LEGAL OPINION REGARDING MERGERS IN RELATION .. – By Oluwatoyin Obe

LEGAL OPINION REGARDING MERGERS IN RELATION TO THE FEDERAL COMPETITION AND CONSUMER PROTECTION ACT, 2018 AND THE FEDERAL COMPETITION AND CONSUMER PROTECTION ACT MERGER REVIEW REGULATIONS, 2020- By Oluwatoyin Obe

To operate a business or company in Nigeria, it is required that such business/company be registered. The applicable laws for the operation of a business/company in Nigeria depend on the nature of business and include: the Companies and Allied Matters Act, the

DETERMINING THE EXISTENCE OF A MERGER:

In discussing mergers, the relevant laws considered are the Federal Competition and Consumer Protection Act, 2018 (the Act), the Federal Competition and Consumer Protection Act Merger Review Regulations, 2020, The Federal Competition and Consumer Protection Commission Merger Review Guidelines, 2020 (the Guidelines) and the Federal Competition and Consumer Protection Act, 2018- Notice of Threshold for Merger Notification Pursuant to Section 93(4) (the Notification).

The enactment of the Act vested regulatory oversight for Mergers & Acquisitions in the Federal Competition and Consumer Protection Commission (the Commission) and by Section 163 of the Act, empowered the Commission to make Regulations regarding mergers and acquisitions. Consequently, the 2020 Regulations was promulgated to provide a regulatory framework for review of mergers, while the Guidelines describes the Commission’s general approach to administering the Act’s merger review process.

According, Part XII of the Act, particularly Section 92, a merger occurs where one or more undertakings directly or indirectly acquires control over the whole or part of the business of another undertaking. Section 3 of the Regulations, expands the definition of a merger to also include an undertaking acquiring or being acquired directly or indirectly. According to Section 92 of the Act, a merger can be through: purchase of shares; amalgamation or a joint venture.

For the purpose of this opinion, mergers through share purchase would be considered. This occurs where an undertaking:

  1. beneficially owns more than one half of the issued share capital;
  2. is entitled to cast majority votes at a general meeting or directly or through a controlled entity controls majority votes;
  3. can appoint or veto the appointment of majority of the directors of the undertaking;
  4. has the ability to materially influence the policy of the undertaking. e.t.c

According to Section 4 of the Regulation, where affiliated undertakings reorganize or restructure internally such that there is a transfer or change of business, shares or operations among affiliated undertakings, without a change of control, it would not be considered a merger. However, where there is a change of control, it would be deemed as a notifiable merger.

The primary consideration in determining whether there is a merger is change in control. The lowest test for control according to Section 6 of the Regulation is the ability to exercise material influence. However, this would be determined based on a case-by-case analysis. The primary factors to be considered in determining influence is shareholding and voting powers (Section 6(3) of the Regulation) including other means of indirect control or influence on policy, key decisions and direction of the business.

The Regulation further provides that where there is the acquisition of above 25% shareholding or voting rights, there is an automatic presumption of material influence. However, where there is an acquisition of below 15% shareholding or voting rights, there will be no such presumption.

Factors considered in assessing material influence include:

  1. distribution of the remaining shareholding, class of shares and whether the acquisition makes the acquirer the largest shareholder;
  2. patterns of attendance and voting at shareholders’ meetings; particularly whether the shareholder under consideration can in practice block special resolutions;
  3. exercise of any preferential or special voting rights;
  4. status and expertise of the acquiring undertaking and its corresponding influence with other shareholders;
  5. the existence of any convertible loan arrangement or shareholder loan arrangement that confers influence over certain decisions;
  6. provisions in the Memorandum of Association of the target undertaking conferring ability on the acquiring undertaking to materially influence policy;
  7. the extent of information rights available to the acquiring undertaking;
  8. any restrictive covenants or special benefits attached to the acquired shares;
  9. any pre-emptive rights in relation to sale of shares or assets;
  10. the composition of the Board of Directors;
  11. other contracts or arrangements between the parties.

Other relevant factors also include other commercial agreements or arrangements between the parties such as:

  1. provision of consultancy services to the target undertaking;
  2. financial arrangements that places conditions which make one party dependent on the other;
  3. rights by one party, by itself or through a nominee, to exercise control with respect to roles in managing or directing the course of the other party including management, finance, technical and operational roles;
  4. any license agreement for use of proprietary information belonging to one party or the party’s ability to dictate tools to be used in the course of operations;
  5. extent to which a party can influence the use of its own systems, operational or governance frameworks, or business model in the operation of the other party.

Section 7 of the Regulation provides that where there is acquisition of minority shareholding, the Commission would consider the following as relevant in deciding there is a merger:

  1. likelihood of interdependence between competitors that leads to coordinated conduct;
  2. likelihood of an increase in the acquirer’s incentive to foreclose rival suppliers;
  3. access to commercially sensitive information of competitors; and
  4. blocking potentially pro-competitive mergers and rationalisation.

Where an undertaking increases its shareholding or board representation, sequel to an earlier acquisition, which confers the ability to materially influence an undertaking’s policy to a level of control, this would be considered as a new merger situation Section 8(1) of the Regulation.

Where control is acquired over a series of transactions or successive events over a two-year period, the Commission would regard the series of transactions or events as having occurred as a single transaction effected on the date the latest transaction occurred (Section 8(2) of the Regulation).

Section 9 of the Regulation provides that where an undertaking is uncertain whether or not a proposed transaction constitutes a merger, it may apply to the Commission by way of preliminary assessment (Form 4 of the Regulation) for clearance and provide the requisite information. This process is known as negative clearance procedure and the applicable fee for negative clearance procedure is N2,500,000.00 (Two Million, Five Hundred Thousand). Where the Commission, after evaluation, considers the transaction not to be a merger or a merger that does not require notification, it would notify the undertaking of its decision. The Commission may revoke the clearance granted where the application was based on inaccurate information.

Section 22 of the Regulation provides that where an undertaking in Nigeria comes within the control of a foreign undertaking, it will be subject to review if it attains the turnover requirements under the Threshold for Merger Regulations 2019 or its acquisition affects the market structure by preventing or lessening competition in Nigeria.

Where such merger occurs as a result of a transaction involving undertakings wholly domiciled outside Nigeria, the Commission will assess the merger if it has a local component (Section 22(2) of the Regulation). Local components mean where it has subsidiaries in Nigeria or attaining the turnover requirements for large mergers and such an undertaking is required to appoint a local legal representative to notify the Commission on their behalf, in accordance with the Act, the Regulations and the Guidelines.

TYPES OF MERGERS:

Section 24 of the Regulation provides for 3 types of mergers:

  1. Horizontal mergers are mergers between undertakings that operate in the same relevant market(s) at the same level of business. For example, manufacturers, distributors. e.t.c.
  2. Vertical mergers are mergers between undertakings that operate at different levels of the production or supply chain of an industry; while
  3. Conglomerate mergers are mergers between undertakings in different markets with no functional link.

Though the 3 types affect competition in a different way and therefore is analysed differently, there are theories of competitive harm and effects, as in Section 35 of the Regulation that are common to each merger. The standard for reviewing every merger is the likelihood of the merger substantially preventing or lessening competition in future. By Section 34 of the Regulation, where a merger involves both horizontal and vertical competition issues, the Commission will assess the merger based on the combined horizontal and vertical impact on competition.

Where a merger is likely to lead to substantial prevention or lessening of competition, the Commission would consider whether there are any efficiencies resulting from the merger that may offset its harmful effects (Section 36 of the Regulation) or whether there are public interest grounds to justify the merger (Section 37 of the Regulation).

Part 2, Section 2.3 of the Guidelines provides that both criteria listed below must be met to constitute a merger situation:

  1. Two or more undertakings must come under common control or there are arrangements in progress or in contemplation which would have the effect of common control;
  2. Either the value of the Nigerian turnover of the undertaking which is being acquired in the preceding year exceeds the prescribed threshold or the combined value of the merging undertakings in the preceding year exceeds the prescribed threshold (known as ‘the turnover test’ as contained in the Threshold Regulations).

NOTIFICATION:

The Commission determines the threshold for determining whether a merger is small or large.

Section 1.1 of the Notification provides that the Commission is notifiable of a merger before implementation, if in the financial year preceding the merger:

  1. The combined annual turnover of the acquiring and the target undertaking equals or exceeds N1,000,000,000.00 (One Billion Naira); or
  2. The annual turnover of the target undertaking equals or exceeds N500,000,000.00 (Five Hundred Million Naira).

Section 2.1 of the Notification states the criteria for calculation of annual turnover as all monies received or otherwise receivable including injections which may be equity or deferred or convertible equity for the purpose of the business or the use of others of the undertaking’s assets yielding interest, royalties, rent or dividend.

The Notification further provides that no amount, including sums that may be otherwise deductible as a matter of law or mutual agreement would be excluded. Additionally, turnover in foreign currency would be converted to Naira at the prevailing official exchange rate determined by CBN for the corresponding period. While the applicable accounting principles in Nigeria under the Financial Reporting Council of Nigeria Act and the undertaking’s audited financial statements would be used in calculating turnover.

Where the relevant undertaking disposes or transfers any asset/business after its last audited financial statement but prior to notification, the turnover of such business or attributed to such asset may be considered by the Commission in the merger.

Schedule 1 of the Regulation provides the Applicable fees for merger notifications as follows:

S/N Threshold

(based on Combined turnover of merging parties)

 Fees

(Consideration of transaction)

 Fees

(last annual turnover)
1. First N500 million 0.3% 0.3%
2. Next N500 million 0.225% 0.225%
3. Any sum thereafter 0.15% 0.75%

By Section 93 of the Act, the Commission needs to first be notified and must approve before there can be a merger. However, by Section 95 of the Act and Section 11 of the Regulation, small mergers can be implemented without notifying or first obtaining approval from the Commission except where expressly required to (in such cases notification should be done within 6 months in the prescribed format and published within 5 working days after receipt by the Commission) or where notification is done voluntarily.

For small mergers which the Commission requires notice, the merger would be approved within 20days or 40days where the Commission issues an extension notice. Where there is no response from the Commission and no extension notice, the merger would be deemed approved within 20days.

A party to a large mergers is required to notify the Commission of the merger (Section 96 of the Act and Section 12 of the Regulation) and to publish the notification within 5 business days after receipt by the Commission. A copy of the notice is also to be delivered to any registered trade union of the undertaking or the employees where there is no registered trade union.

A large merger can only be implemented with approval from the Commission. Any large merger implemented without the approval of the Commission is void, and is an offence for which the undertaking responsible is liable on conviction to a fine not exceeding 10% of the annual turnover of the undertaking in the business year preceding the date of the commission of the offence or any other percentage determined by the court based on the circumstance of the case (Section 96 sub 7 of the Act).

Section 19(1) of the Regulation authorize the Commission to issue, from time to time, a notice specifying the timeframes applicable to the merger review process (“Notice of Indicative Timeframes for Merger Notification and Review”).

PENALTY:

Section 13 (5) of the Regulation provides that any party in violation of the Regulation, the Commission, apart from any prosecution initiated under the Act, may impose an administrative penalty as prescribed by the Administrative Penalties Regulations 2020. The Commission may also declare any steps done in violation as void and of no effect.

Merging parties are required to take proactive steps including establishing internal and expert teams to promote compliance with the Regulation (Section 13(7) of the Regulation).

Within 60 days after the parties to a large merger fulfils the notification requirement, the Commission may issue an extension notice extending the days for the consideration of the merger to 120days or issue a report:

  1. approving the merger;
  2. approving the merger subject to conditions; or
  3. prohibiting the merger.

Where after 60 days the Commission does not issue an extension notice or after the period of the extension notice finishes, there is no report from the Commission, the large merger is deemed approved subject to Section 99 of the Act which allows the Commission to revoke approvals.

The Commission would cause the party seeking approval for a large merger to publish a notice of the Commission’s decision in at least 2 national newspapers. The Commission would give reasons for it’s decision where the merging party requests it to do so or where the Commission prohibits or conditionally approves the large merger.

Section 10 of the Regulation, encourages parties to request for a pre-notification consultation with the Commission to assist in determining the course of a case. Such pre-notification consultation should be submitted at least 2 weeks before submission of formal notification is contemplated

Section 98 of the Act allows the Commission to investigate mergers or request for information regarding the merger from any person or undertaking. Section 101 of the Act also permits the Commission to hear any person, other than the merging parties, who in the opinion of the Commission is able to assist in making a determination on the notification. In making a determination regarding a merger, the Commission may either hold a private or large public hearing.

Where a party decides not to proceed with a merger after giving notification to the Commission, such party may in writing inform the Commission of its decision not to proceed and the Commission would not give a decision on the notification.

REMEDIES AND APPEALS:

Section 39 of the Regulation provides 3 forms of remedies:

  1. Structural remedies: involve a change in the market structure (commitment to divest assets);
  2. Behavioural or non-structural remedies: involve constraints on the future conduct of a merged entity (commitment with respect to certain contractual clauses); and
  3. A mixture or hybrid of both structural and behavioural remedies.

Note however, that behavioural remedies are unlikely to be accepted by the Commission in phase one as they tend to be less effective and capable of ready implementation compared to structural remedies.

By the provisions of Section 103 of the Act and Section 42 of the Regulation, where a party is aggrieved by the Commission’s decision, the party may file an Application for review to the Competition and Consumer Protection Tribunal (Tribunal) within 30 business days of being notified of the Commission’s decision and where the decision relates to the decision of the Tribunal, to the Court of Appeal. Only a party to the proposed merger or person who has made written submissions to the Commission in opposition of the approval of the proposed merger application can be deemed aggrieved for the purpose of an appeal.

EFFECTIVE DATE:

The following dates are the effective date for the respective laws applicable to merger transactions:

The Federal Competition and Consumer Protection Act, 2018 commenced on the 30th day of January 2019.

The Federal Competition and Consumer Protection Act, 2018- Notice of Threshold for Merger Notification Pursuant to Section 93(4) became effective on the 9th day of September 2019.

The Federal Competition and Consumer Protection Act Merger Review Regulations, 2020 commenced on the 20th day of November 2020.

The Federal Competition and Consumer Protection Commission Merger Review Guidelines, 2020.

CONCLUSION:

In view of the extant provisions of the laws highlighted above and where applicable to a company’s transactions which can be considered a merger, such company is required to comply by notifying the Commission of such transaction.

Investment and Securities Act and the regulatory bodies are Corporate Affairs Commission (CAC), Securities and Exchange Commission and Central Bank of Nigeria. However, for the purpose of this paper, the primary focus is the incorporation of companies through the Corporate Affairs Commission’s portal.

Applications for incorporation must be submitted online via CAC’s portal. Below are the current requirements for the incorporation of a Company with the CAC:

Step 1 is reservation of the name of the Company. There is a provision on the portal for at least 2 (Two) proposed names of the company (in order of preference).

Once a name has been reserved, the other details required to proceed with incorporation are:

  1. Details of the Company
  • Registered Address
  • Email address and Phone number
  1. Details of Director(s) and Shareholder(s)
  • Names of Director(s) and shareholder(s),
  • a copy of their means of identification (only National Identification Number- NIN is approved),
  • Addresses, Phone numbers, Email addresses and
  • Signatures in jpeg format
  • The shareholding formula or percentage of each shareholder in the company if the new company will have more than one shareholder.
  • Certificate of incorporation; where a company is a shareholder. The name, email address and signature of the representative of such company would also be required.
  1. Details of the Secretary (Secretary can be an individual or a company)
  • Name and Address
  • Certificate of the Secretary (where it is a company)
  • a copy of his or her means of identification. National Identification Number (NIN) is currently the only acceptable means of identification. (where it is an individual)
  • Phone numbers, Email addresses and
  • Signatures in jpeg format. Where it is a company, signature of one of the directors of the company.

Note: The appointment of secretary is no longer mandatory for a small company. According to CAMA 2020, a small company is a private company with an annual turnover of not more than N120,000,000 and net asset value of not more than N60,000,000 respectively.

  1. The authorized share capital of the company
  • This will depend on the services the company intends to engage in Nigeria. It is important to note there is a mandatory share capital threshold applicable to certain businesses in Nigeria.
  1. Objectives of the company (that is, the business the company intends to engage in).
  2. The name of a witness to the Articles of Association of the Company.

These are the details required to incorporate/register a company on CAC’s portal.

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