This topic is essentially statue-based. You would learn the procedure in law school. We are concerned with the basic principles of mergers and acquisitions in this class. What do you mean by mergers and acquisitions? How can you effect a merger and acquisition and what are the benefits or reasons that undermine business people to engage in it? On the flip side as well, what are the disadvantages?

The primary reason behind mergers and acquisitions is corporate restructuring. When corporate managers talk about corporate restructuring, there must be something driving the restructuring. Ultimately, what you’d see is an attempt to increase or enhance the efficiency of this business which leads to more profit for the benefit of the shareholders. Thus, the whole point of mergers and acquisition is to enhance shareholder value. Some other jurisprudential school of thought have argued that mergers and acquisitions don’t take cognizance of other stakeholder interests like the community or most importantly employees of the business. More often than not, when you have a corporate restructuring, there is always bound to be downsizing or even retrenchment.
Before 1999, CAMA was the primary statutory framework for mergers and acquisition. But now, we have the Investment and Securities Act (ISA) which is the governing statutory framework for mergers and acquisitions in particular.
Corporate restructuring is the process involved in changing the organization of the business. It can involve making dramatic changes to a business by cutting out or merging departments but it typically implies rearranging the business for increased efficiency and profitability. So restructuring may involve the company’s sale or a merger with another company. In essence, such business combinations provide economic and financial benefits such as economies of scale, business risk diversification and the ability to expand the geographical scope of the business. The concept of restructuring involves the ownership of the business and the assets of the business. When we are talking about mergers and acquisitions, we are talking about two different concepts; the mergers on the one hand and the acquisitions on the other hand. These concepts are defined in the ISA.
A number of legal dictionaries contain the common definition. A merger is the combination of two companies or businesses in which one company issues its own shares or stock in exchange or replacement of the shares or stock of a smaller company.
In terms of the statutory definition of mergers, S. 119 ISA tells us what a ‘merger’ means. A merger means any 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 and one or more bodies corporate. S. 119 (2) ISA tells the manner in which a merger may be achieved; a. purchase or lease of the shares, interest or assets of the other company in question; or b. amalgamation or other combination with the other company in question.
Immediately, you would see from the above definition of a merger that a merger is a combination of two business but the way by which one can achieve that merger might be just a simple acquisition of all or most of the shares in another company or a substantial part of the assets of that other company even though those companies might remain separate entities or one might actually go for the real amalgamation of the two entities either into one existing company or into a new company. But the same ISA in S. 117 tells us what a takeover is.
By virtue of S. 117 ISA, a take-over means the acquisition by one company of sufficient shares in another company to give the acquiring company control over that other company.
In the case of a takeover as distinct from mergers, a takeover only relates to an acquisition of sufficient shares of a company to give one control of that company. So in the case of a takeover of a company, you are not looking for an amalgamation or a combination of the business with one’s own business; you just want to exercise control over a particular company. In simple terms therefore, a takeover means acquiring sufficient shares of a company such as would give one sufficient control over the company.
Even though S. 119(2) ISA tells us about the ways mergers can be contemplated and achieved, S. 119(2)(b) (precisely) deals with the types of mergers. First, we may have what is called vertical merger. Essentially, this is a combination of two businesses in two different lines of business. For example, where a fisheries company decides to diversify its business by expanding the geographical state of its business so it merges with a transport company. Secondly, we may have what is called a horizontal merger. This is a combination of two companies in the same line of business. Essentially, the object of a vertical merger is to increase market share. Although not feasible, a typical example would be Coca-Cola merging with Pepsi. Thirdly, we have what is known as a conglomerate merger. Essentially, it is a combination of businesses that are diverse.
It is important to state that SEC has an anti-trust policy which essentially is against monopoly. If a merger would create a monopoly, it is likely that SEC would refuse such combination.

The purposes of mergers and acquisitions
Mergers and acquisitions are sometimes used to implement government policy which is considered desirable for a particular industry. See the 2005 example which was regulatory-driven.
It serves the purpose of safeguarding the business. For example, the acquiring company may decide to acquire or merge with its supply company to safeguard the source of its raw materials.
It serves the purpose of sustainability of the business. Here, we have issues like increased expertise at the management level. By acquiring or merging with another company, the business is able to acquire highly experienced and competent managers of the business.
There is also increased market share to reduce competition and protect existing market. If by mergers and acquisition, some competitors are taken out, it is better for that company. But the flip side is the danger of monopoly and SEC may step in to prevent such. You can think of GLO, MTN and Airtel merging. We are not sure the regulators would allow such; because there would be no competition.
Risk diversification is another driving factor. The company is able to penetrate markets other than the traditional market of that company.
Increase of profit or profit maximization.

The flip side of mergers and acquisitions
The loss of experienced workers or workers generally.
In vertical mergers in particular there may be duplication and over-capacity (too many people doing the same thing).
Class of cultures which affects performance. Different companies have different cultures. When they come together, each section is trying to have their culture dominate.
Uncertainty in terms of the ultimate effect of the merger. The value to be extracted in these mergers is uncertain.
A question may be asked whether a company (being a merger of companies A and C) has a right to retrench workers upon combination. It is the submission of this writer that this is a commercial (as opposed to a legal) decision. If the company feels it is not being efficiently run because the weight of the salary is killing the company or there is duplication of activities, it may go ahead to retrench workers. But where the particular retrenchment is discriminatory against a group, the law may step in. Take example, where MTN Nigeria decides to retrench a lot of its Nigerian employees and replace them with South-Africans, we are of the opinion that this would be considered unlawful.

Procedure for mergers
This is determined by the threshold and category of the merger in question. As we have noted earlier that before the first ISA was enacted in 1999, M&A were governed by CAMA. At this period, there was no distinction between tiny and large mergers which means that the SEC would have been inundated with so many things. Under the present legislation on M&A, we now have different categories of mergers; small, intermediate and large. The whole point of this categorization is that it is not every merger that SEC should bother itself about giving approval since there are so many mergers going on every day. The position under ISA is that if the merger is a small one, then ordinarily SEC approval wouldn’t be required unless SEC insists approval must be sought and obtained. And SEC would likely come up with this idea if the area of the business where the merger is taking place is such an important area that it wants to be sure that it is not likely to create anti-trust issues. Thus, SEC would be the one to say approval is required.
We would find the thresholds and categories of mergers in S. 120 ISA 2007. The section provides a lower threshold of 500,000,000 naira and an upper threshold of 5,000,000,000 naira. This section implies that any proposed merger where the value of that merger is below 500,000,000 naira is a small merger that doesn’t require SEC approval unless SEC insists on the approval. An intermediate merger is one that has a value between 500,000,000 naira and 5,000,000,000 naira. A large merger is one that has the value 5,000,000,000 above. But please note that S. 120(4) ISA provides that ‘pending the time the commission prescribes the thresholds’ so that the SEC may change the threshold. Indeed, the thresholds were changed in 2013. In the SEC rules, the minimum threshold is now one billion but the upper threshold remains five billion. Thus, a small merger is one with a value less than one billion. An intermediate merger is one between one billion and five billion. A large merger is one five billion above.
Please look closely at S. 121 ISA which provides the elements SEC considers in terms of giving approval to a merger. Apart from the issue of anti-trust or monopoly, there is the issue of substantial public interest. The SEC may not approve a merger on the ground of substantial public interest. Thus, a proposed merger may not pop up the issue of monopoly but the commission may still refuse the merger on the ground of substantial public interest.
Please note that even though ISA is the primary statutory framework for effecting mergers and acquisitions in terms of the process but in terms of the regulatory aspect of SEC, there are other industry-specific statutes that also have a role to play in business combinations. For example, two banks can’t merge without the approval of the CBN. Two telecommunications firms can’t merge without the approval of the NCC. Two insurance companies can’t merge without the approval of NICOM. The implication of this is that approval must be sought and obtained from both SEC and these industry-specific bodies otherwise the merger can’t happen. Presently, there is a bill before the National Assembly for a Federal Competition Commission. When this bill is passed and it becomes an Act, we are not sure of how this Act would be interpreted with regard to the regulatory powers of the SEC.
S. 122 ISA deals with the small merger notification and implementation. Unlike the cumbersome notification procedure existing before the enactment of the Act, S. 122(5) ISA provides an easier approach. By virtue of S. 122(5), the SEC has 20 working days from the date of notification to consider all factors and make a determination to approve or not to approve a merger proposal, though it may extend consideration for a single period not exceeding 40 working days.
Sections 125 and 126 deal with the issue of notification procedures for intermediate and large mergers. Typically, what happens in a merger is one of two things. It is either that the business combination is where there are two companies with one being stronger than the other, negotiations around the business combinations would center around: a. which of the companies would stand after the business combination and b. what would be the terms and conditions for the business combination. Typically, the stronger company would remain standing. The other negotiation would be the share exchange. Note that the weaker company would be dissolved but not wound up. There would be a share exchange rate. If the share exchange rate is 1:10 for example, it means that if a shareholder in the weaker company has 100 shares, he would then have 10 shares in the new company. A lot would depend on the balance sheet and the value in this company. But essentially, the value in the weaker company is reflected in the share exchange ratio.
We have noted earlier that a prospectus will be issued. After this prospectus is issued each of the companies will then go to the Federal High Court to order a court order meeting where the prospectus is presented before all the members of the prospective companies for their approval. After these approvals have been obtained, they would go back to SEC to give it approval of the transaction after which they would go back to the court for sanctioning the merger. The merger becomes complete upon the court’s sanction. It is extremely important for the court to sanction the merger because there are certain things that would typically be put in the court-ordered sanction. In a situation where you have eight banks coming together and only one is standing, the document would clearly state that all the rights and obligations of the respective firms have been transferred to the standing firm. The implication of this is that all the pending cases by or against the respective companies are transferred to the standing company. The court in sanctioning the merger will make any of the following orders:
(a) the transfer to the transferee company of the whole or any part of the
undertaking and of the property or liabilities of any transferor company;
(b) the allotment or appropriation by the transferee company of any shares,
debentures, policies or other like interests in that company which under the
compromise or arrangement are to be allotted or appropriated by that company to
or for any person;
(c) the continuation by or against the transferee company of any legal proceedings
pending by or against any transferor company; subsidized
(d) the dissolution, without winding up, of any transferor company;
(e) the provision to be made for any persons who in such manner as the court may
direct, dissent from the compromise or arrangement; and
(f) such incidental, consequential and supplemental matters as are necessary to
secure that the reconstruction or merger shall be fully and effectively carried out.
By virtue of S. 251(1)(e), the Federal High Court has exclusive jurisdiction in civil causes and matters arising from the operation of any enactment regulating the operation of companies incorporated the CAMA. Clearly, it is the FHC that has jurisdiction as to sanctioning, schemes of arrangement, mergers and acquisitions etc. See the case of Afolabi v Western Steel Works.
We have noted that before the enactment of the ISA, business combinations were essentially CAMA-based, but in 1999 part 9 or 10 of CAMA was repealed under the ISA 1999. The aim was to move everything relating to mergers and acquisitions to ISA. But let’s turn to sections 538-540 CAMA. There remains an ongoing debate whether or not one can also effect a merger or an acquisition by a scheme of arrangement under these provisions. Can we avoid regulatory oversight by going through these provisions of CAMA? Please bear in mind the provision of S. 118, rules 423 and 424 of ISA. S. 118(1) ISA
“Notwithstanding anything to the contrary contained in any other enactment, every merger, acquisition or business combination between or among companies shall be subject to the prior review and approval of the Commission.”
Even where we accept that a business combination can be done under CAMA rather than ISA, we are still caught within the provision of S. 118(1) ISA. Inevitably, the business combination is still subject to the prior review and approval of the commission unless it is a small merger.
There is a school of thought which has argued that the arrangement and compromise envisaged in those provisions of CAMA is only for internal restructuring as distinct from external restructuring which would then be mergers and acquisitions as contemplated under ISA. These sections talk about shareholders and creditors of the company where creditors of the company compromise their rights and essentially come up with a new scheme recognizing their right and the payment so that essentially it might be difficult to….
S. 538 ISA deals with the sale of assets. A person may decide to sell substantially all the assets of the company and they may go ahead to do a voluntary winding up after which a liquidator is appointed to sell all the assets. The creditor of the company may enter a scheme of arrangement with the company that instead of winding up the company, why not convert the debt to shares in the company. Because there are existing shares in the company with rights, the scheme of arrangement must be presented to the shareholders for approval and then the court sanctions it. All this can be done outside ISA under S. 538 CAMA. there is therefore an ongoing debate whether the provisions of CAMA should be amended or whether it should be moved to ISA.


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