Mergers & Acquisitions: Identifying the Opportunities & Avoiding the Pitfalls

Transcription

1 FABIAN AJOGWU, SAN Mergers & Acquisitions: Identifying the Opportunities & Avoiding the Pitfalls This merger will result in greater operational integration between Dangote Cement Plc and Benue Cement Plc and make the consolidation of their supply and distribution chain more effective. Following the merger, BCC and DCP will be able to share facilities, inventory and other resources. 1 It is perhaps an interesting starting point to deal with the myth that mergers and acquisitions (M&A) almost always lead to larger companies, or more profit or efficiency. It is not always the case. There are pitfalls as well as opportunities, which require careful consideration and evaluation on the part of the deal makers as well as the deal owner(s). Consolidation does not automatically equal success, larger banks, more product, higher profits or efficiency. It can also mean losses and redundancies and statistics show that more than half of financial services M&A do not succeed 2 In the world of business, mergers and acquisitions constitute a powerful growth tool used by companies to achieve long-term growth and increased revenue or profitability. It is a tool used for expanding the operations of a company with a view to achieving growth. 3 Mergers and acquisitions are crucial to the growth and health of an economy being a highly attractive means 1 Letter from the Chairman of Dangote Cement Plc, Alhaji Aliko Dangote CON, dated August 24, 2020, in the Scheme of Merger between Dangote Cement Plc and Benue Cement Plc. Suit No. FHC/CS/L/1038/10. It is noteworthy that better access to financing, enlarged cement production platform, robust shareholder value proposition, and improved management efficiencies were also cited as envisaged benefits of the merger. 2 Mergers and Acquisitions in European Financial Services: Best practice, future forecasts and strategies for success, Financial Services Report, Source: Accessed June 26, 2011Ibid 3 A Sherman & M Hart, Mergers & Acquisitions from A to Z, AMACOM, 2006, 2 nd ed. P. 1 Fabian Ajogwu, SAN prepared this Paper for presentation to the Corporate Counsel Forum, at the Nigeria Bar Association 2011 Annual Conference, Port Harcourt on August 24, 2011, as basis for discussion at the forum of Lawyers. Materials have been taken from other referenced and cited sources including the book FI Ajogwu, Mergers & Acquisitions in Nigeria: Law & Practice, Centre for Commercial Law Development, 2011 Copyright CCLD, March - August No part of this publication may be reproduced without the written permission of CCLD or the Nigeria Bar Association.

2 for business owners and entrepreneurs to get value from the wealth they have contributed in creating. Mergers are vital tools used by companies for the purpose of expanding their business operations with objectives ranging from increasing their size, long term profitability or relevance within a particular market. A merger is the fusion of two or more companies, as distinct from the take-over of one company by another. Mergers may be undertaken for various reasons, notably to improve the efficiency of two complementary companies by rationalizing output and taking advantage of economies of scale, and to fight off unwelcome takeover bids from other larger companies. The companies involved form one new company and their respective shareholders exchange their holding for shares in the new concern at an agreed rate. From a business perspective, a merger is simply the consolidation of two or more companies into one. Merger presupposes the existence of two independent things or estates, the greater of which would swallow up the lesser one by the process of absorption. Mergers and acquisitions (M&A) activities rose to a global record of US$3.8Trillion in This marked an increase of over thirty-five percent from year 2005, and surpassed the previous high of US$3.4Trillion set in year 2000 during the previous M&A boom. 4 Many of these transactions were cross-border. In a study conducted in 2000 by Lehman Brothers and another in 2010 by Morgan Stanley, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by one percent relative to the acquirer's. 5 Lien argues that -... for every $1 Billion deal, the currency of the target corporation increased in value by 0.5%. More specifically, the report found that in the period immediately after the deal is announced, there is generally a strong upward movement in the target corporation's domestic currency (relative to the acquirer's currency). Fifty days after the announcement, the target currency is then, on average, 1% stronger. 6 The rise of globalization has exponentially increased the market for cross border M&A. In 1996 alone there were over 2000 cross border M&A transactions worth a total of approximately $256 billion. This rapid increase took many M&A firms by surprise because the majority of them never had to consider acquiring the capabilities or skills required to effectively handle this volume of transactions. In the past, the market's lack of significance and a stricter national mindset prevented the vast majority of small and mid-sized companies from considering cross 4 JA Garcia and D McKenzie, Preliminary Issues to Consider in Negotiated Mergers and Acquisitions, accessed January 4, K Lien, Mergers and Acquisitions - Another Tool for Traders, 2005, Investopedia, Accessed October 17, K Lien, Mergers and Acquisitions Another Tool for Traders 2

3 border intermediation as an option which left M&A firms inexperienced in this field. This same reason also prevented the development of any extensive academic works on the subject. 7 Cross-border intermediation has many more levels of complexity to it namely corporate governance, the power of the average employee, company regulations, political factors, customer expectations and cultures, all crucial factors that could affect the transaction. 8 Mergers and Mergers in Nigeria 29 Years After The year 1982 was a landmark year in the history of mergers and acquisitions in Nigeria. Prior to 1982 the concept of mergers and acquisitions had minimal actual significance in Nigeria. One of the very few major mergers that took place before that time was the amalgamation of three companies- Re Bendel Co Ltd, Bendel Intra-city Bus Service Ltd and Trans-Kalife Ltd- to form the Bendel Transport Service Ltd. This situation changed significantly after the Securities and Exchange Commission (SEC) began its operations in 1982, marking the beginning of regulated business combinations in Nigeria. 9 The first merger attempt was in 1982 between United Nigeria Insurance Company Limited and United Life Insurance Company Limited, which was, however, not consummated. Between 1982 and 1988, the SEC supervised thirteen mergers- including the mergers of Lever Brothers Nig Ltd and Lipton Nigeria Ltd, SCOA Nigeria Ltd and Nigeria Automotive Components Ltd, John Holt Ltd and John Holt Investment Ltd- only two of which were unsuccessful. 10 The prospects of mergers and acquisitions in Nigeria have continued to evolve since then. Different legislation have been passed to regulate business combinations, including the Companies and Allied Matters Act of 1990 and the Investment and Securities Act of 2007, as well as some sector-specific Acts, such as the Banking and other Financial Institutions Act of 1991, the Insurance Act of 2003 and the Electric Power Sector Reform Act of In 2002, there was a merger of two important petroleum companies; Agip Nigeria Plc and Unipetrol Plc to form Oando Plc. However, the most striking activities in mergers and acquisitions in Nigeria were undoubtedly the 2005 mergers that took place in the banking sector. These mergers were driven by the Central Bank of Nigeria s 2004 directive to all Nigerian banks to increase their shareholders fund to a 7 Mergers and Acquisitions, Accessed October 17, S Finklestein, Cross Border Mergers and Acquisitions, Dartmouth College, accessed October 18, O. Orojo, Company Law & Practice in Nigeria, Vol. 1, LexisNexis, The first successful merger was between AG Leventis & Company Limited and Leventis Stores Limited in 1983 where 100 ordinary shares of 50 kobo each of Leventis Stores Limited were exchanged for 83 ordinary shares of 50 kobo each of AG Leventis &Company Limited. 3

4 minimum of NGN25 Billion (twenty-five billion naira) 11, from the previous minimum shareholders fund of NGN2 Billion (two billion naira). The deadline for this increase was December 31, Few Nigerian banks had this new minimum capital base, as a result, several mergers and acquisitions emerged, with only 25 out of 89 banks surviving the conditions and operating after Some of the banks formed as a result are Unity Bank Plc, Fin Bank Plc, Sterling Bank Plc, Fidelity Bank Plc, IBTC Chartered Bank Plc 12, Skye Bank Plc, Bank PHB 13 and the United Bank for Africa. The Legal Framework of Mergers and Acquisitions In Nigeria the legislations that have impact, directly or indirectly on mergers and acquisitions in Nigeria are: - The Investments and Securities Act (ISA) 2007 and the Rules and Regulations of the Securities and Exchange Commission (SEC) made pursuant to the ISA. - The Companies and Allied Matters Act (CAMA) The Companies Income Tax Act In addition, there are other sector-specific laws that regulate business combinations. The Banks and other Financial Institutions Act (BOFIA) 14 regulates the banking industry; the Nigerian Telecommunications Act 2003, regulates the telecommunications industry; the Insurance Act 2003 regulates the insurance industry; the Electric Power Sector Reform Act 2005 regulates the electric power sector. 15 Transaction agreements relating to business combinations are typically governed by Nigerian law which has its roots in English common law. The parties to such agreements may, however provide for the law of any other jurisdiction to govern the agreement, especially where the M&A has cross border dimensions. 16 Meaning of Mergers A merger connotes the combination of two companies into one larger company for some economic or other strategic reasons. It is defined as a transaction in which corporations of relatively equal size, combine. 17 It is also seen as a transaction in which two or more corporations combine under state corporation law, with the result that all but one of the participating corporations lose its identity. 18 Sherman and Hart describe a merger as 11 Approximately US$208 million. The exchange at the time was NGN120:US$1 12 Now Stanbic IBTC Bank Plc 13 PlatinumHabib Bank Plc, the result of the merger of Platinum Bank Ltd and Habib Bank Plc. 14 Act No 25 of See n. 1 above. 16 Ibid. 17 B Fox & E Fox, Corporate Acquisitions and Mergers, Matthew Bender & Co, 2004, Vol. 1, p B Fox & E Fox, Corporate Acquisitions and Mergers, Matthew Bender & Co, 2004, Vol. 1, p

5 a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organisation after the merger, it retains its originality. 19 Mergers can be defined from a broad as well as a narrow perspective. From a broad perspective, a merger is simply any takeover of one company by another, whereby the businesses of both companies are brought together as one. The management of both companies is then fused into one. Coyle defines it from a narrow perspective as the coming together of two companies of roughly equal size, pooling their resources into a single business. The stockholders or owners of both pre-merger companies have a share in the ownership of the merged business and top management of both companies continues to hold senior management positions after the merger. 20 The phrase mergers and acquisitions (abbreviated M&A) has been referred to as the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry, grow rapidly without having to create another business entity. Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. 21 A merger is defined under the Investment & Securities Act 22 as the amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertakings or any part of the undertakings or interest of one or more companies and one or more bodies corporate. 23 It entails the transfer of properties and liabilities of one or more companies to another. The transfer is however limited to those rights that can be transferred, and excludes personal contracts such as employment contracts, which has to be specifically provided for. Aluko puts it succinctly thus one or more companies may merge with an existing company (through absorption) or they may merge to form a new company (through consolidation). Nonetheless, a fundamental characteristic of merger (either through absorption or consolidation) is that the acquiring company (existing or new) takes over the ownership of other companies and combines their operations with its own operations A Sherman & M Hart, Mergers & Acquisitions from A to Z, AMACOM, 2006, 2 nd ed. P B Coyle, Mergers and Acquisitions, CIB Publishing, 2000, Kent, p Mergers & Acquisitions, accessed July 26, Investment and Securities Act, No. 29, Section 119 (1) of the Investment and Securities Act, No. 29, B Aluko, Corporate Business Valuation for Mergers and Acquisitions, International Journal of Strategic Property Management, 2005, p. 3 5

6 A merger (or an amalgamation) occurs when two or more companies transfer their businesses and assets to a new company (or to one of themselves) and in consideration, their members receive shares in the transferee company. The single entity so formed could take the identity of the acquirer or that of the target company. In re Lipton Nigeria Limited 25, Lipton Nigeria Limited merged with, and into Lever Brothers Nigeria Ltd. In re John Holt Investment Ltd and John Holt Ltd, John Holt Investment Ltd merged with and into John Holt Ltd. 26 In Re Cheesebrough Products Industries Ltd and Lever Brothers Nigeria Ltd, the merger resulted into a larger Lever Brothers Ltd. 27 The result of a merger could also take on a new identity and name different from the target and acquirer. In the 2002 merger between Unipetrol Plc and Agip Nigeria Plc, the resultant entity became Oando Plc. Possible Identity Outcomes of a Merger Option/ Scenario Resulting Identity Acquirer + Target = Acquirer 28 Acquirer + Target = Target 29 Acquirer + Target = New Entity (by a new name) 30 Acquirer + Target = New Entity (by a new name mixture of acquirer & target s names) 31 The terms merger and acquisition are often used interchangeably to mean the same thing, and in a more common sense used in the twin form of mergers and acquisitions. Acquisition describes the act of gaining effective control over the assets or management and ownership (of shares in the capital) of another company without any combination of companies. Whereas in the case of acquisitions, the companies remain separate legal entities; but with some change in control of companies, the acquisition is seen as a takeover of the target. In this regard, the term acquisition can be interchanged with takeover. 25 Suit No. FHC/L/M21/81 of 5/6/85 (unreported) 26 Suit No. FHC/L/M68/87 of 18/5/87 (unreported) 27 Suit No. FHC/L/M49/88 of 14/11/88 (unreported) 28 For example, the merger between Fidelity Bank Plc, FSB International Bank Plc, and Manny Bank Plc resulted in Fidelity Bank Plc. 29 For instance, the merger between Standard Trust Bank Plc and United Bank for Africa Plc (as the target) resulted in the final entity remaining United Bank for Africa Plc (UBA) - Suit NO FHC/L/CS/476/2005 (unreported). 30 For instance Skye Bank Plc was the new entity by a new name that resulted from the merger of five banks, namely Prudent Bank Plc, Eko International Bank Plc, Bond Bank Plc, Reliance Bank Plc and Cooperative Bank Ltd Suit No. FHC/L/CS/08/2006 (unreported). Similarly, ACB International Bank Ltd, Citizens international Bank Plc, Guardian Express International Bank Plc, Omega Bank Plc, Trans-International Bank and Fountain Trust Bank Ltd merged to form Spring Bank Plc 31 The merger of IBTC Plc and Chartered Bank Plc produced a new name, new entity, IBTC Chartered Bank Plc. 6

7 The term acquisition has also been described to mean a transaction in which a large corporation purchases a small corporation. 32 It could be the purchase of an asset such as a plant, a division or even an entire company. 33 This may be by the purchase or lease of the shares, interest or assets of the other company in question or the amalgamation or other combination with the other company in question 34. A company may also be acquired by purchasing either the entire issued capital of a company or its business and assets. 35 An acquisition occurs when one company acquires sufficient shares in another company so as to give it control of that other company. Akamiokhor describes an acquisition as: a business combination in which ownership and management of independently operating enterprises are brought under the control of a single management. 36 In terms of control, a person is deemed by law 37 to control a company if that person (a) beneficially owns more than one-half of the issued share capital of the company 38 ; (b) is entitled to a majority of votes that may be cast at a general meeting of the company, or has the ability to control the voting of a majority of those votes, either directly or indirectly or through a controlled entity of that person; (c) is able to appoint or veto the appointment of a majority of the directors of the company; (d) is a holding company, and the company is a subsidiary of that company as contemplated by the Companies and Allied Matters Act; (e) in the case of a company that is a trust, has the ability to control the majority of the votes of the trustees, to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust; 32 Fox, B & Fox, E, Corporate Acquisitions and Mergers, Matthew Bender & Co, 2004, Vol. 1, p Sherman, A & Hart M, Mergers & Acquisitions from A to Z, AMACOM, 2006, 2 nd ed. P. 11. Sherman & Hart illustrate this aspect of an acquisition with the Procter & Gamble 2005 major acquisition of The Gillette Company Inc, in order to extend its reach in the consumer product industry. 34 Section 119 (2) a & b of the Investment and Securities Act, Boardman, N & de Carle, R, Legal Aspects of Acquisitions, Company Acquisitions Handbook, Tottel Publishing Ltd, 2007, London. P Akamiokhor, Mergers and Acquisitions: The Nigerian Experience, paper presented at the seminar on Perspectives and Options in Mergers and Acquisitions on 11/5/89. Also cited in Orojo, O, Company law and Practice in Nigeria, Vol. 1, LexisNexis, 2006, p Section 119 (3) of the Investment and Securities Act, No. 29, In this regard, more than one half does not necessarily mean 51% of the shares in the capital of the company. It would suffice to hold 50% of those shares plus one share (that tips the balance). 7

8 (f) has the ability to materially influence the policy of the company in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in paragraphs (a) to (e). 39 Acquisition (sometimes referred to as a takeover) is also referred to as a purchase of one company (the target ) by another. It may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's Board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. In some instances, a smaller firm will acquire management control of a larger or more established company and keep its name for the combined entity. This is known as a reverse takeover; or where it is more of a merger, it is known as a reverse merger. 40 A merger may be achieved by an acquisition. However, the shareholders of the acquired company are paid off (resulting in disinvestments) and the acquirer becomes owner of all or a substantial part of the assets of the acquired company. An essential difference between a merger and an acquisition is that in a merger, there is no disinvestment of the shareholders of the amalgamating companies while the reverse is the case in an acquisition. Other terms closely related but not necessarily the same as a merger include corporate restructuring, divestiture, leveraged buy-out (LBO), liquidation, arrangements, reconstruction, and takeover. Reasons for Mergers There are many reasons for companies wanting to acquire other companies. These reasons include the pursuit of a growth strategy, the defence of hostile action from another would-be acquirer, and financial opportunities. 41 However, the commonest reason is that the merger will result in substantial trade advantage or greater profits than the combined profits of the two companies working separately. There is also the element of synergy. 42 For instance, laying out the reason for the merger between United Bank for Africa Plc and Standard Trust Bank Plc, the Chairman of United Bank for Africa Plc stated as follows The primary objective of the merger is to create the No. 1 bank in West Africa and one of the largest Banks in sub Saharan Africa with a formidable asset base, offering a full spectrum of banking services from basic products and services for the low income personal market to customized solutions for the commercial and corporate market. The combined entity upon completion of the merger will have 39 Section 119 (3) (a) (f) of the Investment and Securities Act, No. 29, For example the reverse takeover of United Bank for Africa Plc by Standard Trust Bank Plc (a relatively smaller bank). 41 B Coyle, Mergers and Acquisitions, CIB Publishing, 2000, Kent, p.7 42 Synergy according to Weinberg and Blank is the favourable affect on the overall earnings caused by combining two firms in circumstances which will give rise to savings in costs or increases in revenue or more simply the 2+2 =5 effect. 8

9 total assets of NGN365 Billion, over 360 branches spread across all the states of the country and a market Leadership position within the sub-regional banking industry. 43 A distinction needs to be made between companies that seek acquisitions to add value to their business by achieving a better rate of growth, and those that identify takeover targets where they can capture and exploit the value that already exists in the business, without necessarily creating more growth. 44 There is a distinction between mergers for commercial or strategic reasons, and mergers for investment or management reasons. Corporate raiders primarily are concerned with the potential financial benefits of takeovers. They look for undervalued companies to buy cheaply, and unlock the value quickly, perhaps by breaking up the acquired company into smaller divisions that can be resold at a profit. 45 More generally, motivation for takeovers and mergers may arise from the fact that cost of production would be less in a larger entity combined with enlarged operational capacity and reduction of duplications (the economies of scale). Mergers and acquisitions may enable a company acquire a competitor which poses substantial threat to it, or a company which supplies its raw materials or provides it with market outlets with the aim of assuring, improving these services, or ensuring that these companies are not taken-over by a competitor. Again, the motivation may be diversification of enterprises with a view to ensuring stability of earnings; and it may be to acquire the much-needed technology or managerial expertise of another company. Large combines have more obvious financial advantages than small companies. There is an enlarged capital base, loan capacity, accelerated growth and increased earnings. There are reasons for going the route of mergers, which have been considered to primarily add to shareholder value. They are as follows: - - Economies of Scale: This refers to the fact that the combined company can often reduce duplicate units or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit. In the United Bank for Africa Plc merger, the Scheme cited economies of scale as benefit, when it stated thus: the combined institution will create economies of scale that will result in a reduction in costs and the utilization of the synergies between the two institutions to streamline the operations of the post merger UBA Letter from the Chairman of United Bank for Africa Plc dated May 18, 2005, in the Scheme of Merger between United Bank for Africa Plc and Standard Trust Bank Plc 44 B Coyle, Mergers and Acquisitions, CIB Publishing, 2000, Kent, p.8 45 ibid. 46 Letter from the Chairman of United Bank for Africa Plc dated May 18, 2005, in the Scheme of Merger between United Bank for Africa Plc and Standard Trust Bank Plc 9

10 Economies of scale that would result in a reduction in costs and utilization of the synergies between the two merging entities to streamline operation was also cited as one of the reasons for the merger between Dangote Cement Plc and Benue Cement Plc Increased Revenues/ Increased Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices. This was laid out as a driver in the UBA merger through the merger, the combined bank will be better able to compete with institutions within Nigeria, the Sub-Saharan Africa region and internationally, thereby increasing market share, surpassing the competition and consequently increasing gross revenue Cross Selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts, or a manufacturer can acquire and sell complementary products. - Synergy: Better use of complementary resources. Excluding any synergies resulting from the merger, the total post-merger value of the two firms is equal to the pre-merger value. However, the post-merger value of each individual firm likely will be different from the pre-merger value because the exchange ratio of the shares probably will not exactly reflect the firms' values with respect to one another. The exchange ratio is often skewed because the target firm's shareholders are paid a premium for their shares. 49 Synergy takes the form of revenue enhancement and cost savings. When two companies in the same industry merge, such as two banks, combined revenue tends to decline to the extent that the businesses overlap in the same market and some customers become alienated. For the merger to benefit shareholders, there should be cost saving opportunities to offset the revenue decline; the synergies resulting from the merger must be more than the initial lost value. In citing operational efficiency as one of the envisaged benefits of the merger between Dangote Cement Plc and Benue Cement Plc, the Chairman stated The merger will result in greater operational integration between Dangote Cement Plc and Benue Cement Plc and make the consolidation of their supply and distribution chain more effective. Following the merger, BCC and DCP will be able to share facilities, inventory and other resources Letter from the Chairman of Dangote Cement Plc, Alhaji Aliko Dangote CON, dated August 24, 2020, in the Scheme of Merger between Dangote Cement Plc and Benue Cement Plc. Suit No. FHC/CS/L/1038/10 48 ibid accessed January 7, Letter from the Chairman of Dangote Cement Plc, Alhaji Aliko Dangote CON, dated August 24, 2020, in the Scheme of Merger between Dangote Cement Plc and Benue Cement Plc. Suit No. FHC/CS/L/1038/10. It is 10

11 To calculate the minimum value of synergies required so that the acquiring firm's shareholders do not lose value, an equation can be written to set the post-merger share price equal to the pre-merger share price of the acquiring firm as follows: pre-merger value of both firms + synergies) post-merger number of shares = pre-merger stock price The above equation then can be solved for the value of the minimum required synergies. The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. The practical aspects of mergers often prevent the forecasted benefits from being fully realized and the expected synergy may fall short of expectations. - Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss-making companies, limiting the tax motive of an acquiring company. - Geographical or other diversification: This is designed to smooth the earnings results of a company, which over a long term, smoothens the share price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below). This was also cited as one of the drivers of the merger of United Bank for Africa Plc the combined institution will facilitate geographical expansion into markets where we had not previously had a presence. As a result, the combined bank will be able to decrease total risk, increase product sales and thus increase overall gross revenue Resource Transfer: Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. - Increased market share which can increase market power: In an oligopoly, increased market share generally allows companies to raise prices. Note that while this may be in noteworthy that better access to financing, enlarged cement production platform, robust shareholder value proposition, and improved management efficiencies were also cited as envisaged benefits of the merger. 51 ibid. 11

12 the shareholders' interest, it often raises antitrust concerns, and may not be in the public interest. 52 The reasons for a merger could also be appreciated from the perspective of the seller. The reasons include - The seller could be approaching retirement or getting ready for an exit out of the business. - The need for competent management or managers that could lead the business to the next level i.e. sustain it. - The business could require substantial investment in new technology and business processes to enhance its competiveness. - The need for access to the target s resources coupled with the need for liquid assets to augment working capital, and meet critical obligations of the company. The reasons for merging could also be appreciated from the buyer s perspective. The reasons would include - The need to enhance revenues, and reduce the operation costs relative to the revenues. In essence to increase the earnings per share (EPS). Mergers in which the acquiring company's earnings per share (EPS) increases is known as accretive mergers. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E. The corollary of accretive mergers is dilutive mergers, whereby a company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E. - Backward or vertical integration (vertical or horizontal operational synergies) or economies of scale. - The need to acquire new technologies, business processes, production capacity and management capabilities. - Strengthening management capabilities. - Change in the overall direction of the business. The risk of imminent business failure could also be a strong reason for a merger. A classical example is seen in the stated reasons for the merger of Nigerian Tobacco Company and British American Tobacco (Nigeria) Limited. In his statement on the market background, business prospects and the scheme of merger in a letter to the shareholders, Nigerian Tobacco Company Plc s Chairman, Chief Oludolapo Akinkugbe CON, laid out the reasons in this text - 52 Mergers and Acquisitions, accessed October 15,

13 The most important challenge in framing this letter to you on behalf of the Board has been the rather difficult task of resolving the dilemma of proposing to you to accept the offer of cash, for the surrender of your shares in NTC, or recommending that we should continue with business on our own in spite of the unfortunate circumstances of what appears to be inexorable dwindling fortunes. As you know, there has been a continued deterioration of the operations of NTC, with a collapse of market share from 70% to less than 20% over the past decade, and deteriorating profitability without prospect for dividend payment. 53 You will recall that your Company came out of many years of marginal profits through a number of restructuring exercises. Profit on sale of assets has represented a good percentage of NTC s reported profits for the past five years. Operating profit has therefore been significantly low and current outlook portends gloomier results. 54 The basis for the deterioration was not analysed in the letter, however three recurring themes that the shareholders had become familiar with, were set out in the letter of NTC s Chairman to include the problem of smuggled cigarettes that were said to be dumped without duty payments at prices that seriously undercut local manufacturers already constrained with high operational cost from wage increases, power outages, port delays, fuel scarcity etc. In that case, the uncertainty relating to excise duties (then 20%) on manufactured cigarettes were said to have aggravated the inability of locally manufactured products to effectively compete with non-duty paying smuggled products. There existed also the potential legal liabilities that threatened the solvency of NTC. The Chairman concluded his review of NTC s business by indicating that its current structure is fundamentally flawed by externally driven constraints to effectively compete in the existing Nigerian business environment. The outlook is a continuing pattern of market share loss and in the absence of opportunities for profitable growth, the risk of business failure is unacceptably high. 55 On the other hand of the merger, Mr Robert Fletcher of British American Tobacco Nigeria Limited presented the justification for the Scheme of merger as follows: - Social responsibility of the majority shareholder of NTC, which is related indirectly to BATNL, to the minority that invested in good times; 53 Scheme of Arrangement (under Section 539 Companies & Allied Matters Act, Cap 59, 1990, and Section 100 Investments & Securities Act No. 45, 1999; and Explanatory Statement (in compliance with Section 540 Companies & Allied Matters Act, Cap 59, 1990) in connection with the Proposed Merger of Nigerian Tobacco Company Plc (RC. 848) with British American Tobacco (Nigeria) Limited (RC ) 54 Scheme of Arrangement and Explanatory Statement in connection with the Proposed Merger of Nigerian Tobacco Company Plc (RC. 848) with British American Tobacco (Nigeria) Limited (RC ) 55 Ibid 13

14 - BATNL, a related party to the majority shareholder of NTC, has the best capacity to manage the fallout of the business failure of NTC; and - The new business strategy of majority shareholder of NTC, and its related or connected parties, as several other multinational companies, to carry on business abroad through wholly owned subsidiaries. 56 Mergers and acquisitions generally take the form of financial mergers and acquisitions, where the buyer is mainly driven by financial considerations; or strategic mergers and acquisitions, where the buyer is mainly driven by commercial considerations. The commercial considerations of a company will very often lie or derive from the company s corporate objectives or mission statement. The objectives could be articulated in general terms, as seeking to make the most of or increase shareholder value. The objective could be more specific, such as increasing earnings per share every year or to achieve a return on capital employed in excess of a given target or the industry standard. A merger decision could also be driven by its business objectives at the time, such as market leadership in the form of geographical market leadership, within a country, a group of countries or globally. It could also be driven by the need for technological leadership; or for providing high quality service or innovation or simply being the lowest cost producer in the industry. 57 The Securities and Exchange Commission (SEC) is charged with the statutory responsibility of considering the desirability or otherwise of a merger from the point of view of the public interest or greater good to the society or economy. 58 This responsibility is exercised with clearly defined criteria and factors to be taken into consideration in arriving at a decision whether or not the merger is against public interest. Whenever required to consider a merger, the SEC is required to initially determine whether or not the merger is likely to substantially prevent or lessen competition, by assessing the factors set out in section 121, subsection (2) of the ISA. 59 If it appears that the merger is likely to substantially prevent or lessen competition, then the SEC will determine 60 - whether or not the merger is likely to result in any technological efficiency or other pro-competitive gain which will be greater than, and off-set, the effects of any prevention or lessening of competition, that may result or is likely to result from the merger, and would not likely be obtained if the merger is prevented, and Scheme of Arrangement and Explanatory Statement in connection with the Proposed Merger of Nigerian Tobacco Company Plc (RC. 848) with British American Tobacco (Nigeria) Limited (RC ) 57 B Coyle, Mergers and Acquisitions, CIB Publishing, 2000, Kent, p.12 & Section 121 of Investment and Securities Act, No. 29, Section 121 (1) (a), ibid. 60 Section 121 (1) (b), ibid. 61 Section 121 (1) (b) (i) Investment and Securities Act, No. 29,

15 whether the merger can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsection (3); 62 In considering the merger, the SEC is required to determine whether all the shareholders of the merging entities are fairly, equitably and similarly treated and given sufficient information regarding the merger. 63 When determining whether or not a merger is likely to substantially prevent or lessen competition, the SEC is required to assess the strength of competition in the relevant market, and the probability that the company, in the market after the merger, will behave competitively or cooperatively, taking into account any factor that is relevant to competition in that market 64 The factors that should be taken into account as being relevant to competition in that market are (a) the actual and potential level of import competition in the market; (b) the ease of entry into the market, including tariff and regulatory barriers; (c) the level and trends of concentration, and history of collusion, in the market; (d) the degree of countervailing power in the market; (e) the dynamic characteristics of the market, including growth, innovation, and product differentiation; (f) the nature and extent of vertical integration in the market; (g) whether the business or part of the business of a party to the merger or proposed merger has failed or is likely to fail; and (h) whether the merger will result in the removal of an effective competitor. 65 When determining whether a merger can or cannot be justified on public interest grounds, the SEC is required to consider the effect that the merger will have on a number of issues 66 - (a) a particular industrial sector or region; (b) employment; (c) the ability of small businesses to become competitive; and (d) the ability of national industries to compete in international markets. 67 Once the initial determination is made, the SEC may then grant an approval in principle to the merger and direct the merging companies to make an application to the court to order separate 62 Section 121 (1) (b) (ii) 63 Section 121 (1) (d) 64 Section 121 (2) 65 Section 121 (2) (a) (h) 66 Section 121 (3) 67 Section 121 (3) (a) (d) 15

16 meetings of shareholders of the merging companies in order to get their concurrence to the proposed merger. 68 The protection of shareholders is further provided in section 121, subsection (5), which provides If a majority representing not less than three quarters in value of the shares of members being present and voting either in person or by proxy at each of the separate meetings agree to the scheme, the scheme shall be referred to the Commission for approval. 69 The Procedure for Mergers in Nigeria Preliminary Considerations The formalities of a merger usually include the following steps: a) The company may execute a Memorandum of Understanding which spells out the understanding of the parties and sets the stage for honest and confident negotiation and anticipates the future steps to be taken by the parties 70. This document is not subject to regulation by the Securities and Exchange Commission. The management of the acquiring and target companies will reach a preliminary agreement. b) The Board of directors of both companies would then adopt a merger agreement. Both companies must notify their respective shareholders of the terms of the proposed merger and the shareholders must approve the transaction by majority vote 71. c) Notification and voting materials usually are provided to shareholders of public companies as part of proxy statements required by statutory instrument. The proxy statements will include the terms of the merger, the consideration that will be offered to the target s shareholders and information about the two companies. These considerations may include stocks and shares or other securities in the acquiring company, debentures, or cash Section 121 (4) 69 Section 121 (5) 70 O. Orojo, Company Law & Practice in Nigeria, Vol. 1 at page B Fox & E Fox, Corporate Acquisitions & Mergers, Vol. 1 page Ibid 16

17 d) If the merger is approved by the required number of shares, the shareholders of the merging company will exchange their stocks for the pre-negotiated consideration. All shareholders must be entitled to receive equal consideration of each of their shares. However a choice of the form of consideration is sometimes permitted 73. Merger Considerations under the Investment & Securities Act 2007 In Nigeria, merger procedures are regulated by the Investments and Securities Act The Act establishes the Securities and Exchange Commission ( the Commission or SEC ) 74 as the highest regulatory authority for the Nigeria Capital Market with the sole aim of ensuring that investors are protected and pursue the maintenance of fair efficient and transparent market. Merger provisions are as contained in part XII of the Act. It is expedient to note that the provisions of the new Act were as a result of the various recapitalization processes in the banking and insurance sectors of the economy which signaled some of the inefficiencies that existed under the 1999 Act. The Act empowers the Commission to determine categories of mergers by prescribing a lower and upper threshold of combined annual turnover or assets or a lower and an upper threshold of combinations of turnover and assets in Nigeria 75. The ISA 2007 has categorized mergers into 3 sub-classes determined in accordance with criteria based on market share threshold, annual turnover, assets or combination of a number of factors to be issued by the commission from time to time. It should be noted that the Act has prescribed the lower threshold to be N500,000,000 while the upper threshold shall be N5,000,000,000. The implication of the above is that every merger in which the size of the transaction is less than N500 million is a small merger and not ordinarily subject to notification and approval by SEC. Where the size of the transaction is between N500 million to N5 Billion, it is an intermediate merger and subject to SEC notification and approval, and where it is above N5 Billion, it is a large merger and also subject to SEC s notification, approval and references to Court 76. The merger procedures in Nigeria would be discussed under the following categories of merger as stipulated by the Investment and Securities Act Small Mergers 73 Ibid 74 See Section 1 Investment & Securities Act 75 Section 120, Investment & Securities Act N. Dimgba, The Regulation of Competition through Merger Control: the case under the Investment and Securities Act 2007, being a paper presented at the Nigeria Bar Association Section on Business Law Conference held in April 16, See also section 120 of the Act 17

18 Under the Act, a small merger is defined as a merger or proposed merger with a value at or below the lower thresholds established by the Act. For small mergers, the parties are not required by the Act to notify the Commission unless it is so specifically required but notification can be done voluntarily at any time. It should be stated here that within 6 months after a small merger has commenced implementation, the commission may require the parties to the merger to notify it in the prescribed form if the commission considers that such merger may substantially prevent or lessen competition or cannot be justified on grounds of public interest. 77 These provisions may present difficulties in practice. For example, it is unclear how the commission would become aware of the merger before its consummation if it is not notified. It may be suggested that the reasoning behind these provisions was to ensure that small mergers are not totally excluded from the supervision of the Commission. 78 Therefore, once a party has notified the Commission in the prescribed form and manner as stated by the Act, the party shall not take any further steps until the merger notification has been processed and approved by the Commission. The Commission is entitled to 20 working days in consideration of the proposed merger and may extend such period to not more than 40 working days for the consideration of the merger approval in which case the Act requires the Commission to issue a certificate of extension to any party who notified it of the merger. Upon consideration of the terms of the proposed merger by the Commission in line with the provisions of section 121 of the Act, the Commission shall notify the parties of its approval or give a conditional approval or in some cases state a prohibition on implementation of the merger. Where the merger has already been implemented, the Commission shall further make a declaration that the merger be prohibited forthwith. 79 Intermediate and Large Mergers The Act has defined intermediate mergers to mean proposed mergers which are between the lower and upper thresholds established in terms of the Act. A party to an intermediate or a large merger must notify the Commission of that merger in the prescribed manner and form. 80 In the case of an intermediate or a large merger, the primary acquiring firm and the primary target firm must each provide a copy of the notice contemplated in section 123 (1) to - a) Any registered trade union that represents a substantial number of its employees; or 77 Section 122 (1),(2) &(3) 78 A. Adefulu, Mergers and Acquisitions Under the Investment and Securities Act 2007, page 3 79 Section 122(5) 80 Section 123, ISA Act,

19 b) The employees concerned or representatives of the employees concerned, if there are no such registered trade unions. The parties to an intermediate or large merger may not implement that merger until it has been approved, with or without conditions, by the Commission. Notification of the merger proposal by the parties is condition precedent to any approval by the commission. Once this condition has been fulfilled, the Commission is expected to within 20 days after having considered the merger terms in line with section 121 of the Act, issue a certificate in the prescribed form approving the merger subject to such conditions as the commission may deem fit to make or may prohibit same as stated in the case of a small merger above. Where the approval is not issued within the stipulated period of 20 working days, the Act still allows the Commission to extend such period for additional 40 days and in this case, a certificate of extension should be issued by the Commission to the party who has notified the Commission of the proposed merger. The Act also contemplates an implied approval. This arises where no approval notification is issued within the total period of 60 days, the merger in this case shall be deemed to have been approved subject however to section 127 of the Act which entitles the Commission to revoke same if the decision to approve was based on incorrect information for which a party to the merger is responsible or approval was obtained by fraud or either of the merger party has breached an obligation attached to the decision. 81 The Commission shall upon granting a merger proposal cause the notice of approval to be published in a gazette and issue a written reason for the decision. Sanctioning the Merger With the coming into effect of the 2007 Act, judicial involvement in sanctioning merger proceedings has been significantly reduced. The 2007 Act provides that only in large mergers are the courts allowed to be involved provided the Commission has sent a notice to the court notifying it that the Commission had examined and approved the mergers. Under the 1999 Act, parties were mandated to go to court to obtain preliminary orders before holding company meetings to consider and approve the merger transactions. The provision regulating the above in the new ISA 2007 is as stated below after receiving notice of a large merger, the Commission shall refer the notice to the Court and within forty working days after all parties to a large merger have fulfilled all the prescribed notification requirements, forward to the Court a 81 Section 125 and

20 statement whether or not implementation of the merger is approved, approved subject to any condition or prohibited 82. Idigbe argues that, from the above, the real intention of the lawmaker was to eliminate court sanction for small and intermediate mergers. He takes the view that the SEC is adequately equipped to deal with those types of mergers, and that the time had come for the courts not to be overburdened with small and intermediate mergers. 83 However, for large mergers, the SEC is required to refer the notice to court and to indicate its approval or otherwise. This clearly means that the court sanctions small mergers where notification is sent to the Commission and large mergers where reference has been made to the court by the Commission. There is no need for a separate application by the parties to court for sanction as the reference by the Commission under section 126 (a) is enough. 84 However, where the merger is approved by the Commission and a reference sent to the court (Federal High Court) for the merger to be sanctioned and when so sanctioned, the same shall be binding on the companies. In sanctioning the approval particularly for small mergers, the court may make any or all of the following provisions 85 - 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 or for any person; c) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; 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: f) Such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or merger shall be fully and effectively carried out. 82 Section 126 ISA A. Idigbe SAN, Merger & Takeover Procedure under the Investment & Securities Act 2007: A Practitioner s perspective, Guardian Newspaper, March 10, A. Idigbe SAN, Merger & Takeover Procedure under the Investment & Securities Act 2007: A Practitioner s perspective 85 Section 122 (6)(a)-(f) ISA

21 Avoiding the Pitfalls The Twin Issue of Due Diligence and Valuation The two main pitfalls arise from two main issues - the lack of or improper Due Diligence, and Valuation. It is not intended to discuss the issue of valuation in this paper, for reasons of limitations of space and time. 86 Due diligence is the set of investigative procedures which precede an acquisition or a merger. It is the process of identifying and confirming or disconfirming the business reasons for a proposed capital transaction. The purpose of due diligence investigation is to enable the purchaser gain sufficient familiarity with the target s affairs to assess the risks involved in the purchase. 87 It is prudent to perform due diligence before the execution of any mergers or acquisitions. Due diligence determines the accuracy of information disclosed by the merging, selling or buying company before the consummation of the transaction in order to avoid any troubles with future business through identification of crucial issues, resolution on contentious facts and confirmation of key assumptions. When risks are adequately identified, the transacting parties can determine the realisation or otherwise of the transaction and project on the appropriate means to execute the acquisition or merger agreement. Several functions are involved in due diligence processes- business strategy, finance, legal, marketing, operations, human resources, and internal audit services. The direction of due diligence efforts depends on what the company expects to gain from the transaction: employees, customers, processes, products, or services. Due diligence involves the complete awareness of the transacting parties on issues delving on the cost of the merger or acquisition, the consequences of negative disclosures, the likelihood of litigation or other unexpected conflict, risks associated with the personal misconduct of the selling parties(e.g. insider trading, self-dealing, fraud etc). 88 Due diligence also allows the seller and buyer to renegotiate the price if the buyer determines that there are problems with information (value of assets, likelihood of lawsuits, robustness of technology, etc.) or certain projections are unrealistic. 86 Reference on valuation can be made on the subject chapter in FI Ajogwu, Mergers & Acquisitions in Nigeria: Law & Practice, CCLD, Fox & Fox, Corporate Mergers and Acquisitions, page 2B Ibid 21

22 Key Participants in Due Diligence Due diligence is handled by teams in the midst of business acquisitions. The teams are typically composed of members with expertise in mergers and acquisitions, as well as in specific areas of function. The members of the teams are often employees of the companies handling the business acquisitions, unless a certain expertise cannot presently be found in the companies; in which case outside experts will be invited. Due diligence teams will get documents from the different departments of the company, using these documents to obtain desired information. With a good due diligence team, company mergers and company acquisitions will go smoothly and within the boundaries of the law. Scope of Due Diligence During the due diligence processes, statements and information are exchanged by the parties to the transaction, which may or may not form part of the consequent definitive agreement. There may also be a specific disclaimer of reliance on information and statements made in the course of negotiations. One of the issues in due diligence is whether the information preceding the definitive agreement can provide a basis for a law suit if it turns out to be inaccurate or untrue in any respect. In Consolidated Edison, Inc. v Northeast Utilities 89, a US Federal District court rejected the Plaintiff s claim that it could rely on statements made in the course of the due diligence process because of language in a confidentiality agreement which specifically stated that the parties could not rely on the accuracy or completeness of the information gathered in the course of performing the due diligence. Timing of Due Diligence When should the due diligence processes begin? Due diligence investigation is usually initiated before a preliminary contract is executed. There will be more time to perform a thorough investigation, greater opportunity to shape the agreement and preferably terminate the transaction. Due diligence activities will preferably start when the parties tentative agreement is embodied in a letter of intent and the parties have agreed to maintain confidentiality with respect to the information exchanged in the process. In practice, a detailed agreement which contains provisions that contemplate extensive due diligence and provide terms for termination, is usually drafted and executed. This agreement may also provide provisions to discourage shopping for other offers pending the determination of a definitive agreement; and compensation for a prospective buyer where the seller breaks the deal for reasons other than discovery of adverse information F.Supp.2d 837 (S.D.N.Y. 2003) 22

23 Litigation, Investigations and Dispute Resolution In any merger and acquisition, any conscientious management will require a comprehensive assessment of the possible legal risks related to the corporate status, assets, contracts, securities, intellectual property etc. of the target company concerned. The implementation of the ideal transaction structure often requires complex corporate legal documentation. The negotiation of the transaction will in most cases require the intervention of a legal expert as numerous legal pitfalls need to be tackled as early as at the negotiation table. The definitive agreement usually has extensive representations and warranties and a specific disclaimer of reliance on information that go beyond the Agreement. A fundamental question in a due diligence process will be whether the information gathered can provide a basis for a law suit if such turns out inaccurate in any material respect. The following information should be vehemently considered: - Schedule and description of pending or threatened litigation, claims and other disputes. - Schedule and description of government, regulatory or administrative proceedings, inquiries or investigations. - Pleadings, filings and correspondence relating to the matters requested in the preceding Items. - Significant Legal opinions rendered to the Company in the last 5 years. - Inquiries with respect to the Company s rights or ownership in or to internet domain names. - Judgments, injunctions or other orders. - Settlement agreements. - Schedule of warranty claims. Due Diligence Review Areas and Checklist A good starting point for due diligence processes is the due diligence checklists. This is a form to be used in connection with a due diligence investigation of a company. It is a request for documents and information from a company in connection with a particular transaction. This document is augmented with techniques including management capability assessments, benchmarking of operational performance, interviewing customers and suppliers, and analysis of business models and projections. 90 The following constitute the usual areas covered under a due diligence process; together with specific documents and issues that should be verified under the various headings. As earlier

24 noted, this aspect of investigation is conducted by the business and technical people who are most familiar with operations, manufacturing, sales, property, insurance and taxation, research development, management and so on. The broad headings of due diligence areas are: - Financial and Strategic Due Diligence, which is typically managed by the buyer/ acquirer s accountants and management team; and - Legal Due Diligence, to be conducted by the Buyer/ acquirer s Counsel. The legal due diligence focuses on the potential legal issues and problems that may serve as impediments to the transaction, as well as sheds light on how the transaction documents should be structured. The more detailed list of due diligence includes - Corporate Matters and Records, Intellectual Property, Material Contracts and Obligations,, Information Technology, Management and Employee Matters, Issues with Regulatory Agencies, General Financial Information (including Cash and Investments, Revenue and Expenditure), Taxation, Insurance, Tangible and Intangible Assets of the Target, Litigation and Claims (Actual and Contingent), Miscellaneous, etc At the end of the due diligence process, the buyer s attorney may find out that there are other documents which do not fall under any of the above headings, but which are nevertheless just as important. These are classified under the miscellaneous list, for instance - Media clippings, Financial analyst reports, industry surveys, Schedule of all outside advisors, consultants, etc., used by the seller over the past five years (domestic and international), etc. Although the above list is not exhaustive, it is important that the buyer s acquisition team and its legal counsel consider and review all these documents in order to gather data to answer ten legal questions during the legal phase of due diligence. They are: 1. What legal steps would need to be taken in order to give effect to the transaction (e.g., director and shareholders approval, share transfer restrictions, restrictive covenants in loan documentation)? Has the appropriate corporate authority been obtained to proceed with the agreement? What key third party consents (e.g. lenders, venture capitalists, landlords, and key customers) are required? 2. What anti-competitive problems, if any, are raised by the transaction? 3. Will the transaction be exempt from registration under the applicable securities loans under the sale of business doctrine? 4. What are the significant legal problems or issues now affecting the seller or that are likely to affect the seller in the foreseeable future? What potential adverse tax consequences to the buyer, the seller, and their respective shareholders may be triggered by the transaction? 24

25 5. What are the potential post-closing risks and obligations of the buyer? To what extent should the seller be liable for such potential liability? What steps, if any, can be taken to reduce these potential risks or liabilities? What will it cost to implement these steps? 6. What are the impediments to the assignability of key tangible and intangible assets of the seller company that are desired by the buyer, such as real estate, intellectual property, favourable contracts or leases, human resources, or plant and equipment? 7. What are the obligations and responsibilities of the buyer and seller under applicable environmental impact assessment laws? 8. What are the obligations and responsibilities of the buyer and seller to the creditors of the seller? 9. What are the obligations and responsibilities of the buyer and seller in relation to employee rights (e.g. would the buyer be subject to successor liability and as a result be obliged to negotiate existing collective bargaining agreements)? 10. To what extent will employment, consulting, confidentiality, or non-competition agreements need to be created or modified in connection with the proposed transaction? When all these questions have been answered satisfactorily, then the due diligence process is said to be complete. Once the due diligence has been completed, valuations and appraisals conducted, terms and price initially negotiated and financing arranged, the definitive legal documentation, which would memorialize the transaction must be structured and prepared. 91 The drafting and negotiation of these documents would usually focus on the key terms of the transactions, the past history of the seller, the present conditions of the business, and a description of the rules of the game for the future. 92 They also describe the nature and scope of the sellers representations and warranties, the terms of the seller s indemnification, the responsibilities of the parties during the time period between the execution of the purchase agreement and actual closing, the terms of the structure of payment, the scope of post-closing covenants of competition and related obligations, the deferred set off or contingent 91 Ibid at pg Ibid. 25

26 compensation components, and what will happen if things go awry post-closing, such as any predetermined remedies for breach of the contract. 93 The M&A Deal Closure The closing of a merger or acquisition usually brings a great sigh of relief to the buyer, seller and their respective advisors. Everyone has worked hard to ensure that the process went smoothly and that all parties are happy with the end result. But the term closing can be misleading in that it suggests a sense of finality, when in truth the hard work, particularly for the buyer, has just begun. 94 One of the major issues with the closing stage is the project staffing level. The first step in determining project staffing level is to divide the work-force into management and staff/ labour. These two groups must be distinguished because the terms of employment are often quite different. Management is often party to employment contracts, and receives deferred compensation, share options, and other issues, while staff can be protected by union contracts and/ or employment laws. 95 In many ways, management staffing is a much easier problem to resolve. The primary task of resolving the level of management staffing is to determine where there are redundancies and who the most qualified candidates are. 96 Following the closing of the transaction, there are many legal and administrative tasks that must be accomplished by the acquisition team to complete the transaction. The nature and extent of these tasks will vary, depending on the size and type of the financing method selected by the purchaser. The parties to any acquisition must be careful to ensure that the jubilation of closing does not cause any post-closing matters to be overlooked. 97 In an asset acquisition, these postclosing tasks typically include the following: - Final verification that all assets acquired are free of liens and encumbrances - Recording of financing statements and transfer tax returns - Recording of any assignments of intellectual property with the appropriate authority - Notification of the sale to employees, customers, distributors, and suppliers - Adjustment of bank accounts and insurance policies - Completion of the transfer of all share certificates - Amendments to the company s memorandum and articles of association - Preparation of all appropriate post-closing minutes and resolutions Ibid. 94 Ibid at pg Ibid at pg Ibid. 97 Ibid at pg Ibid. 26

27 Opportunities for Lawyers A Lawyer who is involved in Merger financing has certain duties and responsibilities, which may include conducting legal risk analysis of the project and its structure, providing legal opinion, assisting in negotiation, reviewing and analyzing proposed project documentation, conducting legal due diligence, preparing relevant agreements, etc. Three important roles are worthy of consideration here - acquisition, evaluation and negotiations. Fox and Fox, take the view that the Lawyer s role in an acquisition is threefold: - To participate in the formulation of the business bargain so that there will be compliance with both federal and state enactments - To coordinate all investigations and analyses so that their results will be reflected in the purchase contract - To document the business bargain and implement its terms. 99 Different legal issues can arise at different stages of the acquisition process and require separate and sequential treatment, ranging from the due diligence, evaluation, negotiation, deal, and post deal stages. Fox and Fox take the view that the Attorney is responsible for guiding the Client toward the successful consummation of an acquisition whenever this is possible and desirable, and advising, where appropriate, that the legal impediments to the transaction cannot be surmounted. According to the Authors the Attorney might also be called upon to demonstrate that differences between the buyer and seller can be overcome by changing the terms or the form of the transaction. 100 While the Lawyer has a major role to play in M&A, it is important to state that they are not the only professionals involved in the process of implementing the deal. Investment Bankers, Accountants and Industry Experts will also be involved, and often play leading roles. For example, the aspect of valuation, the financial aspect of due diligence will have to be performed by Accountants, Investment Bankers and other financial experts. The challenge over the past 29 years of Nigeria s M&A history has been that Nigerian Lawyers somewhat play the relatively smaller (tag-along) role, often working under terms and conditions laid out by the Financial Advisers. This could have the effect of diminishing the otherwise creative role that the Lawyer could and should play in the M&A process; and which to a great extent impacts the fee that can be charged. This is not the case in other jurisdictions such as the United States and United Kingdom, where Lawyers play far more leading roles in M&A. It is interesting to note that while the Nigerian Lawyer plays the tag-along role, he nonetheless carries with him huge professional responsibilities that simply derive from the duty of care long established as the Hedley Byrne Principle. 99 Corporate Acquisitions and Mergers, Page Fox & Fox, Corporate Acquisitions and Mergers, P

28 It is the reversal of this role to a more involving and leading role that is indeed the real opportunity for Lawyers in M&A! 28