2.2, certain sector-specific approvals and notifications may be required – for example, from:
- the Central Bank of Nigeria for banks;
- the National Health Insurance Authority for health maintenance organisations;
- the National Insurance Commission for insurance companies; and
- the Nigerian Communications Commission for the telecommunications sector.
- Corporate approvals: Private M&A transactions completed by a scheme of merger require shareholder resolutions of the merging parties approving the scheme. Shareholder resolutions and statutory declarations by the seller’s board of directors are required for payment of adviser costs and other costs incidental to the transaction.
- Post-completion filings: Certain post-completion filings and notifications may need to be made to the Corporate Affairs Commission. These include:
- share transfer registrations where applicable; and
- persons with significant control notifications with respect to any entity acquiring at least 5% of the capital of a company.
4.2 Do any foreign ownership restrictions apply in your jurisdiction?
Yes, there are various limitations to foreign ownership of investments in Nigeria, as follows:
- A foreign company cannot carry on business or open a bank account without first registering a subsidiary of such a business in Nigeria. This is due to Section 78 of the Companies and Allied Matters Act 2020, which requires any foreign company that intends to carry on business in Nigeria to incorporate a separate company for that purpose in Nigeria unless it qualifies for exemption under the act. Also, every foreign-owned company must have a minimum share capital of N100 million to be eligible for a business and work permits from the Federal Ministry of Interior.
- Foreign directors must obtain a work permit to work in Nigeria or be a signatory to a Nigerian bank account or open a bank account in Nigeria.
- Foreigners cannot own land in certain states in Nigeria. In some states, foreigners cannot acquire an interest in land unless the state governor’s consent is obtained upon payment of the prescribed fees. However, a foreigner may acquire an interest in Nigerian real estate indirectly through a registered company, since a company registered in Nigeria is considered a resident legal entity.
- No vessel which is not wholly owned and registered in Nigeria is permitted to engage in domestic coastal carriage of cargo and passengers within the coastal, territorial inland waters, island waters or any point within the exclusive economic zone of Nigeria. Vessels that are not wholly owned by Nigerians are prohibited from engaging or trading in any domestic trading in the inland waterways. Notwithstanding these restrictions, the law empowers the minister in charge of shipping to grant waivers, and as such he can authorise a foreign vessel to engage in the prohibited activities where he is satisfied that no wholly owned Nigerian vessel is available and suitable to provide the required services.
- The Nigerian Oil and Gas Industry Content Development Act, 2010 requires that preference be given to Nigerian independent operators in:
- the award of oil blocks;
- oil field licences; and
- oil lifting licences; and
- all projects for which contract is to be awarded in the Nigerian oil and gas industry subject to the fulfilment of certain conditions specified by the minister of petroleum.
- Thus, any foreigner that wishes to register an upstream oil and gas company must partner with a Nigerian citizen who will have a majority stake in the company.
4.3 What other key concerns and considerations should participants in private M&A transactions bear in mind in relation to consents and approvals?
- Contractual consents: Existing contracts, agreements and obligations of the target should be reviewed to identify any provisions requiring consents or approvals for:
- the assignment of obligations;
- change of control; and
- Shareholder and board approvals: Parties should be aware of the required approvals from the target’s shareholders and/or board of directors. Shareholder approvals may be necessary for significant ownership transfers or changes in corporate structure.
- Exchange control approvals: Parties are also advised to assess whether the transaction involves any cross-border currency exchange and consider whether it requires approval of or notifications to the Central Bank of Nigeria.
5 Transaction documents
5.1 What documents are typically prepared for a private M&A transaction and who generally drafts them?
- Non-disclosure agreement (NDA): An NDA is often executed in the initial stages of the transaction to ensure confidentiality between the parties involved. It sets out the terms and conditions governing the sharing and protection of confidential information with respect to the transaction.
- Memorandum of understanding/term sheet: This document outlines the preliminary terms and conditions of the proposed transaction, including:
- the purchase price;
- the structure; and
- key obligations of both parties.
- It serves as a roadmap for negotiating the definitive agreements. The terms in this document are usually non-binding.
- Due diligence reports: The buyer typically conducts due diligence on the target to assess its financial, legal and operational status. The due diligence reports provide a comprehensive analysis of the target’s:
- intellectual property;
- litigation; and
- other relevant matters.
- These reports aid in assessing the risks and valuation of the target.
- Shareholders’ resolutions: This may be required in order to:
- authorise the sale of shares or assets;
- approve the transaction (mostly in schemes of merger);
- make any necessary amendments to the company’s articles of association; and
- increase the share capital where this is incidental to the transaction.
- Share purchase agreement: This document is adopted when the transaction is structured as a share purchase. It outlines the rights, responsibilities and obligations of the buyer and seller, including:
- the purchase price;
- the payment terms;
- representations and warranties;
- conditions precedent; and
- post-closing provisions.
- Asset acquisition agreement: This document is adopted when the transaction is structured as an asset acquisition. It defines the terms and conditions attached to the acquisition of the target’s assets. Each asset acquisition agreement is unique depending on the asset class (eg, real estate, equipment, intellectual property and customer list).
- Scheme document: This is usually prepared in respect of M&A transactions completed via a scheme of merger. This document typically sets out:
- the agreement between the parties;
- the conditions and effects of the merger;
- explanatory notes from the financial advisers;
- respective notices of the court-ordered meetings; and
- information relevant to the merger (eg, share capital history, shareholding structure, material contracts, claims and litigation).
These documents are usually drafted by solicitors and financial advisers.
5.2 What key matters are covered in these documents?
- Transaction structure: These documents outline the structure of the transaction, whether it is an asset acquisition, share purchase, or a joint venture contract.
- Consideration, purchase price and payment terms: These documents specify:
- the type of consideration;
- the purchase price; and
- the agreed payment terms, including any milestones, instalments or escrow arrangements.
- Representations and warranties: Both parties make representations and warranties with respect to:
- capacity to contract;
- financial statements;
- intellectual property;
- litigation; and
- compliance with laws.
- Conditions precedent: These documents outline the conditions that must be satisfied before the transaction can be completed. These may include:
- obtaining necessary regulatory approvals, shareholder approvals and consents from third parties; and
- ensuring compliance with any other contractual requirements.
- Indemnities and limitation of liabilities: Indemnities are provided (usually for the buyer) as a means of cover and compensation for losses that may arise or be suffered by the buyer due to the breach of any representation, warranty or obligations made by the seller at the post-completion stage of the transaction. The limitation of liability clause essentially helps to determine the extent of liability accruing to each party to the transaction with respect to damages or losses that may arise during and after the transaction.
- Post-closing obligations, earnouts and escrows: The documents may contain provisions detailing the responsibilities of the parties after the closing of the transaction. These can include:
- transitional services;
- employee matters;
- integration obligations; and
- other post-closing actions.
- Earnouts and escrows are usually included in these documents to protect the buyer/acquirer in the event that there are breaches by the target. For context, if a breach by the target occurs and certain liabilities arise, such liabilities will be covered by the amounts of the transaction sum put into escrow. In the event that there are no breaches or liabilities, the target will be paid earnouts from the escrow account.
5.3 On what basis is it decided which law will govern the relevant transaction documents?
Below are some of the factors considered by parties when deciding the governing law to adopt in transaction documents:
- Jurisdiction of the parties: The law that regulates the parties to the transaction – more specifically the target – typically determines the governing law to be adopted in the transaction documents.
- Regulatory requirements: Certain industries and sectors in Nigeria have specific regulatory requirements that need to be considered. The parties may choose a governing law that aligns with these regulations and ensures compliance with industry-specific laws.
- International considerations: In cases where the transaction has cross-border elements, the parties may choose a governing law that is commonly accepted or widely used in international transactions. This could be a Nigerian law or the law of another jurisdiction that is deemed appropriate for the transaction.
6 Representations and warranties
6.1 What representations and warranties are typically included in the transaction documents and what do they typically cover?
- Organisation and authority: Parties represent and warrant that they are:
- validly existing entities;
- duly organised; and
- in good standing under the laws of their jurisdiction.
- Financial statements: Parties represent and warrant the accuracy and completeness of their respective financial statements provided to each other.
- Title to assets: Parties represent and warrant that they have good and marketable title to the assets being transferred, free and clear of any liens, claims or encumbrances, unless otherwise disclosed.
- Claims and litigation: Parties represent and warrant that they are not involved in any litigation that may adversely affect the transaction; in the event that any litigation is ongoing, this is typically disclosed in the transaction documents.
- Intellectual property: Parties represent and warrant the nature of ownership/licence, validity and enforceability of their respective IP rights, such as patents, trademarks, copyrights and trade secrets. This is to ensure that there are no undisclosed infringements, challenges or encumbrances on the intellectual property.
- Tax matters: Parties represent and warrant the accuracy of tax-related information and disclosures, including representations about:
- the filing of tax returns;
- the payment of taxes;
- the absence of undisclosed audits or investigations; and
- the disclosure of any potential tax liabilities or claims.
- Material adverse changes: Parties represent and warrant that there have been no material adverse changes to their respective businesses, financial conditions or operations since a specified date or the effective date of the transaction.
6.2 What are the typical circumstances in which the buyer may seek a specific indemnity in the transaction documentation?
Buyers may seek specific indemnities to protect themselves from potential losses, liabilities or risks that may arise in certain circumstances. The need for specific indemnities can vary depending on:
- the nature of the transaction;
- the seller; and
- the perceived risks involved.
Some of such specific indemnities sought include:
- tax indemnity;
- IP indemnity;
- real estate indemnity;
- litigation indemnity; and
- regulatory and compliance indemnity to cover liabilities associated with non-compliance with applicable laws and financial statement indemnity with respect to any liability associated with misrepresentations/misstatements in the seller’s financial statements.
6.3 What remedies are available in case of breach and what is the statutory timeframe for bringing a claim? How do these timeframes differ from the market standard position in your jurisdiction?
The specific remedies will depend on the terms negotiated in the transaction documents and the applicable laws. Common remedies that may be available include the following:
- Termination: The non-breaching party may have the right to terminate the transaction agreement in case of a material breach by the other party.
- Specific performance.
- Indemnification: If the breach involves a breach of representations and warranties or a failure to disclose certain information, the non-breaching party may seek indemnification from the breaching party.
- Rescission: In certain cases, the non-breaching party may seek rescission of the contract, which effectively invalidates the transaction and restores the parties to their pre-contractual positions. Rescission may be sought when the breach is significant and fundamental to the transaction.
The limitation period for M&A transaction claims can vary depending on the nature of the claim and the applicable laws. For contractual claims such as breach of representations, warranties or any other contractual obligations, the limitation period is:
- six years from the date the cause of action arose; or
- 12 years if the transaction documentation is under seal.
Tort claims such as negligence or misrepresentation typically have a limitation period of three years. The market standard position in Nigeria is influenced by various factors, including industry practice and contractual agreements. Parties may also negotiate specific timeframes for bringing claims as part of their contractual agreements. These negotiated timeframes may be longer or shorter than the statutory limitation period, depending on:
- the nature of the claim;
- the parties’ preferences; and
- the nature of the transaction.
It is common for parties to include dispute resolution mechanisms, such as arbitration or mediation, which may have their own prescribed timeframes for bringing claims.
6.4 What limitations to liability under the transaction documents (including for representations, warranties and specific indemnities) typically apply?
- Time limitation: Statutory time limitations as stated in question 6.3 usually apply, in addition to timeframes for alternative dispute resolution mechanisms which also have their respective prescribed timeframes for bringing claims.
- Financial limitations: Parties may decide to limit the seller’s liability for certain representations, warranties and specific indemnities to a specific amount or percentage of the consideration to be paid in respect of the transaction.
- Action of the respective parties: A party will not be liable for any acts, omissions or negligence that are independent of any of its representations or warranties and are directly attributable to the other contracting party.
- Waivers: For context, the seller’s liability may be limited where it has made certain disclosures to the buyer and the buyer has expressly waived any seller obligations or liabilities that may arise with respect to these disclosures. This may also apply vice versa.
- Change in legislation: Parties may also be minded to include a limitation of liability for a breach of representation or warranty arising due to a change in law after the transaction’s completion.
6.5 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?
Warranty and indemnity insurance is not common in Nigerian M&A transactions.
6.6 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?
These mechanisms aim to protect the buyer’s interests and provide financial security in the event of a breach of representations, warranties or other obligations by the seller:
- Indemnification provisions: The M&A transaction documents typically include indemnification provisions that outline the seller’s obligations to indemnify the buyer for losses, liabilities or damages resulting from breaches of representations, warranties or other specified matters.
- Escrow accounts: The parties may establish an escrow account, whereby a portion of the purchase consideration is held by a neutral third party, such as an escrow agent or a financial institution. The funds in the escrow account can be used to satisfy any claims by the buyer.
- Earnout provisions: In certain cases, where the consideration is based on the future performance of the target, the M&A agreement may include earnout provisions. These link a portion of the purchase price to the target’s future financial performance. If the target fails to achieve specified performance targets, the buyer may be entitled to a reduction in the purchase price or additional compensation.
- Representations and warranties insurance: Increasingly, parties may opt for representations and warranties insurance. This type of insurance policy provides coverage to the buyer for losses arising from breaches of representations and warranties made by the seller. It transfers the risk of financial loss from the buyer to the insurance provider.
6.7 Do sellers in your jurisdiction often include restrictive covenants in the transaction documents? What timeframes are generally thought to be enforceable?
Restrictive covenants may be included in transaction documents to the extent that they do not prevent, distort or restrict competition in accordance with Nigerian competition law. Notably, the Federal Competition and Consumer Protection Act, 2018 prohibits agreements/clauses that:
- directly or indirectly fix prices of goods and services;
- limit or control the production of goods and services; and
- divide markets through allocation of customers, products, suppliers and territories.
Under Nigerian law, restrictive covenants will be enforceable only where they:
- conform with Nigerian competition law; and
- are reasonable at common law in respect of scope and time.
The reasonableness of a restrictive covenant is determined on a case-by-case basis by the courts.
6.8 Where there is a gap between signing and closing, is it common to include conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?
The inclusion of these conditions is common in M&A transactions. They usually form conditions precedent in the transaction documentation as stated in question 5.2(d). Typically, these conditions are conditions that must be satisfied before the transaction can be completed. These conditions can include:
- obtaining the necessary;
- regulatory approvals;
- shareholder approvals;
- consents from third parties; and
- ensuring compliance with any other contractual requirements.
6.9 What other conditions precedent are typically included in the transaction documents?
- Third-party consents: This refers to obtaining relevant consents or approvals from third parties – such as key customers, suppliers and business partners – whose contracts or relationships may be affected by the transaction and may also affect the transaction.
- Material adverse change: This refers to the absence of any material adverse change or event affecting the target or the overall business environment, which could significantly impact the transaction’s value or feasibility.
- Consistency with representations: This refers to ensuring that the representations and warranties made by the parties in the transaction documents remain true, accurate and consistent with no material changes before the closing of the transaction.
7.1 What types of consideration are typically offered in private M&A transactions in your jurisdiction?
Private M&A transactions are typically financed through cash and stock consideration – that is:
- equity financing;
- debt financing; or
- a combination of both.
Equity financing typically involves one of the following:
- The acquirer selling a portion of its own shares in return for capital/cash to fund the transaction; or
- A stock swap which involves the acquirer using its equity as currency to acquire the shares of the target.
Debt financing, on the other hand, generally involves:
- obtaining loans from lenders to fund the transaction; or
- issuing debt instruments such as bonds or debentures with a commitment to pay the borrowed amount plus interest at a specified period.
Many businesses also utilise a combination of both, balancing the benefits and drawbacks of each method to optimise their capital structure and meet their financial requirements.
7.2 What are the key differences and potential advantages and disadvantages of the various types of consideration?
While equity financing involves the outright purchase of shares or ownership interests by the acquirer via cash/stock swap, debt financing creates a legal obligation for the acquirer to repay the amount borrowed to fund the transaction along with interest over a specified period.
The advantages of equity financing include:
- the absence of any repayment costs at the post-completion stage;
- reduced financial risk for the acquirer and the target; and
- flexibility in deal structure, as the acquirer and the equity investors can negotiate terms that align with their respective objectives and risk appetite.
Perhaps the most consequential disadvantage of equity financing is that by issuing shares to raise capital or doing a stock swap, the acquirer dilutes the ownership and control of existing shareholders. This reduction in ownership stake might lead to a loss of control over strategic decisions and day-to-day operations.
Debt financing, on the other hand, has a lower cost of capital compared to equity financing. This is because lenders generally expect a fixed interest rate which is usually lower than the expected returns demanded by equity investors. Also, unlike equity financing, which dilutes ownership, debt financing does not result in the issuance of additional shares or dilution of existing shareholders’ ownership stake. Moreover, by utilising debt financing, the acquirer can potentially reduce its taxable income as interest payments on debts are typically a tax-deductible expense.
The main disadvantage of debt financing is that borrowing to finance the transaction may increase the financial risk of the acquirer as it becomes obliged to make regular fixed interest payments. If the business experiences a decline in cash flow, it may struggle to meet its obligations and risk default. Adding further financial obligations to the acquirer’s balance sheet may hinder future potential investments and initiatives.
7.3 What factors commonly influence the choice of consideration?
The choice of consideration usually depends on the parties’:
- asset value:
- debt obligations; and
- perceptions of the risks and benefits of the transaction.
Resorting to any of these methods is essentially the acquirer’s choice, which may be influenced by factors such as:
- the long or short-term viability of the company involved;
- the capital structure of the target;
- the ease of exiting from such investment; and/or
- a desire for a change in management or membership control.
In considering its financing options, the acquirer must evaluate:
- its specific needs;
- its financial situation; and
- the growth prospects of the target.
7.4 How is the price mechanism typically agreed between the seller and the buyer? Is a locked-box structure or completion accounts structure more common?
The choice of price mechanism will largely depend on:
- the profile of the acquirer;
- the robustness of the target’s accounting procedures; and
- other factors including:
- the nature of the deal;
- industry norms;
- the negotiations between the parties; and
- the specific circumstances of the target.
Locked-box mechanisms, completion accounts and escrow arrangements appear to be more common in private M&A agreements than pricing mechanisms such as earnouts, as sellers and targets are seldom amenable to earning part of the consideration based on the performance of the business.
The most traditional approach is the completion accounts mechanism; but in recent years, the locked-box method has become increasingly popular as demand grows for high-paced M&A transactions and clean-cut closing procedures, particularly among private equity buyers.
Under the locked-box structure, the final purchase price is agreed by the parties at the point of completion with no post-closing adjustment. Buyers that prefer clean closing procedures tend to favour this approach, but typically it is seen as seller friendly, as there is certainty over the price that they will receive. Its main advantage over the completion accounts mechanism is that:
- there is price certainty for the seller;
- it reduces lengthy negotiations; and
- it can also reduce transaction costs.
The disadvantages, however, are that:
- the target may not get the full benefit if the value of the business increases between the locked-out box and the completion date; and
- the acquirer risks losing value if there is a disconnect between the purchase price and value of the target at completion.
7.5 Is the price typically paid in full on closing or are deferred payment arrangements common?
The terms of payment in a private M&A transaction are typically negotiated between the parties and documented in the sale and purchase agreements. Deferred payment arrangements are especially common because they can provide benefits for both parties.
Deferred payment arrangements allow:
- the acquirer to allocate the payment over time based on the performance of the acquired business, thus reducing the immediate financial burden; and
- potentially, the target to benefit from receiving additional consideration based on the performance of the business after closing and to have a continued stake in its success.
There are certain post-completion obligations for the seller or representations or warranties made by the seller that may give rise to liabilities on the part of the buyer. As a result, payments may be deferred and put in an escrow account with a neutral third party such that the obligations or warranties are fulfilled and remain accurate even after completion of the transaction.
7.6 Where a deferred payment/earn-out payment is used, what typical protections are sought by sellers (eg, post-completion veto rights)?
A deferred payment is basically an interest-free loan which in practice is often made without the provision of any corresponding security. Given the loan nature of the obligations of the purchaser, it is recommended that the seller include standard loan terms in the acquisition documents to protect the seller’s interests, including clauses providing for the following:
- Information undertakings: These require the purchaser to provide certain information to the seller until the final payment has been made. This information will place the seller in a position to understand whether the purchaser remains able to meet its payment obligations. This information could include the annual financial statements or litigation or insolvency proceedings being brought against the purchaser.
- Events that could trigger a default which allows for the acceleration of payments or the enforcement of security: Such triggers could include:
- a judgment being served on the purchaser which exceeds a certain amount;
- the purchaser being placed in liquidation; or
- the purchaser defaulting on payment to a third party.
- Security and collateral: The seller can negotiate with the purchaser for security to be deposited to secure the deferred payment. This can include personal guarantees from the purchaser or third parties.
- Milestones or performance targets: The seller can structure deferred payment arrangement to include milestones and performance targets. If the purchaser fails to meet these targets, the seller may have the right to withhold future payments.
- Guarantees or indemnification: Sellers can negotiate guarantees or indemnification provisions that provide additional protection. These can include guarantees from the buyer’s parent company, directors and other affiliated entities, ensuring that the seller is compensated in case of default or non-payment.
7.7 Do any rules on financial assistance apply in your jurisdiction, and what are their implications for private M&A transactions?
Section 183(1) of the Companies and Allied Matters Act generally provides that where an acquirer is proposing to acquire shares in a target, it will be unlawful for the target to provide, either directly or indirectly, financial assistance to the acquirer for the purpose of reducing or discharging the liability so incurred.
However, there are exceptions provided in Sections 183(3)(a)-(f), such that a target will not be prevented from rendering the financial assistance where:
- this is done in pursuance of an order of court under a scheme of arrangement, a scheme of merger or any scheme or restructuring of a company done with the sanction of the court; or
- its principal purpose in giving the assistance is not to reduce or discharge any liability incurred by a person for the purpose of the acquisition of shares in the company or its holding company, or the reduction or discharge of any such liability, but rather an incidental part of some larger purpose of the company, and the assistance is given in good faith in the interests of the company.
Specifically, private companies are not prohibited from giving financial assistance where the acquisition of shares in question is or was an acquisition of shares in the company or, if it is a subsidiary of another private company, in that other company, provided that:
- the company’s net assets are not thereby reduced by the provision of financial assistance or, to the extent that they are reduced, the assistance is provided out of distributable profits;
- the provision of assistance is approved by special resolution of the company in general meeting; and
- the directors of the company proposing to give the financial assistance have made a statutory declaration in a form prescribed by the Corporate Affairs Commission.
7.8 What other key concerns and considerations should participants in private M&A transactions bear in mind from a financing perspective?
Other key concerns and considerations participants should have in mind include the following:
- Financing costs: Participants should assess the costs associated with financing, including interest rates, fees and other charges. Comparing different financing options and negotiating favourable terms can help the acquirer to:
- optimise the cost of capital and minimise its financial burden; and
- reach a decision as to which of the financing methods is the best for the transaction.
- Business integration and synergies: From a financing perspective, participants should consider the integration process and potential synergies between the acquirer and the target. Identifying cost-saving opportunities, revenue growth potential and operational efficiencies can enhance the financial performance of the merged entity and support the repayment of the financing.
- Foreign exchange regulations: Participants should consider foreign exchange regulations in Nigeria. The Central Bank of Nigeria imposes certain restrictions and controls on foreign currency transactions. It is important to understand any limitations, reporting requirements or approval processes that may impact cross-border financing or currency conversions.
- Repayment structure: Where debt financing is the method utilised, determining the appropriate repayment structure is crucial. Participants should consider:
- the cash-flow generation capacity of the merged entity;
- the projected financial performance; and
- the ability to service the debt.
- Negotiating a repayment schedule that aligns with the expected cash flow can help to ensure the acquirer’s sustainability and the timely repayment of the financing.
8 Deal process
8.1 How does the deal process typically unfold? What are the key milestones?
- Initial discussions: These encompass initial discussions and the execution of confidentiality/non-disclosure agreements at the preliminary stage.
- Due diligence: The due diligence process usually involves:
- the exchange of relevant documents such as title documents, third-party contracts and financial statements between the parties; and
- investigations at the relevant regulatory bodies to verify the information provided by the target and ensure its compliance with applicable laws.
- Assessment and valuation: A valuation of the target is conducted to identify associated risks and arrive at a fair market valuation. This also helps the parties to determine the transaction structure to adopt.
- Corporate and regulatory approvals: Upon completion of the due diligence process, the relevant corporate (shareholder resolutions) and regulatory approvals are obtained to commence the transaction.
- Documentation: Where all of the aforementioned has been completed and is satisfactory to the parties, the final transaction documents are drafted and exchanged by the parties. Documents are signed upon agreement of the parties to the terms of the transaction.
- Pre-closing: There are usually conditions precedent to closing the deal and the eventual transfer of funds/consideration. These conditions precedent must be satisfied in order for the deal to close.
- Exchange of consideration: Consideration is exchanged once the condition precedents have been met. Consideration may be full or partial.
- Post-closing: Upon closing, there are post-completion obligations that must be met by the parties, such as assistance of the buyer by the target to perfect titles where necessary and undertake post-completion filings and notifications with the relevant regulators (eg, the Corporate Affairs Commission and the land registries). The parties are advised to develop post-completion strategies to allow for seamless integration.
8.2 What documents are typically signed on closing? How does this typically take place?
- The share purchase agreement;
- Asset acquisition agreements; and
- Novation/transfer agreements for third-party contracts.
The parties typically exchange drafts of relevant documents and agree via reviews from their respective legal representatives on the binding terms prior to closing.
8.3 In case of a share deal, what is the process for transferring title to shares to the buyer?
The transaction process in the case of a share deal is typically structured as follows;
- The necessary corporate approvals are obtained in respect of the share purchase;
- The share purchase agreement is signed;
- Consideration is exchanged;
- The share transfer is entered in the members’ register;
- Share certificates are issued;
- The share purchase is registered with the Corporate Affairs Commission; and
- Persons of significant control notification takes place.
8.4 Post-closing, can the seller and/or its advisers be held liable for misleading statements, misrepresentation, omissions or similar?
The advisers of the seller can be held liable for professional negligence or misrepresentation in the process of advising on the transaction. Generally, professional advisers must offer advice with a level of professional accuracy reasonable to their expertise. In matters that involve specialist expertise, an adviser in that sense may be liable for negligence where he or she has held himself or herself out as having special expertise on such matters. Notably, the seller and its advisers:
- must exercise the degree of care, diligence and skill that a reasonable prudent seller would exercise in comparable circumstances; and
- may be liable in negligence and breach of duty where they fail to take reasonable care.
8.5 What are the typical post-closing steps that need to be taken into consideration?
- Title/share purchase registration and notification at the Corporate Affairs Commission; and
- Other regulatory confirmations.
Also relevant is the formal transfer of contractual obligations.
9.1 What competition rules apply to private M&A transactions in your jurisdiction?
The Federal Competition and Consumer Protection Act 2018 (FCCPA), the Merger Review Guideline 2020 and the FCCPA Merger Review Regulations, 2020 set out specific laws and regulations relating to competition that must be considered when conducting private M&A deals.
FCCPA: The FCCPA aims to protect consumers, other businesses and the economy from unfair practices that harm competition and hinder market efficiency. Its key provisions include the following:
- Section 59 prohibits agreements or decisions among businesses that prevent, restrict or distort competition in any market. Such agreements are considered unlawful and void. Prohibited acts include:
- price fixing;
- market division;
- production or distribution control;
- collusive tendering; and
- the imposition of unrelated obligations in agreements.
- The law aims to ensure fair competition and protect the interests of consumers and the economy in general.
- Section 60 provides an exception to Section 59. It states that certain agreements or decisions among undertakings can be authorised by the Federal Competition and Consumer Protection Commission. To be eligible for authorisation, the agreement or decision must:
- contribute to improving production or distribution;
- provide consumers with fair benefits;
- impose necessary restrictions; and
- not eliminate competition in a significant portion of goods or services.
- This exception allows for beneficial agreements that balance competition and promote progress.
- Section 61 prohibits undertakings or associations of undertakings from requesting another undertaking or association to refuse selling or purchasing goods or services with the intention of harming a specific undertaking. In other words, it is unlawful to engage in activities that aim to harm a particular business by coercing other entities to boycott its products or refuse to engage in trade with them. The rule seeks to prevent anti-competitive practices that unfairly target and harm specific businesses. It promotes fair competition and ensures that businesses are not subjected to deliberate harm through coordinated refusals to trade.
- Section 62 aims to prevent undertakings from engaging in anti-competitive practices such as withholding supplies or imposing unfavourable terms on dealers that violate price conditions. It also restricts the recovery of penalties from dealers in such cases. The provision promotes fair competition and ensures that dealers are not unfairly targeted or penalised for their resale activities.
- Section 63 nullifies any attempt to establish minimum resale prices in sales agreements. Undertakings are prohibited from including such terms or conditions or publishing prices that suggest minimum resale prices. However, they are still allowed to recommend resale prices without explicitly stating these as minimum prices.
- Section 64 confirms that Section 63, which voids minimum resale price terms, applies to patented goods. Notices of void terms have no effect on a dealer’s right to sell patented goods without infringing the patent. However, the validity of price-regulating terms in licences or patent assignments remains unaffected.
Merger Review Guidelines: The Merger Review Guidelines, which primarily focus on the process and criteria for reviewing mergers, also cover competition-related aspects. Some of the guidelines that relate to competition rules are addressed in Parts 3, 4 and 7 of the Merger Review Guidelines.
Federal Competition and Consumer Protection Act Merger Review Regulations: These regulations contain sections that specifically address competition rules in the context of merger review. While the regulations primarily focus on the process and procedures for reviewing mergers, they also include provisions relating to competition, set out in Sections 7, 32, 33, 38 and 39 respectively.
9.2 What key concerns and considerations should participants in private M&A transactions bear in mind from a competition perspective?
- Anti-competitive effects: Parties should assess whether the transaction could result in anti-competitive effects such as:
- reducing competition;
- increasing market power; or
- facilitating coordinated behaviour among competitors.
- Market dominance: Participants should evaluate whether the merged entity could acquire a dominant position in the relevant market, which could lead to abuse of market power and harm competition.
- Market definition: It is crucial to define the relevant market accurately to assess the potential impact of the transaction on competition. This involves:
- identifying the relevant product and geographic market boundaries; and
- considering substitutes, barriers to entry and market dynamics.
- Barriers to entry: The transaction’s impact on barriers to entry for new competitors should be considered. If the transaction raises barriers, it could hinder competition and prevent new entrants from accessing the market.
- Customer choice and pricing: Participants should analyse whether the transaction could result in reduced customer choice, increased prices or inferior products or services, as this could indicate anti-competitive effects.
- Regulatory approvals: Participants should:
- be aware of the need for regulatory approvals, including competition authority clearance; and
- ensure compliance with the applicable merger control regulations and procedures.
- Remedies: If potential competition concerns are identified, parties:
- should consider whether any remedies – such as divestitures or behavioural commitments – can address those concerns; and
- obtain regulatory approval for the transaction.
- Due diligence: Conducting thorough competition-focused due diligence can help to identify any potential competition issues early in the process, enabling parties to assess and mitigate risks accordingly.
10.1 What employee consultation rules apply to private M&A transactions in your jurisdiction?
No answer submitted for this question.
10.2 What transfer rules apply to private M&A transactions in your jurisdiction?
- Federal Competition and Consumer Protection Act (FCCPA): The FCCPA governs mergers and acquisitions in Nigeria and requires parties to notify the Federal Competition and Consumer Protection Commission (FCCPC) of qualifying mergers. The FCCPC reviews the merger to assess its potential impact on competition and consumer welfare.
- Foreign exchange regulations: Transactions involving the transfer of foreign currency may be subject to foreign exchange regulations imposed by the Central Bank of Nigeria. These regulations govern the repatriation of funds and foreign currency transactions.
- Tax laws: M&A transactions may have tax implications, including:
- capital gains tax;
- value-added tax; and
- stamp duties.
- The Federal Inland Revenue Service oversees tax regulations and the parties to the transaction must comply with the applicable tax laws.
- Terms of contractual obligations: In an M&A transaction, the acquirer usually becomes the new employer and assumes the rights, obligations and liabilities under the existing employment contracts of the target’s employees. The terms and conditions of the employment contracts – including salary, benefits and employment terms – continue to apply unless they are renegotiated by mutual agreement or as required by law.
10.3 What other protections do employees enjoy in the case of a private M&A transaction in your jurisdiction?
- Notice and consultation: Employers must generally provide advance notice to employees regarding the proposed merger or acquisition. This allows employees to be informed about the potential impact on their employment and provides an opportunity for consultation or discussion with employee representatives.
- Transfer of employment: In many jurisdictions, employees have the right to be transferred to the new owner or surviving entity as part of the M&A transaction. This ensures that:
- their employment continuity is maintained; and
- they are not unfairly dismissed or left without job security due to the change in ownership.
- A mutual or ‘tripartite’ agreement may be entered into to that effect.
- Retention of terms and conditions: Employees may be entitled to have their existing terms and conditions of employment preserved after the M&A transaction. This means that their rights, benefits, salary, working hours and other employment terms should remain unchanged unless agreed upon otherwise or subject to lawful amendments.
- Employee benefits and pensions: Protections may exist to ensure that employees’ accrued benefits – such as pensions, retirement plans and other entitlements – are maintained or appropriately transferred to the new employer. This is crucial to safeguard employees’ financial interests and avoid any unfair loss of benefits.
- Redundancy and severance payments: In situations where redundancies or layoffs are necessary due to the M&A transaction, employees may be entitled to redundancy or severance payments in accordance with Section 20(2) of the Nigerian Labour Act. These payments are intended to provide financial support to employees who experience job loss as a result of the transaction.
- Collective bargaining (trade unions): Under Nigerian law, registered trade unions can request and engage in negotiations with employers on matters affecting their members, including:
- working conditions; and
- other employment benefits.
- As such, it is not unusual for the employees of merging parties to join trade unions in a bid to further their social and economic interests.
10.4 What is the impact of a private M&A transaction on any pension scheme of the seller?
The Pension Reforms Act of Nigeria 2014 generally provides for the continuity of pension benefits for employees. Section 14 of the Act states that where there is a transfer of employment from one employer to another, the same retirement savings account will continue to be maintained by the employee.
Other common impacts and considerations may include the following:
- Transfer of pension obligations: In some cases, as part of the transaction, the acquirer may assume the pension obligations of the target. This means that the acquirer becomes responsible for managing and fulfilling the pension commitments to the employees of the target. The transfer of pension obligations may require:
- approval by the relevant pension authorities; and
- compliance with applicable laws and regulations.
- Pension scheme funding: The funding status of the target’s pension scheme is an important consideration. The acquirer will likely assess the financial health of the pension scheme, including any funding deficits or surplus, as part of the due diligence process. The impact on the acquirer’s financial position and its willingness to assume the pension liabilities will depend on the funding status and potential risks associated with the scheme.
- Pension scheme amendments: The terms of the pension scheme may need to be reviewed and potentially amended as a result of the transaction. This could include changes to:
- contribution rates;
- retirement age;
- benefits formulae; or
- eligibility criteria.
- The parties involved may need to negotiate and agree on any amendments to the pension scheme to align it with the post-transaction structure and objectives.
- Employee communication and consultation: Transparent and clear communication with employees about the impact on their pension scheme is crucial. Employees should be informed of:
- any changes to their pension benefits;
- the responsibilities of the buyer in managing the scheme; and
- any potential impacts on their retirement savings.
- Consultation with employee representatives or unions may also be required, depending on local labour laws and collective agreements.
- Compliance with pension regulations: Both the acquirer and the target must ensure compliance with the applicable pension regulations and laws. This includes ensuring that:
- any transfer or assumption of pension obligations meets regulatory requirements; and
- the ongoing management of the pension scheme adheres to relevant legislation.
- Pension scheme continuity: The acquirer should assess the compatibility and integration of the target’s pension scheme with its own existing schemes or pension arrangements. This includes evaluating the potential need for merging or harmonising pension schemes to ensure consistent treatment of employees and efficient administration.
10.5 What considerations should be made to ensure there are no concerns over the potential misclassification of employee status for any employee, worker, director, contractor or consultant of the target?
- Due diligence: Conduct comprehensive due diligence on the target’s workforce, including reviewing:
- employment contracts;
- contractor agreements; and
- consulting arrangements.
- This can help to identify any potential misclassification issues or liabilities that may arise during or after the merger.
- Clear communication: Maintain clear and open communication with employees, workers, contractors and consultants throughout the merger process. Provide information on:
- the merger;
- its potential impact on their employment or engagement; and
- any changes that may occur in their status or terms of engagement.
- Consultation and engagement: Engage with employee representatives, trade unions (if applicable) and relevant stakeholders to address any concerns or questions related to employment status, rights and obligations. This can help to:
- foster transparency and trust; and
- minimise the potential for disputes or legal challenges.
- Proper classification assessment: Before and during the merger process, it is important to conduct a thorough assessment of the employment status of all individuals involved. This assessment should consider factors such as:
- the nature of the work;
- the level of control and supervision;
- the degree of independence;
- contractual arrangements; and
- applicable employment laws.
10.6 What other key concerns and considerations should participants in private M&A transactions bear in mind from an employment perspective?
From the employee’s perspective, there are reliefs available to ease the burden of redundancy in Nigeria as provided under the Labour Act, as follows:
- ‘Last in, first out’ procedure: This principle is entrenched in Section 20(1)(b) of the Labour Act. It is modelled on the Latin maxim ‘Qui prior est tempore portio est jure‘, which means that he who is earlier is stronger in law. In relation to selection for redundancy, the principle aims to:
- prevent any unfairness that may arise from the exercise of managerial discretion; and
- ensure that those who have rendered their services to an organisation for a long time are not suddenly disposed of.
- Share swap: Where one company has an existing employee share option scheme or its employees have accrued claims, in a merger transaction, the shareholders of the merging company usually enter into a share swap as consideration for giving up their shares during the merger. If the aim of the merger is to retain one company and dissolve the company with the share option scheme, the shareholders of the latter company will be given shares in the new company based on the value of the company.
- Employee integration: Proper planning for the integration of employees from the merging entities is crucial. This involves:
- identifying any cultural differences;
- harmonising policies and practices; and
- establishing a smooth transition to ensure a cohesive and productive workforce.
11 Data protection
11.1 What key data protection rules apply to private M&A transactions in your jurisdiction?
The target’s data privacy and protection policies must be reviewed to ensure compliance with relevant laws. The Data Protection Act 2023 is the primary law on the protection of personal information and the practice of data protection.
11.2 What other key concerns and considerations should participants in private M&A transactions bear in mind from a data protection perspective?
Participants in private M&A transactions should consider the following key concerns and considerations from a data protection perspective:
- Data mapping and due diligence: Conduct a thorough data-mapping exercise to identify:
- the types of personal data being processed;
- the purposes of processing; and
- any associated risks.
- During due diligence, assess the data protection practices and compliance of the target, including:
- data transfer arrangements;
- data security measures; and
- data processing agreements with third parties.
- Employee data protection: Consider the handling of employee personal data during the transaction, including:
- employee consents;
- the transfer of employee data to the buyer; and
- compliance with employment laws and data protection regulations.
- Regulatory compliance: Consider the impact of data protection regulations beyond the Data Protection Act, such as:
- sector-specific regulations; or
- international data protection frameworks (eg, the EU General Data Protection Regulation when dealing with EU personal data).
- Data retention and deletion: Assess data retention practices and ensure that personal data is:
- retained only for the necessary period; and
- securely deleted or anonymised when no longer needed.
- Integration and compliance: Plan for the integration of data protection practices and policies post-transaction.
12.1 Who bears liability for the clean-up of contaminated sites? How is liability apportioned as between the buyer and the seller in case of private M&A transactions?
Liability for the clean-up of contaminated sites following exploration and production operations in the oil and gas industry falls on any operator that is considered liable after completion of investigations into the activities which led to the contamination of the particular site.
In private M&A transactions, liability is usually apportioned during the negotiations for the sale purchase agreement of the asset in question. There are a number of available options in this regard – for example:
- any potential liability for contaminated sites may be shared on a 50:50 basis by the seller and the buyer of the asset;
- the seller could be responsible for a majority or all of costs of covering the liability if it arose while the seller was still in control of the asset during the interim covenants period of the sale transaction; or
- in certain scenarios, the buyer of the asset could be fully responsible for the potential liability where:
- it buys the assets on an ‘as is’ basis; or
- the backstop date for any potential liability to be raised/triggered for contaminated sites elapses after consummation of the sale transaction.
There are also different liabilities from an environmental perspective depending on whether the transaction is structured as a share purchase or asset purchase. A buyer that purchases shares in a target which may have environmental liabilities arising from its operations may not be personally liable for any environmental damage arising from the seller’s operations. Under the principle of limited liability, a shareholder typically will not be liable for the environmental liabilities of the company, except where it is proved that the shareholder is aware of the environmental breach and was involved in the offending acts. Nigerian law imposes liability on the directors and officers of a company for environmental damage created by the company; and a shareholder is not regarded as an officer of the company.
12.2 What other key concerns and considerations should participants in private M&A transactions bear in mind from an environmental perspective?
- Examine the environmental and social impact assessment (ESIA) requirements and international environmental laws relating to the asset.
- Review the adequacy of the ESIA process, the ESIA report and the environmental and social action plan.
- Verify whether the seller has adequate arrangements in place to ensure that its operations are in compliance with environmental requirements.
- Where there are risks/gaps in relation to environmental requirements, address these by recommending the implementation of corrective actions.
- Analyse the restoration and abandonment or decommissioning provision/liability of the asset.
- Examine whether there are any penalties/fines for environmental infractions imposed by any regulatory agencies on the seller of the asset.
- Develop a post-acquisition integration plan that includes environmental considerations. This plan should outline steps for:
- integrating environmental management systems;
- sharing best practices; and
- ensuring compliance with environmental standards across the merged entity.
13.1 What taxes are payable on private M&A transactions in your jurisdiction? Do any exemptions apply?
- Capital gains tax;
- Value added tax;
- Stamp duties; and
- Corporate income tax.
13.2 What other strategies are available to participants in a private M&A transaction to minimise their tax exposure?
The parties to a private M&A transaction may consider the following additional strategies to minimise tax exposure;
- tax due diligence; and
- the utilisation of tax losses/carry-forward losses.
13.3 Is tax consolidation of corporate groups permitted in your jurisdiction? Can group companies transfer losses between each other for tax purposes?
There are currently no provisions on group taxation, group relief or group filing of tax returns in Nigeria. Each legal entity within a group is treated as distinct and separate for corporate income tax purposes.
13.4 What other key concerns and considerations should participants in private M&A transactions bear in mind from a tax perspective?
- The application of the cessation rules and commencement rules in Companies Income Tax Act (CITA) based on M&As between related and unrelated parties;
- Claims of capital allowances;
- Value added tax on assets transferred pursuant to the M&A transaction and services provided in connection with the transaction; and
- Stamp duty on transaction documents.
14 Trends and predictions
14.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?
Key transactions in the financial services sector have included:
- Titan Trust Bank Limited’s acquisition of 89.39% of the issued share capital of Union Bank of Nigeria Plc;
- Guaranty Trust Holding Company Plc’s acquisition of 100% shares in Investment One Funds Management Limited;
- Access Bank Plc’s binding agreement with Kenyan-based Centum Investment Plc for the acquisition of the entire 83.4% equity stake held by Centum in Sidian Bank Ltd;
- Fidelity Bank Plc’s proposed acquisition of 100 % equity in Union Bank UK Plc;
- the acquisition by First Pension Custodian Nigeria Limited, a subsidiary of First Bank Nigeria Limited, of 100% of Access Pension Fund Custodian Limited (a subsidiary of Access Bank Plc);
- Access Holdings’ receipt of regulatory approval to acquire a majority stake in First Guarantee Pension Limited; and
- Nigerian financial services group Norrenberger’s receipt of National Insurance Commission approval to acquire 100% of International Energy Insurance Plc.
Transactions in other sectors have included:
- in the manufacturing sector, Flour Mills of Nigeria’s acquisition of a 76.75% in Honeywell Flourmills PLC;
- in the healthcare sector, Pharma’s acquisition of a majority stake in HealthPlus, a leading pharmacy chain in Nigeria; and
- in the telecommunications sector, the 2021 acquisition by Equinix, Inc – the world’s digital infrastructure company – of West African data centre and connectivity solutions provider, MainOne for $320M.
14.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The Securities and Exchange Commission (SEC) has distanced itself from Bitcoin and other popular digital assets such as Ethereum, BNB and XRP, and will only encourage investment in ‘sensible’ digital assets.
The SEC is considering allowing tokenised coin offerings on authorised digital asset exchanges backed by equities, debt or property, but not cryptocurrency. New legislation is underway that could allow cryptocurrencies to be used as investment capital and Nigeria remains one of the largest digital currency markets in the world.
The Policy Advisory Council of President Bola Tinubu has recommended that the implementation of the Nigerian Capital Market Master Plan be accelerated. In this regard, we expect to see the establishment of a national commodity exchange with regional trading centres that would facilitate the creation of investment products that can attract both international and local investment in retail securities. It is also anticipated that there will be a holistic review of the Non-Banking Financial Company Regulation to unlock credit in key segments of the private sector, including mortgages, agriculture and so on.
15 Tips and traps
15.1 What are your top tips for the smooth closing of private M&A transactions and what potential sticking points would you highlight?
Policy uncertainty around foreign exchange management presents considerable risk for foreign investors and therefore close attention should be paid to exit strategies prior to embarking on a deal.
The lack of transparency regarding private targets is a major obstacle for investors and such opacity leaves room for corruption, which in turn can affect turnaround times for obtaining relevant permits. It also has a knock-on effect as it can result in inaccurate forecasts and can thus frustrate business objectives. Insufficient information also disrupts the due diligence process; and unless the data is reliable, investors are unable to move forward, resulting in slow deal growth.
To mitigate some of these risks, it is important to have a communications strategy in place at deal closing. This will demonstrate proactiveness on the part of investors and an understanding that the success of a deal hinges on effectively communicating the future strategy to all stakeholders, from shareholders to suppliers and employees. Also, having a defined integration strategy in place at closing is key, as it can hasten market entry and prepare for security risks such as hackers and malware.
Anti-corruption regulation and legislation have become complex as the government strives to reduce the level of corruption. It is thus critical to work with experienced local legal diligence advisers who can provide real-time advice as to where the ‘bodies’ are usually buried.
Co-Authored by Adedamola Odubanjo, Eberechukwu Okonkwo, Kofoworola Sanya and Mariam Olabiyi.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.