As part of a broader initiative of the Nigeria government to improve the country’s business environment, a bill to amend the 30-year-old Companies and Allied Matters Act, 1990 was given presidential assent on 7 August 2020. The Companies and Allied Matters Act, 2020 (“CAMA 2020”) presented an opportunity to address some of the challenges and uncertainties associated with structuring private equity funds and deals and exercising typical investor rights.
Notable introductions to the CAMA 2020 include the establishment of single shareholder companies, business rescue provisions and netting. In this article, we will highlight the key provisions of CAMA 2020 and its implications for the private equity industry in Nigeria.
Implications for the private equity industry
Recognition and Registration of LPs/LLPs
New corporate structures have been introduced in the form of Limited Partnerships (“LPs”) and Limited Liability Partnerships (“LLPs”). Prior to the enactment of CAMA 2020, LPs were recognised, but only under the partnership law of Lagos State. These structures are now available to investors across the Federation and will, in particular, allay the uncertainty around whether LPs would be recognised by federal courts or the courts of other states.
These structures are typically adopted by PE firms in structuring their holdings and the absence of a universally recognised framework had been one factor limiting the appetite of fund managers to establish funds in Nigeria. One area of certainty that remains, however, concerns the new requirements for all LPs to be registered under CAMA and whether, as a result, previously registered Lagos State LPs will be required to re-register accordingly.
Restrictions on Transfer of Shares and Assets
CAMA 2020 has introduced certain restrictions with respect to the transfer of shares and assets. With respect to the transfer of assets, on the combined reading of sections 342(2) and 22(2)(a) CAMA 2020 ‘major asset transactions’ (i.e. transactions outside the ordinary course of business) involving assets, or rights representing 50% or more of the book value of the company’s assets require shareholder approval. Prior to this, the law was silent as to the requirement of shareholder approval for the disposal of significant assets. One area of note is the apparent contradiction between the approval thresholds stated in sections 342(2) (which provides for 75% threshold) and 22(2)(a) (which provides for unanimous consent) for asset transactions. It will be interesting to see how this conflict is addressed in practice.
With respect to the transfer of shares, the extant CAMA imposed a requirement on private companies to restrict the transfer of its shares in their articles of association, though the form of the restrictions was not outlined. The CAMA 2020 has gone further. Section 22(2) (b)-(c) provides for rights of first offer for all shareholders before shares are sold to third parties and for the sale of a majority equity stake to be subject to the remaining shareholders’ tag-along rights. There are, however, differences of opinion as to whether the provisions at section 22(2)(a)-(c) are default, mandatory or optional. Should they be mandatory, these provisions could significantly extend transaction timelines and investors will need mechanisms to mitigate their impact. It may also impact funding and existing shareholder rights. Existing agreements may need to be reviewed to ensure alignment with these provisions. Companies may also need to amend their articles of association to specifically exclude these restrictions where necessary.
CAMA 2020 gives existing shareholders of any company statutory protection from dilution by giving them pre-emptive rights to any newly issued shares. However, there is no specified timeframe for the exercise or relinquishment of rights. In addition, there is no clarity on whether relinquished rights to new shares can be redistributed and timeframe for the entire process.
CAMA 2020 permits a private company to provide financial assistance (in most cases, collateral/security for acquisition financing) for an acquisition of its own shares or the shares of its holding company upon meeting certain conditions. These conditions include the passing of a special resolution (i.e. a 75% majority decision) of the shareholders approving the financial assistance, the making of a declaration by the directors in a form to be prescribed by the Corporate Affairs Commission and the non-reduction of net assets, or where reduced, that such assistance be financed out of distributable profits.
Prior restrictions on the purposes for executing a share buyback have been removed in the CAMA 2020. Prior to this, buybacks were permitted for a limited number of purposes and there was no provision allowing buybacks as a means of returning capital to investors.
Offers to buy back shares must be made to all shareholders in proportion to their existing holdings. A public company may now buy back its shares in the open market (i.e. at market price). The overturn of these previous restrictions provides investors with an additional exit option.
CAMA 2020 now clearly allows companies to impose qualified and super-majority voting thresholds for board decisions and to disable the chairman’s casting vote in board meetings. However, at shareholder level, there is still no express provision for bespoke voting thresholds or option to disable the chairman’s casting vote.
CAMA 2020 does not clarify the relationship between articles of association and shareholders agreements. CAMA 2020 also makes no amendments to the restrictions on non-voting and weighted shares.
It is apparent that the enactment of CAMA 2020 has come with provisions that address certain challenges and uncertainties for the private equity industry. However, in the attempt to address these challenges, it appears that it has brought about some further challenges and uncertainties itself.
Despite this, it is a welcome development for the legal and business communities as it is expected to enhance the ease of doing business in Nigeria.
Chinyerugo Ugoji, Partner
Damilola Ogedengbe, Senior Associate
Chioma Olibie, Senior Associate« Back to Afri-Spective Blog