AN OVERVIEW OF MERGERS AND ACQUISITIONS IN NIGERIA

Introduction to Mergers and Acquisitions in Nigeria

The Principal law regulating mergers and acquisitions in Nigeria is the Federal Competition and Consumer Protection Act (FCCPA) of 2018. It oversees Nigerian merger and acquisition proceedings. The Act mandates that all large mergers must be notified to the FCCPC before implementation. This requirement ensures that potential anti-competitive effects are assessed before any merger occurs.

Where the merger involves a public company, the Investments and Securities Act 2007 (ISA) will also apply.

In addition, there is sector-specific legislation that regulates merger transactions in certain industry sectors. This legislation complements the ISA rather than supplanting it. The legislation includes:

• the Banks and other Financial Institutions Act 2020(for banks);
• the Nigerian Communications Commission Act 2003(for telecommunications companies);
• the Insurance Act 2003(for insurers and re-insurers);
• the Pension Reform Act 2014(for pension fund administrators);
• the Petroleum Industry Act 2021(for operators in the upstream petroleum industry), and
• the Electricity Act 2023(for operators in the electricity sector

WHAT IS MERGERS AND ACQUISITIONS?

The Federal Competition and Consumer Protection Act[1] (the “FCCPA”) states that a merger is deemed to occur when one or more undertakings (companies) directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking. This may be achieved in any manner, including through –

1. The purchase or lease of the shares, interest, or assets of the other undertaking in question;
2. The amalgamation or other combination with the other undertaking in question or
3. A joint venture.

A  merger also involves the voluntary combination of assets and resources by two or more distinct and independent companies, creating a more robust corporate entity to leverage economies of scale, thereby navigating new market opportunities.

It is the amalgamation of undertakings or any part of the undertakings or interest of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate. Mergers can occur on equal terms (merger of equals) or involve one company absorbing another.

On the other hand, acquisition refers to one company purchasing most or all of another company’s shares or assets, thereby gaining control over that company. Unlike mergers, acquisitions do not necessarily result in the formation of a new entity; rather, the acquired company may continue to operate as a subsidiary or be fully integrated into the acquiring firm.

REGULATORY FRAMEWORK FOR MERGERS AND ACQUISITIONS IN NIGERIA

The need for regulatory framework cannot be overemphasized due to the fact that mergers and acquisitions are schemes employed by most industries to create monopolies.

The legal frameworks governing M&A in Nigeria include:

• Companies and Allied Matters Act (CAMA) 2020:This Act outlines the procedures for mergers and requires court approval.
• Federal Competition and Consumer Protection Act (FCCPA) 2018 regulates mergers to prevent anti-competitive practices and establishes the Federal Competition and Consumer Protection Commission (FCCPC) as the primary regulatory authority. The Commission’s main function related to M&A is to prevent and punish anti-competitive practices, regulate mergers, takeovers, and acquisitions, and protect regulated industries in Nigeria. The FCCPCA also empowered the Commission to create a competitive tribunal to deal with any disputes and concerns that may likely occur.[2]
• Investment and Securities Act (ISA) 2007: Previously governed M&A activities but has been largely superseded by the FCCPA. The FCCPCA repealed certain sections of the ISA dealing with regulatory oversight of ISA over M&A in Nigeria. The Securities and Exchange Commission played the above role under the powers vested by the ISA.

It is pertinent to note here that notwithstanding the position of the FCCPCA, which repealed certain sections of the FCCPC Act in relation to control of Merger in Nigeria, the SEC still has rights to regulate mergers and acquisitions affecting public companies on the grounds that it is the primary regulator of capital market in Nigeria.

• Merger Review Guidelines 2020: These guidelines describes the approach of administering the FCCPC Act’s merger review process applicable to the proposed transactions that are subject to merger notification. The guidelines and other laws put in place are necessary to ensure mergers and combinations do not result in adverse effects on competition. The MRG expands on the procedural and substantive framework under the Merger Review Regulations, expounding the principal analytical techniques, practices and the enforcement policy of the Commission with respect to mergers.
• Merger Review Regulations, 2021: The FCCPC pursuant to powers conferred on it by the FCCPC Act, published in 2020 its Merger Review Regulations 2020 (the MRR) and Merger Review Guidelines (the MRG) which was outlined above. In the MRR, the Commission detailed the substantive and procedural requirements for merger notifications, it provided guidance on the regulatory review process, clarified the process for merger notification and efficient handling of notified cases, and prescribed the procedure for remediation and disposition of notified merger cases. The Commission also issued other regulations between 2020 and 2022, including the FCCPC (Administrative Penalties) Regulations (2020), Guidance Note on Gun Jumping (2020), Notice in respect of Indicative Timeframes for Merger Notification and Review Process (Notice of Merger Timeframes), the Merger Review (Amended) Regulations 2021, Investigative Cooperation/ Assistance Rules & Procedures (2021) and the Notice on Market Definition, Abuse of Dominance Regulations, and the Leniency Rules 2022. The Commission has largely followed the substantive and procedural requirements and the analytical techniques and practices set out in the regulations and guidelines that it has issued.

 The Commission reviews both domestic and foreign-to-foreign transactions that meet the prescribed control and turnover thresholds. However, only foreign-to-foreign transactions that have a local component/nexus come within the FCCPC’s regulatory purview, including cases of indirect control, regardless of how far removed they are from the local undertaking.[3]

The bodies saddled with the responsibility of overseeing the operation of mergers and acquisitions in Nigeria are:

1. Securities and Exchange Commission (SEC):Oversees public M&A transactions and ensures compliance with capital market regulations.
2. Federal Competition and Consumer Protection Commission (FCCPC):Regulates competition-related aspects of mergers, ensuring they do not substantially lessen competition.
3. Corporate Affairs Commission (CAC): Handles company registrations and compliance matters related to mergers.
4. Federal Inland Revenue Service (FIRS): Ensures tax compliance regarding capital gains tax during mergers.
5. The Central Bank of Nigeria: The CBN is involved in mergers and acquisitions involving banks and other financial institutions. The Banking institutions intending to merge must obtain the approval of the CBN before that of the SEC.
6. The Nigerian Exchange Limited (NGX): Quoted companies must meet the listing rules on merger transactions to be able to merge.
7. The Federal High Court (FHC): The court has powers to handle matters concerning companies.[4] The court makes orders guiding shareholders considering arrangement/compromise schemes that involve the transfer of funds.

Types of Mergers

• Horizontal Mergers: A horizontal merger occurs between companies that operate in the same industry and are direct competitors. The primary goal is to increase market share, reduce competition, and achieve economies of scale. Mergers in the banking sector, such as the merger between Access Bank and Diamond Bank, which aimed to consolidate their positions in the financial market, are examples of horizontal mergers.
• Vertical Mergers: Vertical mergers involve companies at different stages of the production or distribution process within the same industry. These mergers aim to enhance supply chain efficiency, reduce costs, and improve product delivery. Vertical mergers mostly occur between manufacturers and suppliers to reduce production costs, improve quality control, and facilitate efficient operations within a corporate entity.

For instance, a manufacturer acquiring a supplier or distributor, common in industries such as oil and gas or manufacturing

• Conglomerate Mergers: Conglomerate mergers occur between companies that operate in unrelated industries. The objective is to diversify business operations and reduce risk by entering new markets. For example, companies seeking to expand their portfolios by merging with firms outside their primary business areas
• Concentric Mergers: Concentric mergers involve companies that are related by technology or market but do not directly compete with each other. These mergers aim to leverage complementary resources and capabilities to enhance product offerings. For instance, a technology firm merging with a company that provides complementary services or products.

Types of Acquisitions

• Stock Acquisition involves purchasing a controlling interest (typically 51% or more) of another company’s shares. It can be friendly (agreed upon by both parties) or hostile (where the acquiring company seeks to take over without consent).
• Asset Acquisition:In this type, one company acquires the assets of another company rather than its shares. This method allows the acquirer to choose specific assets while leaving behind unwanted liabilities.

For a merger or acquisition transaction to qualify as mandatorily notifiable to the FCCPC, the transaction must meet the following criteria:

Control test: This is met when, among other things, a company acquires control over another undertaking by acquiring more than 50% of the issued share capital of a target company.

The threshold test: This is met where the turnover of both the acquiring entity and the target company together exceeds the threshold of NGN1 billion or the annual turnover of the target exceeds NGN500 million.

The FCCPC will only clear and approve a merger and acquisition if it is satisfied that the M&A will not substantially prevent or lessen competition. Suppose it appears that the merger is likely to substantially prevent or lessen competition. In that case, the FCCPC will determine whether or not the merger can be justified as being likely to result in technological efficiency or due to other substantial public interests.

Procedures for Mergers

1. Initial Planning and Strategy Development

• Define Objectives:Identify the strategic reasons for the merger, such as market expansion or operational efficiencies.
• Select Target Companies:Research and identify potential merger candidates that align with your business goals.

2. Due Diligence

• Conduct Comprehensive Due Diligence:Assess the financial, legal, and operational aspects of the target company to identify risks and synergies. This includes reviewing financial statements, contracts, and compliance with regulations.

3. Documents Required

• Merger Plan: A comprehensive document detailing the rationale for the merger, including expected benefits, market analysis, and strategic goals.
• Minutes of Meetings: Minutes from board meetings or shareholders’ meetings where the merger was discussed. These should reflect the decision-making process and any resolutions passed.
• Business Plans: The most recent business plans of both merging parties, outlining their operational strategies and financial forecasts.
• Financial Statements: Audited financial statements for the last two years for both companies to provide a clear picture of their financial health.
• Market Analysis Reports> Reports, surveys, or studies conducted within the last two years assessing market conditions, competitive landscape, and potential for sales growth.
• Legal Documents: Copies of relevant legal documents such as:
• Memorandum and Articles of Association (Memart)
• Certificates of incorporation
• Any agreements related to the merger (e.g., heads of terms, memorandums of understanding).

4. Determine Merger Category

• Classify the Merger: Based on combined annual turnover, determine if the merger is a:
• Small Merger: Below the threshold stipulated by the FCCPC.
• Large Merger: Above the threshold (typically one billion naira).

5. Notify the Federal Competition and Consumer Protection Commission (FCCPC)

• Notification Requirement:For large mergers, submit a notification to the FCCPC before implementation. This includes:
• FCCPC Form 1 (Notice of Merger)
• A non-confidential executive summary of the merger.
• Details of the merging parties, including their ownership structures and control.
• The nature of the merger and its strategic rationale.
• Relevant financial documents.
• Information on how the merger will affect competition in the market.
• The annual turnover of the merging entities
• Public companies must also notify the Securities and Exchange Commission (SEC).

Thresholds for Notification:

• A merger is considered a large merger if the combined annual turnover of the acquiring and target companies exceeds ₦1 billion or if the target’s annual turnover exceeds ₦500 million in the financial year preceding the merger.

6. Public Consultation

• Engage Stakeholders:The FCCPC may publish the proposed merger in the Federal Gazette and invite public comments. This allows stakeholders to express their views on potential competitive impacts.

7. FCCPC Review Process

• Assessment of Competition Impact:The FCCPC reviews the merger to determine if it may substantially prevent or lessen competition.
• Approval or Conditions: The FCCPC can approve the merger with or without conditions or prohibit it based on its findings.

8. Approval Notification

• Issuance of Approval Certificate:If approved, the FCCPC issues a certificate indicating approval, which may include specific conditions.
• Publication of Decision:The decision is published in at least two national newspapers and in the Federal Government Gazette.

9. Implementation of Merger

• Execute Merger Agreement:Upon receiving approval, execute the merger agreement and integrate operations.
• Compliance with Conditions:Ensure compliance with any conditions imposed by the FCCPC during implementation.

10. Post-Merger Compliance

• File Post-Merger Documents:Within two weeks of completion, submit necessary documents to the FCCPC, including:
• A copy of the court order sanctioning the scheme (if applicable).
• Evidence of compliance with any conditions set forth by the FCCPC.
• Reports on employee arrangements and financial adjustments.

11. Monitoring and Inspection

• Post-Merger Inspection: The FCCPC may conduct inspections within three months after approval to ensure compliance with regulatory requirements and assess how well the new entity performs.

Procedures for Acquisitions

• Preliminary Assessment
  • Conduct a thorough analysis of the target company, including financial health, market position, and potential synergies.
  • Identify strategic objectives for the acquisition.
• Engagement of Advisors
  • It is important to hire financial advisors, legal counsel, and consultants to assist in due diligence and negotiations.
• Due Diligence
  • Perform detailed investigations into the target’s financial records, legal obligations, operational capabilities, and market conditions.
  • Assess any potential liabilities or risks involved with the acquisition.
• Valuation
  • Determine the fair value of the target company using various valuation methods (e.g., discounted cash flow analysis).
• Negotiation
• Initiate discussions with the target company regarding the terms of the acquisition.
  • Draft a Letter of Intent (LOI) outlining preliminary terms and conditions.
• Documentation
  • Prepare necessary legal documents, including:
  • Share Purchase Agreement (SPA)
  • Disclosure schedules
  • Regulatory filings
  • Ensure compliance with relevant laws and regulations.
• Regulatory Approval
  • Submit required documents to regulatory bodies such as the Federal Competition and Consumer Protection Commission (FCCPC) for approval.
  • Address any concerns raised by regulators during this process.
• Closing the Deal
  • Finalize all agreements and complete the transaction.
  • Conduct a closing meeting to execute documents and transfer ownership.
• Post-Acquisition Integration
  • Implement strategies to integrate both companies’ operations, cultures, and systems.
  • Monitor performance and address any challenges that arise during integration.

Conclusion

Mergers and acquisitions are important for the proper functioning of the economy of any nation. They enable businesses to gain efficiencies like economies of scale and diversify risk across several activities. With the commitment of the FCCPC, merger processes will be transparent, and all combinations seeking to promote monopoly and pose a threat to competition will not see the light of day.

It is, however, appropriate for companies who are desirous of entering the above arrangements to engage legal and financial advisors early in the M&A process to navigate regulatory complexities effectively and ensure regulatory compliance.

This article is for informational purposes only and should not be considered legal advice. For specific legal guidance, please contact our team directly.

For expert guidance on arbitration, litigation, and dispute resolution matters, please contact our specialized team in the Part of our Corporate & Commercial Law practice from our full-service offerings across Lagos, Abuja, and Abakaliki. Please contact our partner Hans Offia on [email protected] 

Email our general team on [email protected] for general inquiries on the subject matter.

[1] Section 92 FCCPCA, 2018.

[2] Section 39(1) FCCPCA

[3] Regulation 22 of the MRR.

[4] Section 251 CFRN 1999.