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22 Jan

CORPORATE LAW WEEK 18, CORPORATE RESTRUCTURING (EXTERNAL OPTIONS)

WEEK 18: CORPORATE RESTRUCTURING 2 (EXTERNAL OPTIONS).

Third parties are involved in the process of external restructuring.

:: RATIONALE, LEGAL FRAMEWORK AND REGULATORY BODIES INVOLVED: for growth, expansion, diversification, development, leveraging on economies of scale, survival strategy (e.g. merger of various banks), stock exchange quotation, technological Drive, Management Expertise, etc.

:: EXTERNAL RESTRUCTURING OPTIONS.

– ACQUISITION: Where one company buys sufficient shares (but below 30%) in another (private/unquoted) company as to give it sufficient control. SEC Rule 421-434.

Letter of intent[1] should be given to SEC prior to acquisition.

After acquisition, the purchase agreement, evidence of settlement of the purchase agreement and evidence of settlement of severance benefits of affected employees should be given to SEC.

SEC can then conduct a post-acquisition inspection three months after the approval and consummation of the exercise. 439 SEC Rules 2013.

– TAKE OVER: where a person or company[2] (with the intention of taking over control of a public company) makes a takeover bid to the target public company so as to acquire 30-50 percent of the shares in the target company. See generally Section 117 and 131 ISA. 445 SEC Rules 2013.

The takeover bid should be signed by the maker, contain name and address of the offeror, shares sought to be acquired, terms of acquisition and state whether he is going to acquire the shares of dissentients at a fair market value.

Up to 60 percent of members of the company sought to be taken over should be served the bid. See Section 142 ISA. Bid is to be registered with SEC before dispatch and authority to proceed with the bid should be granted by the SEC[3]. The authority last for 3 months (but can be renewed for another 3 months provided application for renewal is made within 14 days from current expiration). The SEC may carry out a post takeover inspection not less than 3 months after the registration of the bid.

MERGER: is the amalgamation of the undertakings (or a part of the undertakings) of two or more companies-Section 119 ISA.

There should be prior approval of SEC which it would grant if it is satisfied that such merger is not likely to cause substantial restraint of competition or monopoly in the line of business or economy-121 ISA, 423 SEC Rules.

Although prior approval is not needed where merger is between holding companies or small mergers.

Forms a merger may be Horizontal (fusion of enterprises in the same line of business/field), Vertical (symbiotic fusion of complementary enterprises e.g. manufacturer and supplier) or Conglomerate (fusion of totally unrelated business usually for diversification).

Pursuant to Section 120 ISA, the SEC divided mergers into 3 Categories/thresholds based on the combined assets and or assets of merging companies viz:

} Small Merger: if the combination is below one (1) billion. They need not notify SEC. Although the SEC can require notification (within 6 months from commencement of the merger) if it is of the opinion that the merger may substantially prevent or lessen competition or cannot be justified on grounds of public interest. 122 ISA. After notification, if SEC does not respond after 20 days, it is deemed to have approved. It appears they only notify sec after concluding the merge.

} Intermediate Merger: combined assets or turnover of merging companies is between 1-5 billion Naira. Need approval of SEC before consummating the merger. Approval is deemed after 20 working days here too.

} Large Merger: where combined threshold is more than 5 billion. Note procedures for all.

PROCEDURE FOR INTERMEDIATE AND LARGE MERGERS:

– Prepare scheme document.

– Pre-merger notification to SEC[4]. (Pay 50k merger notification fee).

– Apply to FHC to sanction/approve. Afterwhich;

– Pass a special resolution.

– Get another SEC Approval filing the following; a copy of court order sanctioning the scheme within 7 days of the order, copy of newspaper publication of court order, statement of the actual cost of the scheme,

– Upon completion (which must be done within 3 months from courts order); SEC is to be notified.

– SEC may inspect within 3 months after approval to ascertain the level of compliance.[5]

Note that SEC may revoke its decision on approval if there was misrepresentation, deceit or breach of terms and obligation attached to the merger by the merging parties-Section 127 ISA.

Furthermore, SEC can direct a company to break up and re-register them as separate entities within the time specified in the notice[6]. The commission must refer the order to the FHC for sanctioning.

– MANAGEMENT-BUY-OUT: 449 SEC Rules 2013. Here the management of the company acquire controlling shares.

Procedure being that;

  1. The management team passes resolution undertaking to buy-out.
  2. Shareholders pass resolution approving buyout.
  3. Company and Management team enter into agreement detailing (or containing documents on) terms, conditions, settlement of/arrangements for employees, creditors, existing contracts, assets, trust deed (where applicable), third party and taxation.
  4. A copy of MEMO and ART, Certificate of Incorporation, Prospectus[7] and Documents of No. 1,2 and 3 above (and any other document required) are submitted to SEC by the management team for approval.

Note that management buy-in is where outsider managers try to buy into the co.

In practice, there may be a combination of the two (management buy-in and buy-out).

 

– PURCHASE AND ASSUMPTION: another company or investor is allowed to purchase the liabilities of a failing company and assume ownership over its assets. A duly executed Deed of Purchase and Assumption should be drafted.

The assumed company undergoes dissolution through judicial sale of its assets and liabilities.

– RESTRUCTURING OF GROUP OF COMPANIES: needs formal approval of SEC[8] and court order sanctioning the scheme to be filed with the SEC within 7 days of order alongside a copy of newspaper publication, statement of actual cost of the scheme, report on settlement of shareholders, etc.

: CHERRY PICKING: also aimed at reducing loss as above but here the other company does not take up liabilities but just picks the viable assets that it could save by integrating it into its own operations. This was offered to investors during the Post-Banks Consolidation Exercise in 2005.

:: REGULATORY ROLES OF SEC AND OTHER INSTITUTIONS FOR EXTERNAL RESTRUCTURING:

SEC: receives pre-merger notification, formally approves and sanction the scheme and post-merger notification of compliance. Then inspection.

CAC: Registration/filing and certification of Corporate resolutions, documents, sanctions/order, merger notice and de-registration notice.

FHC: to ensure compliance and justice.  Deal with objections, sanctions the scheme, etc. Re Lipton Nigeria Ltd, in the Matter of John Holt Investment Ltd Scheme of Arrangement. Order Shareholder’s meeting, sanction the scheme.

NSE: self regulatory organisation which provides trading floor for securities of companies quoted at the exchange.

Other industry specific laws like CBN-CBNA pursuant to Section 7 BOFIA, NCAA-NCAAA, NCC-NCCA.

: Legal[9] and financial[10] due diligence should be carried out to ascertain veracity and accuracy of information supplied.

:: ETHICAL ISSUES ARISING, PROFESSIONAL RESPONSIBILITY AND DISCLOSURE IN EXTERNAL RESTRUCTURING.

:: CHECKLIST OF DOCUMENTS NEEDED.

 

[1] Accompanied with acquirer and acquiree’s CTC MEMOARTs, Board Resolutions, Certificates of Incorporation, CTC form CAC 07, Annual reports, Report of Valuation of assets, Sharepurchase agreement, N 50k application fee, etc.

[2] For company, must be pursuant to resolution of its board of directors and company.

[3] Application accompanied with Particulars of directors of the offeror company, 5 years Annual Report of the offeror company, Evidence of payment of N50,000 application fee, newspaper publication, etc. If SEC refuses, request SEC to refer the fact of refusal to the IST for review.

[4] Need board resolution, detailed information on the proposed scheme, MEMO ART of merging companies, certificate of incorporation of Merging companies, market effect and competitors.

[5] Remember to attach Special Resolution, Court Order, evidence of publication of court order, original certificate of incorporation of the companies, updated annual returns, updated filing and payment of fees.

[6] Where it considers that company setup substantially prevents or lessen competition or in public interest.

[7] 2 copies detailing Profile of the Co and Management Buyout, 5 years audited financial statement, claims and litigation.

[8] Remember to attach Shareholders Resolution, Certificate of incorporation, CAC CTC of Directors, No Objection Letter (this no objection letter applies to others?), Financial Statement.

[9] Ascertain ownership, MEMOART details and compliance, sector specific requirements, directors, statutory books, charges, titles of properties and status of properties, encumbrances, land and corporate searches, contingent liabilities,

[10] Checkign Accounting records, valuation of assets and liabilities, product development and competition, tax implication, ability to raise loan, predictions for the future, etc.

Isochukwu

Quite eccentric really

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