Currently, economies around the world are facing a slow-down, and Nigeria is not exempted. This will impact the spending powers of the consumers and the Government alike. Take for instance, the 2020 budget of the Federal Republic of Nigeria has been summarily slashed, Companies will now see more reason to work lean and with less staffs.
Things are no longer as they used to be, times have changed and fast. This pandemic has changed the entire market equations. Recently, the international Labour Organization envisaged 25 million lay offs world wide. Startups and Companies are currently facing cash crunch.
Many Companies can’t currently pay salaries; while some are slashing salaries. What if the situation persistent or even escalates, what option are available to Companies and Startups?
The Legal solutions:
In Nigeria, there are numerous Legal alternatives in which startups and companies can pursue to ensure their continued sustainability. Generally, these solution are broadly called corporate restructuring. Some applicable options are Merger, Acquisition, Take-over, Purchase and Assumption, and Cherry Picking.
The general governing Law are Securities and Exchange Commission Rules, Federal Competition and Consumer protection Act, Investment and Securities Act, Companies Allied Matters Act. There are other specific sectorial laws that are applicable depending on the sector in which the startup or company operates.
Sections 92 – 103 of the FCCPA provides for a new merger control regime. The FCCPA empowers the Federal Competition and Consumer Protection Commission (“FCCPC” or “Commission”) as the overall supervising authority for M&A activities in Nigeria and repealed Sections 118 – 128 of the ISA 2007 relating to merger control requirements. Section 92 (1) (a) of the FCCPA, provides that “a merger occurs when one or more undertakings directly and indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking”. Section 92 (1) (a) in addition provides that the merger may be achieved in any manner including through (a) purchase or lease of shares, interest or assets of the other undertaking; (b) amalgamation or combination with the other undertaking; and (c) joint venture. This implies two umbrella methods to attaining control over the business of another undertaking. That is (a) to “acquire” shares, interest or assets of the other undertaking; or (b) to “establish” control without necessarily acquiring any interests in the target entity.
Section 92 (2) sheds more light on what constitutes “control”. In Sections 92 (2) (a) and (d), control is attained through acquisition of interest in another undertaking. That is, by (a) “beneficially holding more than one half of the issued share capital or assets of the undertaking”; and (b) being “a holding company and the undertaking is a subsidiary of the [holding] company”. While under Sections 92 (2) (b), (c), (e) and (f), control is established without acquiring an interest in the other undertaking. That is, by (a) being “entitled to cast majority of the votes at the general meeting of the undertaking or ability to control majority of the votes”; (b) being “able to appoint or veto the appointment of majority of directors”; and (c) being “able to control the majority of the votes of the trustees, to appoint majority of the trustees or to appoint or change majority of the beneficiaries” in cases where the undertaking is a trust.
Under the FCCPA, mergers are categorized in small and large mergers. A small merger is a merger with a value at or below the threshold stipulated by FCCPC by its regulations. A large merger is one with value above the threshold stipulated by the Commission . Under the ISA 2007, mergers are categorized into small, intermediate and large mergers. The Act empowers the FCCPC to make regulations to determine a threshold of annual turnover for the purposes of determining a small or large merger and the method of calculation of annual turnover to be applied. It is good to note that the FCCPA.
Securities and Exchange Commission Rules treats acquisition as a separate transaction differently from Mergers. Rules 433 SEC Rules, define Acquisition as business combination where a person or group of persons buys most, if not all, of a company’s ownership stake in other to assume control of the target company.
By Rule 434, SEC is empowered to regulate the acquisition in both private Companies and unquoted public companies through the filing and approval of the requirements for acquisition by any corporate body or individual. Where a holding company is squirting shares solely for investment purpose.
By section 131 of ISA Take Over is a restructuring option involving Acquisition if least 30% ( 30 to 50%) of the shares or voting rights ( or any lower it higher threshold by SEC may prescribe) of the target company either by an individual or a company with the intention of taking over the company. Acquisition by one company of sufficient shares in another company to give the acquiring company control over the other company.
Where the acquiring company acquire the target company, both companies will form a single group bin which the acquirer is the holding company and the target company becomes the subsidiary. Hence, both companies exists.
This is a restricting options for moribund companies or failing companies. It is also aimed at reducing the loss of investment of a company. In this mode, the investor will not take up all the liabilities of the failing company, but it will inspect the books and account, account, business operation and activities of the dialing company in other to pick and choose those aspect of the failing business that it can save by integrating it into its own business.
Mergers and other restructuring process are not necessarily only for big multinational companies, neither is it exclusively for big companies . They are majorly to help Companies to exploit available options under the law to ensure their their sustainability in one form or the other.
Written by Opatola Victor Esq. An Abuja based Legal has advised startups to start considering the option of Mergers and acquisition and other option available under the law, to cushion the economic impact and effect of the Corvid-19 pandemic.