Corporate Restructuring 2 (External Options)

Corporate Restructuring 2 (External Options)

We shall conclude our discourse on corporate restructuring by examining the external options of corporate restructuring i.e. corporate restructuring alternatives that involves parties outside the company. These options include:

1. Acquisition
2. Mergers
3. Takeovers
4. Purchase and assumption

1. ACQUISITION
   Acquisition is the takeover by one company of sufficient shares in another company as to give the acquiring company control over the other company. For an external corporate restructuring to qualify as an acquisition; the threshold of acquisition must be below 30% as provided for in Rule 421 of the Consolidated Securities and Exchange Commission (SEC) Rules 2013.

   Acquisition as a corporate restructuring strategy is peculiar to only private companies and public unquoted companies. The SEC as the apex regulator requires the acquirer to file an Expression of interest/letter of intent accompanied with documents stated in the Consolidated SEC Rules 2013 and the filing shall be done by a Capital Market Operator registered as an insuring house/investment advisor.

   1.1 POST-ACQUISITION REQUIREMENTS BY THE SEC
   a. Executed share/asset purchase agreement.
   b. Evidence of settlement of purchase agreement
   c. Evidence of settlement of severance benefits of employees who may be affected by the restructuring exercise. Rule 436 (consolidated rules 2013)
   d. Post acquisition inspection by the SEC, three months after the approval and consummation of the exercise Rule 439.

   2. MERGERS 
   Mergers and Takeovers are regulated by the Investment and Securities Act 2007. Section 119 (1) of the Act defines a merger as:

 “an amalgamation of the 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 one or more body corporate.”

In a nutshell, a merger is the union of two or more companies in order for the merging companies to consolidate and continue being going concerns. The shares procured in a company by another in the course of a merger is usually above 51%. This union helps to increase the assets of merging companies as they complement each other.

Companies enter into mergers for the purposes of diversification and reducing risk, taking advantage of economies of scale through large-scale production, securing efficient management of hitherto poorly managed entities and or reducing competition.

2.1 TYPES OF MERGERS
In general terms, a merger could be any of the following forms:
a. A vertical merger: a vertical merger of the businesses in the same industry but at different levels in the production process and distribution of products. For example, a merger of the source of raw materials with the source of production and the source of marketing.
b. Horizontal merger: a combination of businesses of the same level within the same industry, such as a merger of banks in the financial sector of the Nigerian economy. An example is the Access and Diamond Bank merger.
c. Conglomerate merger: It is a combination of unrelated or indirectly related businesses. This is done for diversification purposes.

2.2 CLASSES OF MERGERS
Under the Investments and Securities Act (ISA), a merger would take any of the following three forms:
a. A small merger: this is a merger that results in a small business with an annual turnover of assets that is less than N500,000,000 i.e below the lower threshold established by the CAC. Keep in mind that by virtue of Section 122 of the ISA:

“a party to a small merger is not required to notify the Securities and Exchange Commission for approval and it may implement the merger without approval unless required to notify the commission.”

It is important to further note that the SEC may within 6 months after the implementation of the merger require the parties to the merger to notify the commission of such merger in a prescribed form, If the SEC is of the opinion that the merger may substantially prevent or lessen competition and or the merger cannot be justified on public interest grounds. 

b. An intermediate Merger: is a combination of businesses with a value of the minimum or the lower threshold of N500 million but not more than N5 billion. In the case of an intermediate or large merger, the primary acquiring and primary target company shall provide a copy of the notice given to the commission to:

i. Any registered trade union that represents a substantial number of its employees.
ii. The employees concerned or representatives of the employees concerned, if there are no such registered trade unions.
Keep in mind that the parties to an intermediate or large merger can not implement the merger until the company has approved it with the SEC with or without conditions. 

c. In a large merger: the business combination that emerges must be at least on the upper threshold of N5billion. 

By virtue of Section 126 ISA, after receiving the notification of the merger, the commission is required to refer the notice to the court and within 40 working days after all parties to a large merger have fulfilled all the prescribed notification requirements, forward to the court a statement whether or not the implementation of the merger is approved, approved subject to any conditions or prohibited.

Please note, the SEC after approving a merger, be it an intermediate or large merger, may revoke such approval if the decision was based on the incorrect information for which a party to the merger is responsible, the approval was obtained by deceit or a company concerned in the merger has breached an obligation attached to the decision.

It is important to note that before now there were three types of mergers which were small, intermediate and large mergers, but by the advent of the Federal Consumers Competition and Protection Act (FCCPA) only two forms of mergers exist, they are; small mergers and large mergers. This has caused ambiguity as to what applies to mergers that were ordinarily to be classified as intermediate due to the thresholds involved. Intermediate mergers occurred when the combined assets of the merging companies were above 1 billion Naira but not up to 5 billion Naira.

3. TAKEOVERS
Section 117 ISA defines takeovers as “acquisition by one company of sufficient shares in another company to give the acquiring company control over that other company.” The company making the acquisition is the bidder and the company that is being acquired is the target company. Please note, a takeover differs from a merger, in that, the company taking over remains in existence, but as a subsidiary of the acquiring company. A takeover is also known as an acquisition in business circles. Also note that the parties making the takeover bid must seek the authority of the SEC to proceed with the takeover bid. The application to the SEC may be made by or on behalf of the persons proposing to make the bid. The application must give the names and other particulars of the persons (bid must also give the particulars of proposed bid and contain such information which must be accompanied by the documents or reports as may be prescribed by regulation.

It is important to also note that, in deciding whether or not to authorize the takeover bid the SEC shall consider the likely effect of the takeover bid on the economy of Nigeria or any policy of the federal government with respect to manpower and development.

If the takeover bid will not have any adverse effect on the two stated issues, the SEC shall grant an authority to proceed with the takeover bid, the bid must be approved by a resolution of that company’s board of directors or otherwise every director in default commits an offence and shall be liable on conviction to a fine of not less than N100,000 or to imprisonment for a term not exceeding 12 months or to both such fines and imprisonment. 

4. PURCHASE AND ASSUMPTION 
Under this category of external restructuring, the focus is usually the rescue of some of the investments in a moribund or failing company. The aim is to effect a reduction in losses occasioned by depreciating investments by allowing another company/investor to purchase the liabilities of the failing company and assume ownership of its assets. The assumed company undergoes dissolution through the judicial sale of its assets and liabilities.