corporate restructuring

This involves the members of the company in general meeting resolving by special resolution that the company be subjected to members voluntary winding up or be wound up and a liquidator be appointed and authorized to sell the whole or part of the company’s undertaking or assets to another corporate body known as the transferee company, in consideration for cash, fully paid shares or debentures in the transferee company which would then be distributed in species amongst the members of the company in accordance with their rights in liquidation. Section 714(1) CAMA 2020.

Management Buy Out is the acquisition, by the management team of a company, of controlling shares of that company or its subsidiaries with or without third party financing. Rule 449 (a) SEC Rules, 2013. The management team might consist of the directors and the officers of the company.

By Section 9 of the Federal Competition and Consumer Protection Act, reasons for which the Federal Competition and Consumer protection Commission may revoke its decision on approved or conditionally approve merger scheme is as follows:

• a. Incorrect information for which a party to the merger is responsible.
• b. Any approval obtained by deceit.
• c. The parties fail to implement the merger within 12 months after the approval was granted.
• d. Breach of an obligation attached to the merger by any of the merging parties.

The bodies concerned with Corporate restructuring in Nigeria are:

• a. Corporate Affairs Commission
• b. Federal Competition and Consumer Protection Commission
• c. Securities and Exchange Commission
• d. Federal High Court
• e. Nigerian Stock Exchange

Corporate restructuring options can either be internal or external or a combination of both. The option to adopt is usually a product of business decisions and legal exigencies. The Internal Restructuring involves one company alone and it usually precedes external restructuring while External Restructuring involves another company.

The types of internal corporate restructuring are:

• a. Arrangement and compromise.
• b. Arrangement on sale.
• c. Management buy-out.
• d. Reduction in share-capital.
• e. Share reconstruction/consolidation.

The external restructuring options include:

• a. Merger.
• b. Acquisition.
• c. Takeover.
• d. Management Buy-In.
• e. Purchase and assumption.
• f. Cherry picking.

Arrangement is defined as any change in rights or liabilities of members, debenture holders or creditor of a company or any class of them. Section 710 CAMA 2020. Compromise is not defined in the Companies and Allied Matters Act. However, it may be defined as an arrangement that terminates a dispute. It is synonymous with Reconstruction and business rescue.

The procedure for arrangement and compromise under Sections 711, 712, 713, 715 and 716 of the Companies and Allied Matters are as follows:

• a. The scheme or compromise is prepared by the company, a member, creditor or where the company is being wound up, the liquidator.
• b. An application in a summary way is made to court for an order calling for a separate meeting of the applicants to be affected by the scheme to be summoned in such a manner as the court directs.
• c. The notice of the meeting shall be accompanied with a statement explaining the general effect of the arrangement and in particular state any material interests of the directors of the company and whether it would affect the directors differently from other persons. Similarly, if it affects debenture holders give particulars.
• d. If a majority representing not less than three quarters in value of the shares of members or class of members, or of the interest of creditors or class of creditors, as the case may be, present and voting either in person or by proxy, agree to the scheme, an application may be made to court by one or more of the companies, and the court shall sanction the scheme.
• e. The court shall refer the scheme to the Securities and Exchange Commission, which appoints one or more inspectors to investigate the fairness of the scheme or compromise and make a report thereon to the court. The court shall specify a time frame for its receipt of the report from the Securities and Exchange Commission.
• f. If the court is satisfied as to the fairness of the compromise or arrangement, it shall sanction it and shall be binding on all creditors or the class of creditors or on the members of the company as the case may be and also on the company and in the case of a company being wound up on the liquidator and contributories of the company. Re Lipton of Nig. Ltd. (Unreported) Suit No. FHC/L/M2185.
• g. An order sanctioning the scheme shall have no effect unless an office copy of the order has been delivered by the company to the Corporate Affairs Commission for registration and copy of the order must be annexed to every copy of the memorandum of association of the company issued after the order had been made.

The procedure for the arrangement and compromise are as follows:

• a. The Board of Directors propose the scheme of arrangement on sale, and direct the company secretary to convene a general meeting where the resolution will be passed.
• b. The directors will make a declaration of solvency as the basis of the members’ voluntary winding up. This declaration must be made within the five (5) weeks immediately preceding the date of the passing of the special resolution for voluntary winding up and must be delivered to the Corporate Affairs Commission for registration before the date of the special resolution. The declaration must embody a statement of the assets and liabilities of the company as at the latest practicable date before the making of the declaration. The declaration must also state that the directors are of the opinion that the company will be able to pay up its debts in Full within 12months from the commencement of the winding up. Section 625 CAMA 2020.
• c. Company secretary sends out a 21 days’ notice of general meeting, usually Extra ordinary General Meeting. d. At the meeting for which notice was given, a special resolution is passed authorizing the following:
• 1. The voluntary winding up of the company.
• 2. The appointment of a liquidator with power to sell the company or any of its undertakings or assets and reinvest the proceeds in the new entity. Section 620(1) (b) & 714 CAMA 2020.
• e. The liquidator will convene a meeting of the shareholders and/or of the creditors for the purpose of considering and approving the proposed scheme of arrangement on sale.
• f. The liquidator will convene a final dissolution meeting where the accounts of the entire winding up exercise and his report thereon would be considered.

The procedure for Management Buy – Out is as follows:

• a. Resolution of the management team to undertake the Management Buy-Out is passed.
• b. Special resolution of the shareholders of the company approving the Management Buy-Out is passed.
• c. The application for the approval of the Management Buy-Out shall be filed by the Management team making the acquisition, accompanied by the following documents:
• 1. A copy of the special resolution of the shareholders of the company approving the Management Buy-In.
• 2. Copy of the resolution of the management team to undertake the Management Buy-Out.
• 3. A copy of the Certificate of Incorporation of the company.
• 4. A copy of the Memorandum and Articles of Association of the company.
• 5. Two copies of the Prospectus of the company.
• 6. A copy of the sale agreement between the company and the management team.
• 7. Trust deed, where applicable.
• 8. Any other document required by the Securities and Exchange Commission from time to time. Rule 449(b) SEC Consolidated Rules, 2013.

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. Section 92 (1) (a) FCCPA.

The types of mergers are:

• a. Horizontal mergers: Rule 421(1) SEC Rules defines a horizontal merger as a merger involving direct competitors. Thus, a horizontal merger is a combination or fusion of companies in the same line of business. That is, it is merger of competitors.
• b. Vertical mergers: Rule 421(1) SEC Rules defines a vertical merger as a merger between companies in a non-competitive relationship. That is, a vertical merger is a combination or fusion of two or more companies which are engaged in complimentary business activities.
• c. Conglomerate mergers: A conglomerate merger is a combination or fusion of two or more companies that engage in completely unrelated aspects of business. Rule 421(1) SEC Rules.

The categories of mergers are:

• a. Small Merger: A small merger is a merger or proposed merger with a value at or below the lower thresholds. Rule 427(1) SEC Rules provides that the lower threshold for a small merger shall be below N1, 000, 000, 000 (One billion) of either combined assets or turnover of the merging companies.
• b. Intermediate Merger: An intermediate merger is a merger or proposed merger with a value between the lower threshold and the upper threshold, which by Rule 427(1) SEC Rules is currently between N1, 000, 000, 000 (One billion) and N5, 000, 000, 000 (Five billion). Therefore, an intermediate merger is a merger or proposed merger in which the combined assets or annual turnovers in Nigeria of the merging companies is at a value between N1, 000, 000, 000 (One billion) and N5, 000, 000, 000 (Five billion) or any value which SEC may prescribe from time to time. c. Large Merger: Large merger is a merger or proposed merger with a value above the upper threshold, which by Rule 427(1) SEC Rules is currently above N5, 000, 000, 000 (Five billion). Therefore, a large merger is a merger or proposed merger in which the combined assets or annual turnovers in Nigeria of the merging companies is at a value above N5, 000, 000, 000 (Five billion) or any value which SEC may prescribe from time to time.

The regulatory bodies involved in a merger transaction are:

• a. Federal Competition and Consumer Protection Commission.
• b. Central Bank of Nigeria.
• c. Corporate Affairs Commission.
• d. Nigerian Exchange.
• e. Federal High Court.
• f. Other sectorial specific regulators.

The agreements prepared and executed in a merger transaction are as follows:

• a. Exclusivity Agreement.
• b. Memorandum of Understanding.
• c. Confidentiality Agreements.
• d. Scheme of Merger.

The two types of diligence are:

• a. Legal due diligence.
• b. Financial due diligence.

The items covered under legal due diligence are as follows:

• a. Ownership of the company.
• b. Directors of the company and any service contract.
• c. Copies of license to do business.
• d. Any change in the status of the company.
• e. The date and registration status of the company.
• f. All statutory books of the company.
• g. All titles to the properties of the company.
• h. All charges created by the company and the debenture holders.
• i. Legal status of the assets and liabilities of the company.
• j. Copies of collective bargaining agreement and employees benefit plans.

The items to be covered under financial due diligence are:

• a. Accounting records of the company.
• b. Value of assets and liabilities to be acquired.
• c. Product development and competitors.
• d. Capital investments, profitability, merger, price earnings ratio.
• e. Tax liabilities of the company and tax implication of the transaction.
• f. Ability to raise short term and long term capital as well as the cost of such capital in relation to general industrial indicators.

The procedure for a merger is as follows:

• a. Approval and preparation of the merger scheme/merger proposal by the Boards of Directors of each of the merging companies.
• b. Pre-merger notification to the Securities and Exchange Commission or Federal Competition and Consumer Protection Commission: Parties to a small merger are not required to notify the Securities and Exchange Commission, but may voluntarily notify the Securities and Exchange Commission. That is, pre-merger notification is not compulsory except if within 6 months of the implementation of the merger, the Securities and Exchange Commission requires the merging companies to notify it and obtain approval. However, the Securities and Exchange Commission may demand notification and if notification to the Securities and Exchange Commission is required, parties shall take no further step to implement the merger until the merger is approved or conditionally approved.
• c. Obtain approval in principle from the Securities and Exchange Commission and Federal Competition and Consumer Protection Commission may give an approval in principle and direct the merging companies to apply to court for separate meetings of the merging companies to be ordered (court ordered meetings).The responsibility for approval of mergers under the Federal Competition and Consumer Protection Act lies with the Federal Competition and Consumer Protection Commission which is created under the Federal Competition and Consumer Protection Acts. When considering a merger or a proposed merger, the Federal Competition and Consumer Protection Commission shall determine whether or not the merger is likely to substantially prevent or lessen competition. Section 94(1) FCCPA. If it appears that the merger is likely to substantially prevent or lessen competition, then the Federal Competition and Consumer Protection Commission will determine:
• 1. Whether or not the merger is likely to result in any technological efficiency or other procompetitive gain which will be greater than, and off-set, or is likely to result from the merger, and would not likely be obtained if the merger is prevented.
• 2. Whether the merger can or cannot be justified on substantial public interest grounds.
• 3. Determine whether the merger can or cannot be justified on substantial public interest grounds. Section 94(1) FCCPA.

The procedure for the demerger of companies is as follows:

• a. Where the Securities and Exchange Commission forms the opinion that the activities of the company lessens or eliminates competition, it shall communicate the basis of its observation to the company in writing.
• b. The company shall forward its response to the Securities and Exchange Commission within thirty (30) days from the day it received the Securities and Exchange Commission’s letter.
• c. The Securities and Exchange Commission will review the company’s response and where it is found that competition is restrained, senior officers of the company shall be invited to further defend their position.
• d. After hearing them, the Securities and Exchange Commission will communicate its final decision to the company.
• e. The Securities and Exchange Commission will forward its decision to Federal High Court for sanctioning. Upon the sanction, the break-up becomes effective and the affected company shall be broken-up into smaller entities.

The following are the roles of solicitor involved in a merger:

• a. Conducts legal due diligence.
• b. Participating in the negotiation process.
• c. Drafting the memorandum of understanding, transaction implementation agreement, merger agreement and other agreements that may be drafted such as exclusivity agreements.
• d. Review legal documentation and provide a legal opinion on actual and/or threatened litigation.
• e. Securing all necessary approvals.
• f. Ensure the passing of all necessary resolutions required to effect the merger
• g. Obtain court hearing date for the proposed merger and obtain court order for court ordered meeting.
• h. Obtain court sanction for the merger scheme.
• i. Ensure that proper procedure is followed and that the process is implemented in full compliance with all relevant legal requirement.
• j. Conduct the order of proceedings at the court-ordered meetings.
• k. Assist with obtaining shareholders’ support for the passing of the necessary resolutions at the court ordered meetings.

Acquisition is the take-over by one company of sufficient shares in another company to give the acquiring company control over that other company. Rule 421 SEC Rules, Rule 433 SEC. Rules defines acquisition as business combination where a person or group of persons buys most, if not all, of a company’s ownership stake in order to assume control of the target company.

The requirements for an acquisition are prescribed under Rule 434(b) SEC Rules which provides that the acquirer (acquiring company) shall file a Letter of Intent. The Letter of Intent will be accompanied by the following documents:

• a. Two (2) draft copies of Information Memorandum.
• b. Extracts of board resolutions of the acquirer and the acquiree (target company) agreeing to the acquisition signed by their respective company secretaries and directors, where applicable.
• c. The Memorandum and Articles of Association of both the acquirer and the acquiree recently certified by the Corporate Affairs Commission, where applicable.
• d. Certificates of Incorporation of both the acquirer and the acquiree, where applicable, certified by their respective company secretaries.
• e. Extracts of shareholders resolution of both the acquirer and the acquiree to be signed by a director and company secretary, where applicable.
• f. Summary of the claims and litigations of the acquirer.
• g. A copy of “No Objection” letter from the relevant regulatory body, where applicable.
• h. Copies of letters appointing the financial advertisers.
• i. Particulars of Directors and Allotment of Shares of both the acquirer and acquiree certified by the Corporate Affairs Commission, where applicable.
• j. Notarized consent of directors of both the acquirer and the acquiree, where applicable.
• k. Financial Services Agreement between the acquirer and the acquiree and their respective Financial Advisers, where applicable.
• l. Share Purchase Agreement (SPA) and any other relevant agreement executed between the acquirer and the acquiree, where applicable.
• m. Payment of N50, 000 being application fee.
• n. Payment of processing fee based on the value to be acquired on the graduation fee.
• o. Annual report and accounts of both companies for the preceding period of five (5) years or a shorter period of three (3) years for private companies and those that have been operating for less than five (5) years.
• p. Source of fund to finance the acquisition must be clearly disclosed and backed by documentary evidence.
• q. Report of valuation shares/assets, where applicable.
• r. Publication of the acquisition in at least two national dailies after consummation of the acquisition.

The post-acquisition requirements by the Securities and Exchange Commission are: -

• 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 SEC Consolidated Rules 2013.
• d. Post-acquisition inspection by the Securities Exchange Commission, three months after approval and consummation of the exercise. Rule 439 SEC Consolidated Rules 2013.

By Section 131(1) of the Investment and Securities Act, take-over is an external restructuring process that involves the acquisition of at least 30% (30% to 50%) of the shares or voting rights or any lower or higher threshold as Securities and Exchange Commission may prescribe from time to time) of the target company, either by an individual called a core investor or a company called the acquiring company, with the intention of taking over the target company. A takeover is a situation where a person or group of persons acquire or wish to acquire a minimum of 30% shares in a public company with the intention of taking over the control of that company. Section 117 Investment Securities Act 2007, Rule 445 SEC Rules 2013.

A bid, being an invitation under a takeover bid must be in a document that states the following:

• a. The name and address of the offeror.
• b. The maximum number and other particulars of the shares in the offeree company proposed to be acquired during the period specified in the invitation.
• c. The term on which those shares are proposed to be acquired.
• d. The number and other particulars of the shares in the offeree company to which:
• 1. The offeree.
• 2. Any company in the same group of companies as the offeree or anyone of the offeree is or are entitled immediately before the date of the takeover bid.
• e. State whether it is going to acquire the shares of dissenting members at the fair market value. Section 142 (c) Investment and Securities Act, 2007.

The procedure for obtaining approval from the Securities and Exchange Commission to proceed with a takeover bid as provided for in Section 447 (1) (b)(c) SEC Rules includes:

• a. An application for authority to proceed with a take-over bid shall be made to Securities and Exchange Commission by or on behalf of the person proposing the bid before the proposed bid is made. The application shall state the following:
• 1. The name and other particulars of the person making the bid.
• 2. The particulars of the proposed bid with supporting documents in compliance with the Investment and Securities Act and the Securities and Exchange Commission Rules.

• 3. Any other information or document that the Securities and Exchange Commission may require from time to time
     

• b. By Rule 447(3) SEC Rules, in addition to the take-over bid the following documents shall be filed with the Securities and Exchange Commission:
• 1. A letter of application.
• 2. Two copies of the Information Memorandum where applicable.
• 3. A letter of “No objection” from relevant regulatory body where applicable.
• 4. A copy of shareholders and board resolutions of the offeror certified by the company secretary approving the takeover where applicable.
• 5. A copy of the certificate of incorporation certified by the company secretary.
• 6. Copies of the Memorandum and Articles of Association of the offeror certified by the Corporate Affairs Commission.
• 7. Copies of letters from the offeror appointing their financial adviser to the transaction.
• 8. 3. By Section 134(7) of the Investment and Securities Act, where the Securities and Exchange Commission grants the authority, the authority shall be in writing, signed by or on behalf of the Securities and Exchange Commission, dated, and give sufficient particulars of the proposed takeover bid to enable it to be identified.
• 9. By Section 134(8) of the Investment and Securities Act and Rule 447(2) of the Securities and Exchange Commission Rules, the authority to proceed with a takeover bid shall be and remain in force for a period of three (3) months, subject to renewal on application by the person making the bid. The application for renewal must be made within fourteen (14) days prior to the expiration of the authority and such renewal shall be for a period of not more than three (3) months.
• 10. A copy of the proposed take-over bid shall first be lodged with the Securities and Exchange Commission for registration before it is dispatched to the shareholders of the target company.

The procedure for a takeover bid is as provided for in Rules 445 - 448 of the Securities and Exchange Commission Rules are as follows:

• a. Preparation of a takeover bid.
• b. Application to the Securities and Exchange Commission for authority to proceed with the take-over bid.
• c. When the Securities and Exchange Commission grants the authority to proceed with the take-over bid, file a copy of the proposed bid with the Securities and Exchange Commission for registration. It must be noted that the authority lasts for three (3) months and renewable for another three (3) months if application for renewal is made within fourteen (14) days before its expiration. After the grant of the authority to proceed, file the following documents with the Securities and Exchange Commission for the registration of the take-over bid:
• 1. Two (2) draft copies of the takeover bid.

• 2. Consent letters of directors and other parties to the transaction.
     

• 3. Form CAC 7A containing the particulars of directors of the offeror.
• 4. A copy of draft Financial Services Agreement between the financial adviser and the offeror, and any other agreement(s) entered into in the course of the transaction.
• 5. Annual report and accounts of the offeror for the preceding period of five (5)years or the number of years the company has been in existence, if less than five years.
• 6. Payment of N50,000 application fee and relevant Securities and Exchange Commission fee based on the value of shares to be taken over.
• 7. A draft newspaper publication of the proposed takeover.
• 8. Evidence of source of funds.
• 9. Any other documents the Commission may require from time to time. If satisfied, the Securities and Exchange Commission will register the take-over bid. However, if the Securities and Exchange Commission is not satisfied, it will not register the bid and where it so refuses, the applicant can within thirty (30) days of receipt of the notice of refusal, send a notice in writing to the Securities and Exchange Commission requesting it to refer the fact of the refusal to IST for review.
• 10. Upon registration of the take-over bid, the offeror shall proceed to make the formal take-over bid to not less than twenty (20) members representing not less than 60% of the members of the target offeree company.
• 11. Upon the completion and conclusion of the take-over bid, the offeror shall, within seven (7) days of the conclusion of the offer, file with SEC the following documents:
• a. Schedule of the shareholders of the target company who accepted the offer containing the volume and value of the respective shares.
• b. Evidence of settlement of the consideration.
• c. Post-takeover inspection is conducted by the Securities and Exchange Commission not less than three (3) months after the registration of the take-over bid.

The procedure/guide for the settlement of the dissenting shareholders and acquiring their shares is as follows:

• a. The offer by the acquiring company must be accepted by shareholders holding not less than ninety (90%) percent of the total number of shares subject to acquisition.
• b. The offeror/acquiring company may, within one (1) month after the acceptance of the offer amounting to at least 90% is made, give notice to a dissenting shareholder offeree stating that:
• 1. That the offer/bid has been accepted up to 90%.
• 2. That the offeror/acquiring company is bound to take up and pay for, or has taken up and paid for, the shares of the offerees who accepted the take-over bid
• 3. That the dissenting shareholder has the right to elect whether he would be paid for his shares in the same way and on the same terms the others were paid for; or whether he would require his shares to be valued and a fair value paid to him.
• 4. Within twenty (20) days of receiving the notice from the offeror, the dissenting shareholder may by notice sent to the offeror, make his election as indicated above. If he fails to make the election, then he will be deemed to have elected to be paid for his shares in the same way and on the same terms the others were paid for. In such a case, the dissenting shareholder is bound to surrender his shares certificate to the acquiring company within twenty (20) days of receiving the said notice of the acquisition of the target shares.
• 5. Within twenty (20) days of the expiration of the notice to the dissenting shareholders, the offeror/acquiring company must pay to the target company, the amount or consideration it would have paid to a dissenting shareholder had he accepted the bid earlier; and the target company should hold such money in trust for the dissenting shareholder, who shall pay the amount into a bank account established for that purpose, or place the consideration in the custody of a bank.
• 6. The offeror shall send a copy of every notice sent to the dissenting shareholder to the target company and must also notify it of the election made by the dissenting shareholder.
• 7. The offeror shall also send a copy of every notice sent to the dissenting shareholder to the Securities and Exchange Commission within one (1) month after the date on which it was so sent.
• 8. Where the dissenting shareholder elects to be paid a fair value for his shares, the offeror shall apply to the Federal High Court within twenty (20) days of such election to determine the fair value of the shares. If the offeror fails to make the application within the period specified, the dissenting shareholder can make the application within a further period of twenty (20) days. It must be noted that the dissenting shareholder shall not be required to pay security for costs.
• 9. On hearing the application, the court may appoint one or more independent valuer (s) to assist the court in fixing a fair value for the shares of the dissenting offeree.
• 10. The final order of the court shall be made against the offeror in favor of each dissenting offeree who made the election and for the amount of his shares as fixed by the court. The court may also make an order allowing the prevailing bank interest rate to be paid from the date the dissenting shareholder sent his share certificate to the offeror.
• 11. The order of the court shall operate to divest the offeree company of the money or other consideration held in trust for the dissenting shareholder and vest same in the dissenting shareholder or in any person in trust for him.

Purchase and Assumption is a category of external restructuring which 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 or investor to purchase the liabilities of the failing company and assume ownership of its assets. The assumed company undergoes dissolution through judicial sake of its assets and liabilities.

This is an external restructuring option for a moribund or failing company, also aimed at reducing the loss of investment. Unlike the restructuring option of purchase ad assumption, the company or investor is not taking up all the liabilities of the failing or failed company, but is allowed to inspect the books, assets, business operations or activities of the failing company with a view to choosing or picking out those aspects it could save by integrating them into its own business activities.

Management Buy-In is a corporate action involving the purchase of a controlling stake in a company by a management team from outside the company.