Mergers and Acquisitions (M & A) are two of the most misunderstood words in the business world. Both terms often refer to the joining of two companies, but there are key differences involved in their usage.They are the most favored or best financial means all over the world of saving companies from serious financial distress.
In most business settings, Mergers and Acquisitions (M&A) are used interchangeably, however, they have different legal meanings. In a Merger, two or more companies combine to form a new company. This is to say that a Merger implies the combination, joining, or the fusion of two or more formerly independent companies into one organization or company with common ownership and management. In Acquisitions, one company buys another company. Typically it is a larger company purchasing a smaller one. The company being bought, called the ‘target company may continue operating or its assets may be integrated into the acquirer.
The Federal Consumer Competition Protection Act which is the regulatory framework for M & A in Nigeria provides that “A Merger occurs when one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking”. Mergers can be achieved through the purchase or lease of the share, an interest, or assets of the other undertaking in question, and the amalgamation or other combination with the other undertaking in question, or a joint venture.
In the same vein, the Banking Supervision Department of the Central Bank of Nigeria via the “Procedures Manual for Processing Applications for Bank Mergers/Take -Overs” released in December 2004, defined “Merger” as a reorganization process involving the coming together of two or more banks whereby a new bank with a new legal status (the successor bank) is created and the merged banks are simultaneously liquidated. All the rights and obligations of the merged banks pass to the successor bank
Against the backdrop of the foregoing, this article gives an insight into the mechanics of Mergers and Acquisitions in Nigeria.
LEGAL FRAMEWORK AND BODIES REGULATING MERGERS AND ACQUISITIONS IN NIGERIA
The Federal Competition and Consumer Protection Commission (FCCPC) as the regulatory body governing M &A in Nigeria, according to powers vested on it by the Federal Competition and Consumer Protection Act 2018 (FCCPA), is responsible for the administration and enforcement of the provisions of the FCCPA.
The FCCPA repealed sections 118 -128 of the Investment and Securities Act which vested regulatory powers of M & A in Nigeria on the Investment and Securities Commission. It also establishes the Competition and Consumer Protection Tribunal to adjudicate over conducts prohibited by the Act and disputes that arise from the provisions of the Act. The Act through the establishment of the Commission and Tribunal seeks to promote competition in Nigerian markets at all levels, by eliminating monopolies, prohibiting the abuse of a dominant market position, and penalizing other restrictive trade and business practices. The FCCPA has issued various regulations and guidelines for Mergers in Nigeria including Notice of Threshold for Merger Notification, 2019, the Merger Review Regulation 2020, the Merger Review (amended) Regulations, 2021 inter alia.
The role of the Investments and Securities Commission is now limited to fairness consideration in the exercise of its primary function as the regulator of the capital market.
The Corporate Affairs Commission established by the Companies and Allied Matters Act 2020, being the principal legislation regulating the operations of companies in Nigeria, also plays a part in M & A in Nigeria. The CAC receives corporate filings and certifies corporate resolutions and the de-registration of any dissolved company that may occur in the merger process.
Other Merger sectoral regulatory bodies include the Nigerian Communications Commission (NCC) which plays an important role for telecommunication companies that wants to merge, the Central Bank of Nigeria (CBN) for bank mergers, the National Insurance Commission (NAICOM) for insurance companies and the Nigerian Electricity Regulatory Commission (NERC) for the electricity sector.
The Federal High Court is also a relevant judicial authority in merger control under the powers vested on it by Section 251 of the Constitution of the Federal Republic of Nigeria 1999 (as amended). The Federal High Court regulates mergers by ordering the shareholders and members of the merging companies to hold meetings and sanction the merger as it relates to the transfer of assets and dissolution without winding up, which becomes effective from the day the order is given. This sanction is important, and no bank or company can proceed with any merger or acquisition scheme without the court’s sanction.
The Federal Inland Revenue Service (FIRS) is equally a regulatory body, no merger and acquisition can take place without prior clearance from the Federal Inland Revenue Service, especially in respect of the company’s capital gains tax.The FIRS is responsible for ensuring that all taxes due or payable by the merging companies are fully recovered.
SALIENT POINTS TO NOTE IN M & A TRANSACTIONS IN NIGERIA
- CATEGORIES OF MERGERS
Under the FCCPA, there are only Small Mergers and Large Mergers in Nigeria.
Small Mergers refers to a merger with a value at or below the threshold stipulated by the Commission by regulations while Large Mergers means a merger with a value above the threshold stipulated by the Commission by regulations.
A party to a small merger is not required to notify the FCCPC of that merger unless the FCCPC requires it to do so per the provision of the FCCPA. A party to a small merger may also implement that merger without approval, unless it is required to notify the FCCPC.
A party to a small merger may voluntarily notify the FCCPC of that merger at any time. Within six months after a small merger is implemented, the FCCPC may require the parties to that merger to notify it of the merger in the prescribed manner and form if, in the opinion of the FCCPC, having regard to the provisions of, the merger may substantially prevent or lessen competition.
A party to a small merger requiring notification may take no further steps to implement that merger until the merger has been approved by the FCCPC with or without conditions.
A party to a large merger is required to notify the FCCPC of the merger in the prescribed manner and form.The notification of the merger shall be published within five business days after receipt by the Commission.
It is pertinent to note that the FCCPC in the exercise of the powers conferred upon it by Sections 3,92,93 and other powers enabling it notified the public of its determination of the threshold requirements for mergers. By Section 1 of the Notice, mergers shall be notifiable before implementation if in the financial year preceding the merger, the combined annual turnover of the acquiring undertaking and the target in, into, or from Nigeria equals or exceeds N1,000, 000, 000 (One billion Naira) or the annual turnover of the target undertaking in, into or from Nigeria equals or exceeds N500, 000, 000 (Five Hundred Million Naira). The parties to a large merger shall not implement the merger unless approved, with or without conditions, by the FCCPC under the provisions of the FCCPA.
Furthermore, parties who fail to notify the FCCPC suffer the risk of their merger being void. However, apart from the merger being void, the FCCPC has the power to impose administrative fines on parties for breach of any of the provisions of the Act.
All merger applications shall be subject to the payment of an application fee in the sum of N50,000 per undertaking.
- TYPES OF MERGERS
There are five basic types of mergers:
- Horizontal merger: A merger between companies that are in direct competition with each other in terms of product lines and markets. A merger of two or more banks is a horizontal merger. A famous example of a horizontal merger is the merger between Access Bank Plc and Diamond Bank Plc to become Access Bank Plc in 2019.
- Vertical merger: A merger between companies that are along the same supply chain (e.g., a retail company in the auto parts industry merges with a company that supplies raw materials for auto parts).
- Market-extension merger: A merger between companies in different markets that sell similar products or services.
- Product-extension merger: A merger between companies in the same markets that sell different but related products or services.
- Conglomerate merger: A merger between companies in unrelated business activities (e.g., a clothing company buys a software company). For example, the merger between Walt Disney Company and the American Broadcasting Company (ABC) was a conglomerate merger in 1995.Walt Disney Company is an entertainment company, while American Broadcasting company is a US commercial broadcast television network (media and news company).
- AGREEMENTS EXECUTED IN A MERGER TRANSACTION
Prior to preparing and executing the merger agreement, some preliminary documentation would be required, such as a memorandum of understanding (MOU) (usually subject to contract), exclusivity agreement, and confidentiality agreement. All of this is done as a preventive measure to guarantee that the complex nature of a merger is handled smoothly.
- Memorandum of Understanding (MOU): An MOU is required when a merger is envisaged, and the parties have reached an agreement in principle. Before the parties sign the legally binding merger agreement, they normally agree on the details of the proposed deal and conduct due diligence. As a result, most MOUs are not legally enforceable and are labeled “subject to contract.” An MOU may not be necessary where the merging companies were previously known to each other because of existing relationships such as a holding company and its subsidiary.
- Exclusivity agreements: Under this type of agreement, the merging companies agree not to sell their assets to anyone else for a defined period of time. It is most relevant in the purchase of public companies. 
- Confidentiality agreement: The parties may also execute a confidentiality agreement that prohibits either party (merging companies) from exposing confidential information about the other, unless permitted by law under special circumstances.
- Merger Agreement/Scheme: After due diligence has been completed, a merger agreement/scheme is usually executed. It is final and legally binding which may provide a mechanism for the adjustment of the exchange ratio if, at the post-merger stage, any of the representations made by any of the merging companies is untrue and affects the agreed valuation and exchange ratio. 
- STRUCTURE OF ACQUISITION
Suppose Company A wants to buy Company B, Company A has two main options: a share purchase or an asset purchase.
A Share Purchase means acquiring a company by buying a majority of its shares. In a Share Purchase, Company A becomes the new owner of Company B and all the assets and liabilities automatically transfer to company A. Typically, the target’s shareholders exchange their stock for cash, shares in the acquirer, or a combination of both. A Share Purchase Agreement (SPA) will be drawn for this purpose setting out the terms and conditions regarding Company A buying some or all of B’s shares. Depending on the proportion of shares purchased, this agreement gives Company A some or complete control over Company B.
Conversely, the acquiring company can effectively obtain the business without buying the shares. Instead in an Asset Purchase, the acquiring company cherry-picks the specific assets of the target company. This could be factories, vehicles, and Intellectual Property. The money from the asset sale goes directly to the target company and not the company shareholders. An Asset Purchase Agreement (APA) will be drawn for this purpose setting out the terms and conditions regarding Company A buying some or all of B’s assets.
- THE ROLE OF ESCROW AGREEMENTS IN M &A TRANSACTIONS
When a party’s deliverable in an M &A transaction cannot be implemented immediately after signing the transaction documents, an escrow can help ensure that each party’s commitments are met. This can happen when a seller needs to transfer a shareholding, real estate, or other assets to an acquirer in a process that involves delays such as title transfer registration with statutory authorities or tender offer announcements; or when a buyer wants to defer payment of the purchase price until the transfer is confirmed. In such instances, the parties to the transaction will often turn to an impartial, professional third-party escrow agency, who can ensure that the transfer of their deliverable in the M&A transaction is matched with a matching transfer from the other side. Escrows can also be used as a “proof of money” by a buyer who wants to reassure sellers by demonstrating their ability to complete the transaction.
In other words, Escrow arrangements help to minimize the counterparty risk of non-completion or failure to deliver for each of the parties.
Another common use of escrow agreements in M & A transactions is as a “hold-back” or “retention” of a portion of the purchase price (typically around 10% to 25% depending on the nature of the deal) for a warranty period during which the buyer can confirm that the seller’s representations and warranties in the sale documents are true and correct. In this case, the seller will most likely demand cash payment of the “retention” purchase price into an escrow account to ensure that the balance payment is made automatically if no warranty claim is submitted.
- DUE DILIGENCE
Before a company considers a merger or acquisition, it is important to know what the other company is worth and the financial and legal risks involved in buying the company. Due diligence helps a company know whether a company is worth buying and on what terms it should be bought.
Due diligence is an exhaustive process that begins when the offer has been accepted; due diligence aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations. Thus, before any binding merger agreement or transfer or final purchase agreement is made, there is a need to investigate and be satisfied with the accuracy of the information supplied by the target company to the acquiring company so that the acquisition is not made on faulty assumptions or wrong information. Business prudence also requires that the target company conducts due diligence on the acquiring company to see if it can acquire it, and also conduct internal due diligence on itself before making representations and warranties to avoid making misstatements that may render it liable in the future.
NB: There are two major types of due diligence namely: legal due diligence and financial due diligence.
Legal due diligence involves conducting due diligence on ownership of the business, business profile, employees, intellectual property and technological issues, Litigation analysis, Corporate searches, Material contracts, and Regulatory compliance.
Financial due diligence covers the company’s accounting and financial control systems, a comparison of the company’s previous trading performance, present trading position, the company’s existing tax liabilities, as well as the tax implications of the proposed merger, the estimated value of the assets and liabilities that will be acquired, revenues and expenses, product development, investment profile, and competitors, capital investments, profitability, margin/price-earnings ratio, and a prediction of trade results, profitability/creditworthiness are all things that need to be considered.
It is pertinent to state that the best way to conduct financial due diligence is to conduct a detailed credit check and audit of the company.
- REPRESENTATIONS, WARRANTIES AND INDEMNITIES
Representations and warranties are used in mergers and acquisitions to protect against losses arising due to the seller’s breach of certain of its representations in the acquisition agreement. Warranties are assertions made by the target firm about the state of the company, which are normally found in the Share Purchase Agreement (SPA). Because they are contractual agreements, the target company can be sued for breach of contract if they turn out to be false or deceptive.
The merging companies may also execute indemnities to protect any party from being held liable for incorrect or false representations upon which the other party relied and as a result of which he experienced loss or harm. Indemnities are commitments to reimburse the other party for costs or damages that have been identified. Parties might seek additional assurances by executing indemnity, guarantee, or performance bonds contracts.
Merging with (and to an extent acquiring) another company aims to help a company generate more money than it would otherwise have been able to produce on its own. Businesses might also merge with or acquire another company to access a market quicker, remove a competitor, access new skills/technologies- and more.
It is therefore recommended that companies understand the above points discussed and ensure that they comply with the provisions of the FCCPA. Companies are also encouraged to engage professionals to carry out due diligence for their transacations.
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