Written by Gbolahan Elias, Partner, G Elias & Co and Yemisi Falade, Senior Associate, G Elias & Co
Some aspects of the Companies and Allied Matters Act (Repeal and Re-enactment) Bill 2018 (the “Bill”) significantly impact private equity investors and their advisers. Some of the aspects are welcome, while others are missed opportunities for reform.
The Bill was passed by the Senate on May 15, 2018 and the House of Representatives on January 17, 2019. It was supposedly transmitted to the President for his assent prior to March 2019, however, the Bill is apparently once more before the House of Representatives and recently had another first reading on July 23, 2019. This means that the Bill has not yet become law and recommendations can still be made to the National Assembly to refine it.
The Bill is intended to replace the Companies and Allied Matters Act (1990) (“CAMA”). It introduces several proposed important reforms, which are highlighted in more detail below. Unfortunately, the Bill fails to fix some aspects of company law that often challenge players in the private equity sub-sector. Among these are the survival of old rules relating to the redemption of preference shares and the prohibition of share warrants and non-voting shares. Hopefully these concerns will be remedied in the course of the Bill going through the Nigerian National Assembly again.
New (and welcome) Developments
There are several helpful new developments under the Bill, including that a private company can now have only one shareholder; a company can now give financial assistance to an investor as long its solvency will not be threatened; a company can now acquire its own shares; the “one share, one vote” rule is no longer to apply to preference shares; limited partnerships can now be organised under Federal law; and large companies can now be merged by court order even where none of the merging companies is a shareholder of the other.
Single Shareholder Private Companies. Under CAMA a company incorporated in Nigeria must have at least two shareholders. In contrast, the Bill allows a private company to have only one shareholder. This will be convenient for private equity investors that choose not to invest directly in Nigerian companies but rather in a parent company in a tax-advantaged jurisdiction with that parent company investing in a Nigerian company. As the law currently stands, the parent company cannot own the Nigerian company 100%. There must be at least one other shareholder. The Bill allows the parent company to own the Nigerian company 100%.
Financial Assistance. Under CAMA, financial assistance rendered by a company to a shareholder or potential shareholder seeking to acquire shares in the company is expressly prohibited. This restriction poses a challenge on share acquisitions especially with regard to the investee company providing indemnities to potential private equity investors as an incentive or pre-condition for their investing in the company. The Bill now allows private companies to provide financial assistance subject to (i) the net assets of the company not being reduced below 50% and, where so reduced, the assistance should be provided out of distributable profits, (ii) approval of the company by a special resolution, and (iii) the directors of the company making a statutory declaration of solvency.
Acquisition by a Company of its own Shares. CAMA restricts the ability of a company to acquire its own shares to rare situations such as the redemption of preference shares, settling a debt, and the elimination of fractional shares. This restricts the exit options of private equity investors in Nigerian companies - an investor exiting by selling its shares to the company is prohibited except in exceptional circumstances. The Bill has changed that. It now allows a limited liability company to acquire their shares subject to (i) the articles of association of the company permitting such acquisition, (ii) a special resolution of the company approving the acquisition, (iii) the shares being fully paid up, (iv) publication in two national newspapers, (v) a declaration of solvency by the directors of the company, (vi) the payment being made from distributable profits, and (vii) the company not holding more than 15% of its issued shares as treasury shares (that is, shares that the company has acquired from its shareholders).
Weighted Voting Preference Shares. The Bill, unlike CAMA, allows a preference share to carry more than one vote where the terms of issue so prescribe. With the introduction of preference shares having more than one vote, each private equity investor may have weighted shares that make it easier for them to exercise control over the companies and thereby protect their investment more securely and conveniently.
Limited Partnerships. The Bill allows not more than 20 persons to register a limited partnership with general partner(s) and limited partners, with the limited partnership having juristic personality separate from that of its partners. This allows private equity investors to explore setting up funds in Nigeria by way of limited partnerships that are “pass through” vehicles. The partnership will not be liable to pay income tax, only the partners themselves will pay income tax. Prior to the Bill being law, limited partnerships could only be formed under state law, and few states have a limited partnership law (Nigeria is a Federation with 36 States.) There are lawyers who would argue that the benefits of limited liability partnerships do not apply beyond the boundaries of the state under which the partnership is formed. Allowing partnerships under Federal law addresses this challenge.
Mergers of Unrelated Large Companies. As the law currently stands, large unrelated companies cannot be merged by court orders transferring liabilities from one of them to the other. Mergers by court orders are permissible only where one of the companies is a shareholder of the other, or each of the combined revenues or assets of the company is less than the equivalent of roughly USD1.5million. This has been a major inconvenience where the private equity investment contemplates a merger either as an instrument of growth during the life of the investment or as an exit tool. The Bill has changed the law here. Mergers by court orders are now permissible without regard to either any existing relationship between the merging companies or their size.
Room for Further Reform
The Bill is welcome, but it does not go far enough. Ideally, it should also allow for the easier redemption of preference shares, the issuing of warrants and the denomination of share capital in hard currencies.
Redeeming Preference Shares. The law in issue here prevents the redemption of redeemable shares out of capital (rather than out of profits or the proceeds of a fresh issue of shares). The Bill leaves this rule intact. It therefore limits the possibility of paying off private equity investors using the assets of the investee company even where that would not make the target either crippled or insolvent. Much time and effort is frequently spent by lawyers and other advisers in trying to explain to foreign private equity firms the scope and limits of the rules, to structure and design around the rules and in seeking alternative exit options. In our experience, the outcomes of such efforts are not always either elegant or fully convincing as a matter of law.
The law has its roots in nineteenth-century English law, but the United Kingdom and the Commonwealth have largely moved away from this. The laws in the United States of America have never contemplated this to any meaningful extent. Modern emphases are on (i) the realities of companies having sufficient net assets and solvency, and (ii) financial statements not being misleading, not on conceptual purity that annoys and can trap investors but lack practical significance. The real-world evidence from these other jurisdictions is a strong indicator that Nigeria should also follow suit.
Further, it is not clear why controls such as ensuring that the net assets of a company are not reduced below 50% that apply to financial assistance in the Bill (see above) are not applicable here too. As long as such controls are in place, it is unclear why preference shares should not be redeemable from the net assets of the company.
Other Prohibitions Relating to Shares. Among the peculiarities of Nigerian law are that it prohibits the issue of warrants (as distinct from options). The law is also unclear on whether or not the capital of a company may be denominated in a currency that is not Nigerian. It is unfortunate that these rules limit the options available to foreign private equity firms and tend to discourage them from investing in Nigeria. Nigerian companies need increased access to money from such firms and elsewhere. It is also unfortunate that the Bill does not categorically sweep away the rules against issuing warrants, and does not make it clear that the capital of a company can be denominated in foreign currency.
The rules here have not always been part of our law. In the pre-1990 era prior to the law currently in force, our law allowed warrants, and nothing in it prohibited the denomination of a company’s shares in foreign currency. Indeed, in those days many companies incorporated under UK law and with capital denominated in Pounds Sterling carried on business in Nigeria without fraud, chaos, inefficiency or incongruity.
Where the majority of shareholder capital of a company flows in from Europe and its revenues are from exports, there is a compelling case to have its capital denominated in Euros. Denominating the capital of a company in foreign currency would certainly not mean that Nigerian Currency (Naira) would not be legal tender for the purpose of its debtors paying off their debts to it.
The reconsideration of the Bill by the 9th Nigerian National Assembly is a welcome development that we expect will address most of the reforms pointed out above.
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