Tuesday, July 15, 2014 10:29 PM / By Olumide K. Obayemi and Olukayode O. Adegbola*
Evaluating the Role and Powers of the Nigerian Securities and Exchange Commission in the Context of February 2014 FBN Holdings Plc Acquisition of Oasis Insurance Plc.
This paper argues that Nigeria needs an independent governmental agency such as the Federal Trade Commission's Bureau of Competition as obtains in the United States, which is to enforce Nigerian antitrust laws. As in the United States, equal playing field and adequate legal protection for competition must form the foundation of the Nigerian free market economy. While not fully developed, Nigerian antitrust laws must continue to promote the interests of consumers; support unfettered markets, and must result in lower prices and more choices.
Exactly, seven years ago—precisely on June 25, 2007, the Nigerian legislature enacted and the President assented to the Investment and Securities Act, Cap 29, Laws of the Federation of Nigeria (“ISA 2007”). The ISA 2007, via Section 314(1) repealed, in entirety, its predecessor—the outdated Investment and Securities Act, Cap L24, Laws of the Federation of Nigeria, 2004 ("ISA 1999"). The ISA 2007, and its novel provisions of mergers and acquisitions, was fashioned after the South African Companies Act of 1973 and the South African Securities Regulation Code on Take-overs and Mergers (“SRP Code”) as enacted by the Securities Regulation Panel (“SRP”). The SRP Code, in turn, was fashioned after City Code on Take-overs and Mergers (1968) enacted by the London Panel on Take-overs and Mergers (“London Code”). Further in 2013, pursuant to Section 313 of ISA 2007, the Nigerian Securities and Exchange Commission (SEC) enacted the General Rules and Regulations Pursuant to the Investment and Securities Act 2007 (SEC Regs) to govern securities market.
Section 118 of ISA 2007, further vests on the SEC, the power of merger control, i.e., either to approve or disapprove any application for intermediate and/or large mergers in Nigeria, with the Federal High court having the power to sanction such mergers.
Finally, where a merger would substantially lessen competition, sections 121, 126, 127 and 128 of ISA 2007 allow the SEC to either refuse/revoke the merger and/or order a break-up of the business combinations, where such lessens competition.
It is the dual regulatory power of SEC that forms the fulcrum of this review considering the February 2014 FBN Holdings Plc acquisition of Oasis Insurance Plc. FBN Holdings through its subsidiary—FBN Life Assurance Limited acquired majority stake of 4,630,595,326 ordinary shares of N0.50kobo each, representing 71.2% of the total issued ordinary share capital of Oasis Insurance Plc. The acquisition was effected through the execution of a share sale and purchase agreement with the majority shareholders of Oasis Insurance. The SEC approval, pursuant to sections 118, 119,120 and 121 of ISA 2007, was also assessed to be devoid of Anti-Trust laws in the Nigerian Insurance Sector. According to FBN, the acquisition was strategically aimed at diversifying FBN Holdings’ businesses into general insurance service offerings, complement its existing life assurance with a range of general insurance products and with a plan to deepen FBN Holdings’ insurance penetrations in Nigeria. It will further enhance efficiency and profitability.
Earlier on, in 2013, China Petroleum Corporation (Sinopec) acquired 20% interest in OML 138 from E&P Nigeria Limited for US$2.5billion.
It is therefore important to re-evaluate whether the SEC’s approval of the 71.2% and 20% acquisitions by FBN and Sinopec were in full compliance with antitrust rules and Competition law requirements.
According Citibank’s Willem Butler, the Nigerian economy, by 2050, would be one of the largest economies in Africa. Thus, there have been several corporate restructurings in Nigeria due to emerging market growth of the 21st century. The total value of M&A transactions in Nigeria had increased progressively, and in 2011 and 2012, it was US$1.548 billion and US$7.415 billion, respectively.
Deals in the oil and gas sector were driven by activities of indigenous and foreign players seeking to acquire upstream oil and gas assets of various International Oil Corporations (IOC). Oando Plc (through its subsidiary—Oando Energy Resources), had commenced acquisition of OML 30 of Conoco-Philips’ Nigerian Upstream Oil and Gas Business, valued at US$1.8billion, to close July 31, 2014, including obtaining Nigerian Minister of Petroleum Resources’ approval. This will make Oando the largest indigenous oil producer in Nigeria. It is estimated that post-acquisition, Oando’s Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) will rise from the current annual average of N45 billion to N100 billion. Yet, big ticket deals are expected to continue to occur in the oil and gas sector due to acquisition of IOC’s oil and gas assets by local and other international players.
There were substantial transactions in the fields of Telecommunications, involving Shanduka Group Limited’s investment in MTN Nigeria Communications, CAPCOM’s investment in Multilinks, Starcomms and MTS and Tiger Brands Limited’s investment in Dangote Flour Mills.
Nigerian Breweries, Plc has also proposed a merger with Consolidated Breweries, as a result of which Nigerian Breweries Plc’s shares rose to N178 per share from N150 as of 6th June 2014. In 2013, UAC of Nigeria PLC acquired majority stake in two new corporations—i.e., Livestock Feeds and Portland Paints and Products Plc.
It has been projected that in 2014, the financial services sector would witness some M & A activities, driven by potential acquisition of insurance companies by local and international players. Further, the release of a transaction roadmap for divestment of government interest in the banks and the need for mortgage institutions to comply with the 2013 recapitalisation deadline is expected to spur M & A activities.
It is also anticipated that the power sector may record M & A activities as the preferred bidders for the Power Holding Company of Nigeria (PHCN) successor companies will refinance their debts with equity funding.
Simultaneously, government implementation of import substitution strategies and promotion of agriculture is expected to be a key driver of M&A in the consumer market sector.
Current events show that Seplat has now obtained dual listing status by being listed both on the London Stock Exchange and Nigerian Stock Exchange. Caverton Offshore Support Group, a leading provider of marine, aviation and logistics services to local and international oil and gas companies became the first offshore support company to be listed on the Nigerian Stock Exchange.
Recently, a major business combination was initiated on 9th July 2014, when shareholders of Lafarge Cement WAPCO Nigeria Plc (Lafarge WAPCO) overwhelmingly approved the creation of Lafarge Africa Plc, by approving the consolidation of Lafarge’s Nigerian and South African assets and with Lafarge Africa as a holding company to be listed on the Nigerian Stock Exchange (NSE). With SEC approval, Lafarge Group will transfer its shares in its businesses in Nigeria (i.e., shares in AshakaCem, Unicem and Atlas) and South Africa to Lafarge WAPCO for a cash consideration of $200million and the issuance of 1.4billion Lafarge Africa shares to the Lafarge Group. The emerging new holding company, Lafarge Africa, will be the 6th largest firm listed on the NSE in terms of market capitalisation put above $3 billion. Lafarge Africa will have a combined production capacity of around 12 million metric tonnes (MT) comprising Lafarge WAPCO (4.5 million MT), Lafarge South Africa Holdings (3.6 million MT), United Cement Company of Nigeria (2.5 million MT), Ashaka Cement ( one million MT) and Atlas Cement Company – an import operation with bagging capacity of 0.5 million MT.
There are several advantages of mergers and acquisitions. First, it allows an easy passage/entry of a foreign business to enter into the Nigerian economy. Burger King from the United States might have a hard time commencing business afresh in Nigeria with regards to logistics, staffing, sourcing raw materials and expertise. Purchasing the shares of “Mr. Biggs” would serve as an easy vehicle to make a quick and less expensive in-road/emergence in Nigeria. Second, where a company is going out of business, a merger with a pre-existing business is a better choice over and above filing for bankruptcy and injuring loyal staff, creditors, and suppliers of raw materials. To file for bankruptcy and throw several people into the job market is less advantageous than selling the business to new owners, who may absorb the business’ liabilities as part of their growing empire. Third, where economic downturn persists, and in order to raise enough capital to stay afloat, corporations in the same line of business may combine to raise sufficient income to survive. For example, where the cost of importing newsprint materials has become exorbitant, major newspaper companies such as Punch and Guardian may merge so as to pool resources together to succeed. Fourth, expansion into a new geographical area may be achieved by the acquisition of a pre-existing corporation. Where Nigerian Breweries intends to expand its market into Osun State, it is preferable if it acquires International Breweries—the producers of Trophy Larger beer. Fifth, where the Target corporation’s Research and Development department has renowned experts and the acquiring corporation possesses advantages in other areas, such as networking, manual labour and fleets of truck, the two corporations may combine to utilize their individual amenities. Sixth, where foreign and local businesses are involved, it is better if a reputable local company were acquired to stimulate the immediate logistics and business concerns after commencement of business locally. Seventh, business combinations give the business owner the residual right to alienate his interests in the business.
Under section 118, of the ISA 2007, there are three broad categories of merger threshold that constitute merger control requiring approval of the SEC: (a) small merger (transactions involving N500,000,00.00); (b) intermediate merger (transactions between N500,000,00.00-N5billion); and (c) Upper merger (transactions involving N5billion and above). Further, under Section 131; where an entity acquires shares which carry 30% of the voting rights of the target company, or where, acting together with affiliates and subsidiaries, the acquirer between 30-50% of the voting rights, an offer must be made to the minority shareholders of the same class of stock acquired.
Our major concern is with section 121 which gives the SEC the authority to determine whether it appears that a merger is likely to substantially prevent or lessen competition. We contend that the SEC should not be the agency to determine violation of competition rules. This is because, mergers and acquisition tactics that may have been tailored towards achieving monopoly may be too intricately structured with ingenuity of crafty professionals. An agency such as the SEC that is already inundated with regulation of the stock markets and the de-materialization of stock certificates ought not to be saddled with an equally daunting function, that ought, ordinarily be assigned to a separate and independent technical and competent important agency as presently obtains.
Moreover, since the anti-trust rules did not previously exist in the old 1999 ISA Act, the need to have develop firm home-grown set of laws and practical guidance to serve as foundational basis for future coordinated practice in anti-trust jurisprudence.
As stated above, in the United States, Federal Trade Commission's Bureau of Competition regulates the anti-trust sector. Similarly, in the United Kingdom, both the Competition Commission and the Office of Fair Trading handle competition regulation. Even in South Africa where ISA 2007 was borrowed from, the Competition Commission and Competition Tribunal also handle competition disputes.
In final submission, it is recommended that Nigerian legislators create two governmental agencies for competition regulation. The first agency should be similar to the FTC. We recommend that Nigeria should enact a separate legislation for competition regulation as in the United States where both the 1914 Federal Trade Commission Act and the Clayton Act give the FTC the authority to enforce the antitrust laws, i.e., laws that prohibit anticompetitive mergers and business practices that seek to prevent hard-driving competition, such as monopolistic conduct, attempts to monopolize, and conspiracies in restraint of trade.
The second agency to be created should be similar to the Bureau of Competition, which, aAs part of the FTC, investigates potential law violations and seeks legal remedies in federal court or before the FTC's administrative law judges. The Bureau also serves as a resource for policy makers on competition issues, and works closely with foreign competition agencies to promote sound and consistent outcomes in the international arena. U.S. antitrust laws are enforced by prosecutors working with both the FTC's Bureau of Competition and the Antitrust Division of the Department of Justice.
We are more interested in quality over quantity. The issuance of approval for all kinds of mergers and acquisitions detracts from the spirit of ISA 2007. True competition promotes efficiency by corporations, varieties for consumers, and, invariably, revenue for the government. True competition cannot be achieved outside of a strict and competent monitoring and regulatory framework.
*Olumide K. Obayemi and Olukayode O. Adegbola are with Ajumogobia & Okeke, Lagos, Nigeria.