Thursday, October 15, 2020 / 09:50 AM / OpEd by Joba Akinola / Header Image Credit: Study International
Nigeria recently passed a new companies' legislation which introduces sweeping changes to its corporate law. Critical amongst those changes is the revision of the 'financial assistance' rules to provide more flexibility for parties looking to complete share acquisition deals in Nigeria. This article considers the new rules and offers some perspectives on their potential impact on the deal making landscape in Nigeria.
1. On 7 August 2020, the Companies and Allied Matters Act, 2020 ("CAMA 2020") was passed into law, bringing the past few years of anticipation to a grand finale. CAMA 2020, which repeals and replaces the Companies and Allied Matters Act, 1990 ("CAMA 1990") is designed to bring Nigerian company law in line with international standards and approaches adopted in leading economic centres, with a view to improving the ease of doing business in the country. In doing this, CAMA 2020 dispenses with provisions that had become redundant or non-reflective of commercial realities, whilst attempting to clarify issues that had been the subject of debate in corporate governance circles.
2. One of the key matters addressed by CAMA 2020 is the regime relating to the provision of financial assistance by a company with respect to the acquisition of its shares (or that of its holding company). Under CAMA 1990, Nigerian companies were statutorily prohibited from providing any form of financial assistance to a person seeking to acquire shares in them or their parent companies, subject to certain limited exceptions.
3. "Financial assistance" was defined to mean any "gift, guarantee, security or indemnity, loan, any form of credit and any financial assistance". In terms of timing, the statutory restriction looked at assistance provided prior to the acquisition (with a view to funding the acquisition), and assistance provided after the acquisition (with a view to reducing any liability incurred in connection with the acquisition). The consequences of non-compliance were that: (i) the company and its management would be subject to fines; and (ii) more importantly, the act or transaction constituting financial assistance (such as security provided to support acquisition debt) would be at risk of being invalidated on the basis of the provision.
4. As mentioned, this rule was subject to a number of exceptions, being: (i) where the financial assistance is a loan provided in the ordinary course of business of the company e.g. a bank or other financial institution ordinarily engaged in the lending of money; (ii) the funding of share acquisition in the company (or its holding company) by a trustee holding on behalf of the company's employees pursuant to an employee share scheme; (iii) loans provided to employees for purposes of beneficially acquiring the company's shares; and (iv) any act or transaction otherwise authorized by law.
5. However, in the deal making context, many of these exceptions were not considered broad or flexible enough to accommodate most typical deal structures, especially in leveraged acquisitions. Whilst a significant number of players in the Nigerian deal making space began to take a more relaxed view of these restrictions, (especially considering the presence of very little litigation before the domestic courts on the basis of the CAMA 1990 provision), the attendant risks lingered, and the market consensus appeared to be that there was a need to review these rules. This was particularly so, as the United Kingdom, which had provided most of the source material for the CAMA 1990, had by its 2006 Companies Act, introduced a number of exceptions to this rule which provided greater flexibility on deals.
6. Against the following backdrop, CAMA 2020 does a number of key things to address some of the concerns over CAMA 1990. These are considered in turn below.
Key Changes Introduced by CAMA 2020
Clarification of "Acts or Transactions Authorized by Law"
7. As noted above, CAMA 1990 had provided for, amongst other exceptions "any act or transaction authorized by law". The scope and extent of this exception was unclear, and some practitioners had questioned whether this would extend to any transaction which was not ex facie illegal and had backing in some statute, such as the issuance of a debenture. However, the relevant provision has now been clarified by providing some examples - which include typical corporate actions such as payment of dividends, issuance of bonus shares, share redemptions and buybacks.
8. It is not yet clear whether this provision would be construed using the ejusdem generis rule - which would mean that a court would likely be inclined to only consider corporate actions as falling within this exception - although, on the understanding that the examples given are not 'transactions' in the corporate law sense, that would still leave questions as to what sorts of 'transactions' are contemplated by the exception. That said, the added language nonetheless gives some insight into the mind of the draftsman and provides better guidance to parties undertaking Nigerian corporate acquisition transactions.
The Scheme of Arrangements/Merger Exception
9. In addition to the clarification highlighted above, CAMA 2020 provides that "anything done in pursuance of an order of the court under a scheme of arrangement, a scheme of merger or any other scheme or restructuring of a company done with the sanction of the Court" will be exempt from the restriction on financial assistance. This makes clear that where, for instance, in connection with a merger, one of the merging entities is to provide financial assistance to support a merger
10. Prior to the introduction of this exception, certain deals in the market had, where practicable, been structured as schemes of arrangement, with a sizeable number of corporate lawyers forming the view that: (x) a scheme of arrangement would almost certainly qualify as a transaction authorized by law; and/or (y) in any case, the sanction of the court necessarily granted as part of such a scheme would serve to insulate such transactions from potential challenges on the basis of the financial assistance restriction.
The "Purpose" & "Good Faith" Exception
11. This exception exempts "an assistance given by a company where its principal purpose in giving the assistance is not to reduce or discharge any liability incurred by a person for the purpose of the acquisition of shares in the company or its holding company, or the reduction or discharge of any such liability, but an incidental part of some larger purpose of the company, and the assistance is given in good faith in the interests of the company" (emphasis mine).
12. Unlike the other exceptions, this is more fact sensitive and will require significant judicial analysis should the issue come up for question. From the relevant provision, it does seem that there are two (2) key elements: (x) the principal purpose of the act or transaction should not be the rendering of financial assistance to the acquirer, but rather a larger purpose of the company; and (y) the target company must be acting in good faith in its own interests. The elements of this exception are conjunctive, so a court applying the exception would need to satisfy itself that both elements exist.
13. This provision largely reflects the UK Companies Act, 2006 (in relation to public companies) and, looking to English court decisions for guidance, it seems clear that the answer will not always be easy. In Re Uniq Plc, the court held that a payment by a company for full consideration received by it or its subsidiary and with the genuine purpose of advancing its own interests and not in order to provide financial assistance, would not violate the restriction, notwithstanding the company's knowledge that the funds would be applied towards the acquisition of shares in the company or its holding company. On the other hand, the court in Chaston v SWP Group found that a transaction may run afoul of the relevant UK provision "even if only one of the purposes for which it was carried out was to assist the acquisition of shares".
The Whitewash Procedure
14. Lastly, CAMA 2020 introduces the so called "whitewash procedure", which is only available to private companies. In summary, the provision carves out financial assistance which would otherwise breach the provision if: (i) the net assets of the company are not reduced by reason of the financial assistance, and, even where they are reduced, the assistance is from distributable profits of the company; (ii) the financial assistance is approved by a special resolution; and (iii) the directors of the company make a declaration in a form to be prescribed by the Corporate Affairs Commission (whilst no form has been prescribed as yet, it is expected that this will be a declaration of solvency largely similar to that required in the UK).
15. This exception, arguably more than the others, will be particularly helpful in the context of leveraged acquisitions, where the lenders will typically look to the revenues of the target as the principal source of repayment and the assets of the target as security for the acquisition debt. With this change, on the presumption that a shareholders' resolution and directors' declaration should be relatively easy to procure on most private equity deals, the key hurdle that remains will be to satisfy the test in limb (i) above.
16. It is expected that this will not pose a major problem in the context of security or other credit support, though there are lingering practical questions as to how guarantees, for instance, will be treated in this context - will a court look to accounting principles in Nigeria to determine whether the contingent liability associated with a guarantee has the effect of a reduction of the target company's net assets, regardless of whether the guarantee is actually called?
17. As regards repayment, existing structures to migrate operating revenues upstream (in addition to dividends) should largely still continue to be as useful as they are - though it should be noted that recent changes in the tax landscape (particularly, new limitations on interest deductibility for foreign related company loans introduced by the Finance Act, 2019) may somewhat impact the viability of some of these structures.
18. In essence, the new introductions to the sections regulating financial assistance, like a number of other provisions across CAMA 2020, largely reflect a legislative intention to close the pre-existing gap between the state of the law and the market to the extent possible - as the key changes to some degree reflect, (and therefore, validate) some of the structures that the market had devised to deal with concerns around the financial assistance rule.
19. From a policy perspective, the question lingers as to whether the legislature should be playing catch-up, as it appears to have done here, or perhaps have taken a more proactive approach by abolishing the financial assistance restriction in its entirety, or at least, as regards private companies. This is especially so, given that, as some commentators have suggested, its supposed philosophical nexus to capital maintenance principles is somewhat suspect and, in any case its continued utility in the current global economic context (with private equity now a $4.1 trillion industry) is increasingly doubtful.
20. Having said that, the introduction of the new changes certainly is a positive step by the Nigerian legislature - one that is expected to ease what had hitherto been a key legal concern on acquisition financing and related refinancing transactions, help simplify transaction structures and further reduce overall transaction costs.
About the Author
Joba Akinola is a member of the Olaniwun Ajayi's Power & Infrastructure Practice. He advises on various aspects of the financing, development and acquisition of a broad range of energy and infrastructure assets. He also provides corporate and regulatory compliance advisory. Joba is qualified to practise in the State of New York and worked at the New York offices of Sullivan & Cromwell LLP, advising on LNG projects, Rule 144A debt offerings, private equity offerings and investment fund matters. Joba is a Harlan Fiske Stone Scholar and Justice Mohammed Bello prize winner. He can be reached vide JAKINOLA@OLANIWUNAJAYI.NET