OpEdsPrivate Equity

1 Types of private equity transactions 

What different types of private equity transactions occur in  your jurisdiction? What structures are commonly used in  private equity investments and acquisitions? 

Private equity (PE) transactions in Nigeria can generally be classified  into venture capital, growth capital, buyouts (including management  buyouts) and mezzanine financing. Available structures commonly  used for private equity investments are equity investments and quasi 

equity investments, which would include taking preferred stock or convertible notes by the private equity fund entity. 

Limited liability companies and limited partnerships are most typically used as investment vehicles for PE investments. 

2 Corporate governance rules 

What are the implications of corporate governance rules for  private equity transactions? Are there any advantages to going  private in leveraged buyout or similar transactions? What are  the effects of corporate governance rules on companies that,  following a private equity transaction, remain or later become  public companies? 

There are no special corporate governance rules applicable to  private equity transactions other than those imposed by sector specific regulators such as the Code of Corporate Governance for  the Telecommunications Industry 2016 issued by the Nigerian  Communications Commission. Corporate governance issues  relating to private companies in Nigeria, including companies with  private equity participation, are generally addressed by contractual  agreements, memorandum and articles of association subject to the  Companies and Allied Matters Act (CAMA) and any code of corporate  governance rules adopted by the company. 

The Securities and Exchange Commission (SEC) rules and regulations are applicable to public companies and these rules make substantial provisions for disclosure and reporting requirements. In addition,  there are regulatory and disclosure requirements if a public company is  listed, as such companies are also subject to the Listing Requirements  of the Nigerian Stock Exchange (NSE). 

There are obvious advantages when a public or listed company  goes private as this will mean less regulation and disclosure obligations. However, it should be noted that it is not a common practice to  have companies going private as a result of private equity investments  whether in a leveraged buyout or any other transaction. 

Where a target company with private equity participation remains  a public company, nothing changes. However, where a private company  becomes a public company, such company would become subject to  the application of the SEC Rules and Listing Requirements of the NSE. 

3 Issues facing public company boards 

What are some of the issues facing boards of directors of  public companies considering entering into a going-private  or private equity transaction? What procedural safeguards,  if any, may boards of directors of public companies use when  considering such a transaction? What is the role of a special  committee in such a transaction where senior management,  members of the board or significant shareholders are  participating or have an interest in the transaction? 

One major issue that may be faced by the board of directors of a public  company entering into a PE transaction is that of ensuring that each of  the directors of the company carry out the fiduciary duties as prescribed  by CAMA. The fiduciary duties of the directors include a duty to act  in good faith, exercise independent judgment, act in the best interest  of the company as a whole – so as to protect its assets and promote its  business – and avoid conflict of interest, thus mandating that directors  declare any interest in any proposed transaction or arrangement. 

Conflicts of interest may arise where a director has a personal  interest in the private equity transaction. This director is obliged to  disclose any such conflict or potential conflict of interest. In addition  to the requirements of CAMA on disclosure of conflicts of interest by  directors, companies generally have provisions in their articles of asso ciation or another document dealing with issues of conflict of interests  regarding the board, management and other personnel of the company. This situation needs to be handled properly by the board to avoid  the exploitation of any information or opportunity of the company.  A special committee of the board, which may consist of independent  non-conflicted directors, may be constituted for this purpose. The  special committee may be charged to objectively evaluate, review and  approve the private equity transaction on behalf of the company. 

4 Disclosure issues 

Are there heightened disclosure issues in connection  with going-private transactions or other private equity  transactions? 

Under the SEC Rules, the provisions guiding the operation of private  equity funds in Nigeria provide for submission of quarterly returns,  annual report of the fund to the SEC and semi-annual reports to its  investors. 

A company to which a takeover bid has been made is required to  provide sufficient time and information to all its shareholders to enable them to reach a properly informed decision in respect of the bid.  Such disclosures are required to be prepared with the highest standard of care and accuracy and must contain all information relevant to  the transaction. Further, listed companies are required to ensure that  investors and the public are kept fully informed of all factors that may  affect their interest and to make immediate disclosures of any informa tion that may have material effect on market activity in, and the prices  or value of, listed securities as well as details of any major changes in  the business or other circumstances of the company to shareholders  and the NSE. The NSE requires all listed companies to maintain pub licly accessible websites whereon companies are required to display  conspicuously, information submitted to the NSE. 

The Listing Requirements of the NSE stipulate, among other  things, that in order for a public company to voluntarily delist its securities from the NSE, the prior approval of the shareholders must have  been obtained by way of a special resolution passed at a duly convened  meeting of the company. The company must have given its shareholders at least three months’ notice of the proposed withdrawal of the listing including the details of how to transfer the securities. The public  company going private must also give the shareholders who so elect, an  exit opportunity before the shares are delisted. 

SEC Rules mandate a public company seeking to delist to notify the  SEC of its intention to delist. The NSE is also required to consider and  dispose of the application within 10 days and notify the SEC when it is  approved. 

5 Timing considerations 

What are the timing considerations for a going-private or  other private equity transaction? 

Timing considerations for private equity transactions include the time  within which proper due diligence exercises can be concluded, the  length of time required for the formation or structuring of the vehicle  to be used for the execution of the transaction and the exit time projections. Sector specific regulations and approvals also form part of key  timing considerations of private equity transactions. 

With respect to going-private transactions, a company seeking to  voluntarily delist from the NSE is required by the Listing Requirements  to have been listed on the NSE for a minimum of three years prior to  when it seeks to delist. Consequently, private equity investors seeking  to go into a private equity transaction with a public company that has  been listed on the NSE for less than three years will have to factor in  this timing requirement with respect to voluntary delisting. The SEC  Rules require the NSE to consider and dispose of applications to delist  within 10 days. 

Where a private equity transaction involves a takeover, the offeror  is required by the Investments and Securities Act (ISA) and the SEC  Rules to seek the approval of the SEC as well as register the proposed  bid with the SEC prior to making a takeover bid. Where the approval  is granted, the offeror is required to make the approved bid within a  period of three months following the date of approval. The offeror may  thereafter apply for an extension of this period before the expiry of the  three-month period. Where a takeover bid is made for all the shares of  a class in an offeree company, the offeror is proscribed from taking up  shares deposited pursuant to the bid until 10 days after the date of the  takeover bid. Where the bid is made for less than all the shares in a class  of the offeree company, the offeror is proscribed from taking up shares  deposited pursuant to the bid until 21 days after the date of the takeover  bid. A takeover bid is required when the shares being acquired are not  less than 30 percent of the shares of the company. 

Further, delays caused by addressing issues such as the rights of  dissenting shareholders may form part of the timing considerations in  private equity transactions. 

6 Dissenting shareholders’ rights 

What rights do shareholders have to dissent or object to a  going-private transaction? How do acquirers address the risks  associated with shareholder dissent? 

Shareholders who do not accept the terms of a going-private transaction may vote against it at the general meeting of the company at which  the issue is considered or may choose not to accept a takeover offer.  However, where a takeover offer is accepted by the shareholders of a  company holding not less than 90 percent of the shares of the company  or the class of shares in respect of which the bid is made, the dissenting  minority shareholders’ shares may be bought by the offeror at the same  price as the other shares or at fair market value after notifying the dissenting shareholders of its intention to do so. 

Shareholders, personal representatives of deceased shareholders  and persons to whom shares have been transferred or transmitted by  operation of law who dissent or wish to object to a going-private transaction can make an application to court to restrain the company from  going private on the ground that such an act would affect the individual  right of the shareholder as a member of the company. 

Further, shareholders, personal representatives of deceased shareholders, persons to whom shares have been transferred or transmitted by operation of law, directors, officers, former directors, former officers and creditors of the company, as well as the Corporate Affairs Commission (CAC), are empowered to apply to court to object to a going-private transaction. Such an application may be sustained only where it can be shown that proceeding with the transaction is:

  • illegal, oppressive, unfairly prejudicial or in disregard of interests  of a member or members in the case of an application by a share holder, personal representative of a deceased shareholder and  persons to whom shares have been transferred or transmitted by  operation of law; 
  • oppressive, unfairly prejudicial or discriminatory to such director,  officer, former director, former officer or creditor of the company;  or 
  • oppressive, unfairly prejudicial or discriminatory against a member or members in a manner that is in disregard of public interest  in the case of an application by the CAC. 

To deal with any issues that may arise from shareholders’ dissent to  going-private transactions, acquirers are careful to comply with the relevant provisions of the law and regulations to avoid creating possible  grounds upon which the dissent may subsist. 

7 Purchase agreements 

What notable purchase agreement provisions are specific to  private equity transactions? 

As with other transactions, the provisions of purchase agreements will  depend on negotiations between the parties. Provisions on issues such  as warranties, default, anti-dilution, redemption or conversion of preferred equity, composition and powers of the board and management  of the company, matters exclusively reserved for shareholders’ decision, finance and accounting regime, non-compete, confidentiality and disclosures, tag-along and drag-along rights, exit options and corporate  governance obligations are often prominently featured in purchase agreements for private equity transactions. 

8 Participation of target company management 

How can management of the target company participate in a  going-private transaction? What are the principal executive  compensation issues? Are there timing considerations for  when a private equity buyer should discuss management  participation following the completion of a going-private  transaction? 

One of the concerns of private equity investors includes ensuring that  the interests of management align with the interests of the investors with a view to the growth of the company. To this end, management of  the offeree company may be required to execute employment agreements with non-compete and confidentiality provisions. Further, the  terms of employment of management may constitute part of the pre-closing covenants in a going-private transaction such that management  participation and compensation issues are dealt with prior to the completion of the transaction. 

Timing considerations for the participation of management in a  going-private transaction are often a product of the provisions of the  purchase agreement entered in respect of the transaction. 

9 Tax issues 

What are some of the basic tax issues involved in private  equity transactions? Give details regarding the tax status  of a target, deductibility of interest based on the form of  financing and tax issues related to executive compensation.  Can share acquisitions be classified as asset acquisitions for  tax purposes? 

The tax issues involved in a PE transaction depend on the structure of  the transaction. Where a PE vehicle is registered as a partnership, the  individual partners will be liable to pay tax on their personal income.  Limited liability companies, on the other hand, bear the tax as an entity  while the individual investors (which could be corporate or individual). are liable to tax on their investment income. Income such as dividends, interest and management fees are subject to withholding tax. For non resident investors, such taxes withheld are treated as their final tax  obligation. The target and investors will also need to note that stamp duties may arise at a flat rate or ad valorem on the transaction documents. Other investor tax liabilities will depend on the exit model the transaction adopts. For instance, management fees will incur with holding tax while carried interest will incur capital gains tax. Note also that interest on foreign loans that have a repayment period (including  moratorium) of two years and above enjoy certain tax exemptions. The  rate of the exemption ranges from 40 to 100 per cent and is subject to  the grace period allowed. 

Targets incorporated as companies are taxed under the Companies  Income Tax Act. Generally, company profits are taxed at the rate of 30  per cent. In Nigeria, interest payment on sums borrowed and employed  as capital in acquiring profits is tax deductible. Consequently, some  businesses prefer debt financing to equity financing to enable them  benefit first from the loan and subsequently from the tax deductibility of interest payments. Equity financing, whether in the form of preferred or ordinary stocks, will entitle the shareholders to dividends.  Such dividends will be subject to a 10 percent withholding tax. Upon deduction of the withholding tax, such dividend will be treated as  franked investment income.

Capital gains tax payable on gains earned on the disposal of assets  are not applicable to the disposal of shares. Consequently, with respect  to this tax, share acquisitions are not asset acquisitions. In practice  however, where it is a major transaction the revenue authorities might  investigate to compare the proceeds from the sale of shares and the  net book value of the assets to decide whether or not capital gains tax  should arise.  

10 Debt financing structures 

What types of debt are typically used to finance going-private  or private equity transactions? What issues are raised by  existing indebtedness of a potential target of a private equity  transaction? Are there any financial assistance, margin loan  or other restrictions in your jurisdiction on the use of debt  financing or granting of security interests? 

Depending on the structure of a private equity transaction, loans may  be sought to finance a PE transaction and such loans may be senior  or subordinated debts. In practice, such loans are often in the form of  senior debt. Foreign loans are subject to the relevant foreign exchange  regulations and may be brought in through approved channels to  enable repatriation of repayments. 

Existing indebtedness of a potential target would play a role to the  extent of the priority ranking of such debts and whether or not such  debts are being serviced at the time of the proposed private equity  transaction. As part of the structure, it may be decided to either keep  or repay the existing indebtedness depending on how such repayment  may affect the cash flow of the target company. The consent of the pro vider of the existing indebtedness would usually be required before  new financing would be taken by the company. 

There are restrictions under CAMA on the provision of financial  assistance by a company whether by way of loan, guarantee, security,  indemnity or any form or credit in relation to the acquisition of its own  shares. There are also restrictions on margin loans. 

11 Debt and equity financing provisions 

What provisions relating to debt and equity financing are typically found in going-private transaction purchase  agreements? What other documents typically set out the  financing arrangements? 

The financing provisions will depend on whether the structure is pure  equity, debt, quasi-debt, leveraged or a combination. As such, it could  range from fairly straightforward to very complex credit documenta tion. In practice, banks have traditional provisions that govern the  various facilities they offer. However, it is not unusual to have debt and  equity finance raised from institutional investors who are not banks. It  is also important that the financier or investor ensures that the target  has complied with all CAC requirements and filings for a going-private  approval. 

In a debt and equity financing arrangement, provisions creating  conditions precedent to the investment are very usual, following the  outcome of due diligence on the target entity. Further, provisions on  redemption of shares, pre-emptive rights, restrictions on indebtedness,  tenor, interest rate, reporting requirements, obligation of parties, tag along rights, drag-along clauses, share transfers, anti-dilution and closing or exit, among others, are typical. The documentation may include  investment or loan agreement, share sale and subscription agreement,  sale and purchase agreement and shareholders’ agreement. 

12 Fraudulent conveyance and other bankruptcy issues 

Do private equity transactions involving leverage raise  ‘fraudulent conveyance’ or other bankruptcy issues? How are  these issues typically handled in a going-private transaction? 

Some transactions made prior to an insolvency may be avoided under  certain circumstances, for example conveyances, mortgages, payments or other acts relating to property that amount to a fraudulent  preference of creditors. Also, any conveyance or assignment of all of  a company’s property to trustees for the benefit of all its creditors shall  be void. 

These concerns are often mitigated with representations and war ranties by the target company that there are no ongoing, threatened or  imminent winding-up or liquidation proceedings and that a receiver or  manager has not been appointed with a provision for indemnity upon  breach. The scope of the warranties would further be determined by  the outcome of the due diligence on the target company. 

13 Shareholders’ agreements and shareholder rights 

What are the key provisions in shareholders’ agreements  entered into in connection with minority investments or  investments made by two or more private equity firms? Are  there any statutory or other legal protections for minority  shareholders? 

To protect the interest of minorities, a shareholders’ agreement may  provide that certain decisions may be taken only if approved by a super majority or qualified majority of the body or organ of the company  making the decision. The voting threshold would therefore typically  include an affirmative vote from a part of the minority. Such matters  may include decisions as to the issuance of new shares, increase in  share capital, acquisitions, disposals, mergers, borrowing and giving  guarantees or security, related party transactions, approval of budgets,  change of business plan and alteration of the constitution. The agreement may also make provision for breaking deadlocks. 

There is also some statutory protection under CAMA that requires  a special resolution (a resolution passed by not less than three-quarters  of the votes cast) of shareholders to take the following decisions:

  • a change of name of the company; 
  • an alteration of the articles of association; 
  • a change of the objects of the company; 
  • variation of class rights; 
  • rendering the liability of the directors unlimited; and • an arrangement or reconstruction on sale of the assets of a  company. 

14 Acquisitions of controlling stakes 

Are there any legal requirements that may impact the ability  of a private equity firm to acquire control of a public or private  company? 

A takeover bid is required where a person intends to acquire 30 percent or more of the voting rights in a public company irrespective of whether  it was acquired in a single transaction or a series of transactions over  time. A takeover bid can be made only if the SEC grants authority to  proceed to that effect. In deciding whether or not to grant authority to  make a takeover bid, the SEC would consider the likely effect of the  proposed takeover bid on the economy of Nigeria and on any policy of  the federal government with respect to manpower and development.  A takeover bid shall not be made to fewer than 20 shareholders representing 60 percent of the members of the target company, but it can be  made to such a number of shareholders holding in the aggregate a total  of 51 percent of the issued and paid up capital of the target company.

There is no need for a takeover bid where the shares to be acquired are shares in a private company. 

For a private company, save for companies in certain sectors that  are subject to industry specific regulations, any requirements for the  acquisition of control will primarily be governed by the provisions of  the articles of association of the company or any shareholders’ agreement entered into by the shareholders or investment agreement  entered with prior investors in the company. 

15 Exit strategies 

What are the key limitations on the ability of a private equity  firm to sell its stake in a portfolio company or conduct an  IPO of a portfolio company? In connection with a sale of a  portfolio company, how do private equity firms typically  address any post-closing recourse for the benefit of a strategic  or private equity buyer? 

Contractual limitations on the ability of a private equity firm to sell its  stake in a portfolio company or conduct an IPO of a portfolio company  may include provisions such as pre-emption rights, tag-along rights,  restrictions on drag-along rights and put options. These rights are usu 

ally embedded in shareholders’ agreements. 

Also, listing requirements may limit the ability of a private equity  firm to sell its stake in a portfolio company or conduct an IPO of a  portfolio company. To list on the Main Board or on the Alternative  Securities Market (ASeM) of the NSE, promoters are required to retain  50 per cent of shares held at IPO for the first 12 months from the date  of listing. 

Further, with respect to the Main Board, the company to be listed  must have a cumulative pre-tax profit of at least 300 million naira  for the last three fiscal years with a pre-tax profit of at least 100 million naira in two of these years and a market capitalisation of not less  than 4 billion naira at the time of listing, calculated using the listing  price and shareholders’ equity. Listing on ASeM does not have these  requirements. 

With respect to listing on the Main Board, a minimum of 20 percent of share capital must be offered to the public and held by at  least 300 shareholders. In listing on ASeM, a minimum of 15 percent of share capital must be offered to the public and held by at least 51  shareholders. 

Contractual time limitations may be agreed with respect to representations or warranties, or both, given by a private equity firm to  a buyer. A private equity firm investing in a portfolio company would  usually require warranties from sellers and from the management team  of the target company. The said warranties may relate to compliance  with applicable laws, the power to contract, title to shares and to assets. 

16 Portfolio company IPOs 

What governance rights and other shareholders’ rights and  restrictions typically survive an IPO? What types of lock-up  restrictions typically apply in connection with an IPO? What  are common methods for private equity sponsors to dispose  of their stock in a portfolio company following its IPO? 

The holdings of the existing shareholders may be restructured for purposes of the IPO and some of the governing rights of the shareholders  will survive the IPO such as representation on the board and non compete rights. However, the company will now be subject to more  regulations including the ISA, SEC Rules and Regulations and Listing  Requirements. 

In respect of lock-up restrictions, the Listing Requirements provide  that the issuer in respect of an IPO to the Main Board of the Exchange  shall ensure that the promoters and directors will hold a minimum of  50 percent of their shares in the company for a minimum period of 12  months from the date of listing and will not directly or indirectly sell or  offer to sell such securities during that period. 

Subject to the lock-up restrictions, private equity sponsors or investors may dispose of their stock through a buyout, which may be by  another PE entity, institutional investor or the management. 

Update and trends 

According to the Nigerian Bureau of Statistics, the value of  capital imported into Nigeria in the second quarter of 2017 rose by US$884.1 million to stand at US$1.79 billion with portfolio investments being the main facilitator for the growth. The private equity sector also witnessed a series of transactions in diverse  industries. Earlier in the year, Sahel Capital, fund managers for the Fund for Agricultural Finance in Nigeria and Cardinal Stone  Capital Advisers, a Nigerian private equity fund manager, entered  agreements for an investment in Crest Agro Products Limited, an integrated cassava processor based in Kogi state. In finance, the FSDH Merchant Bank, a financial services group in Nigeria, received investment funds from Advanced Finance and Investment  Group, through the Atlantic Coast Regional Fund. The educational  sector also had private equity transactions such as the agreement  entered by Verod Capital Management, a leading West African  

private equity firm, to acquire a significant minority stake in  

Greensprings Educational Services Ltd, a 32-year old educational  service provider offering pre-primary, elementary, secondary and  post-secondary schooling. 

17 Target companies and industries 

What types of companies or industries have typically been  the targets of going-private transactions? Has there been  any change in focus in recent years? Do industry-specific  regulatory schemes limit the potential targets of private  equity firms? 

There are not many going-private transactions in Nigeria as there are  few instances of public companies that have gone private, although for eign investors who want to strengthen their control of, and investments  in, the companies tend to want to go private. 

Transactions involving companies in some sectors such as tel ecommunications, electricity, insurance, financial services and the petroleum industry will be subject to further industry-specific regulation. It is yet to be verified that industry-specific regulations have  limited the potential targets of private equity firms, even though such regulations make the process more elaborate. 

18 Cross-border transactions 

What are the issues unique to structuring and financing a  cross-border going-private or private equity transaction? 

There are few financing concerns that are unique to cross-border private equity transactions. These include tax considerations, importation  of capital and repatriation at the point of exit. Where capital is to be  imported in a PE transaction, the investors require a certificate of capital importation that is issued by a bank within 24 hours of the entry of  the capital into the country. Obtaining the certificate of capital importation is a prerequisite for repatriation. There are no foreign investment restrictions on cross-border private equity transactions in Nigeria  except for certain industries in which private participation, both local  and foreign, is prohibited except with a licence from the federal government (eg, defence). 

19 Club and group deals 

What are some of the key considerations when more than one  private equity firm, or one or more private equity firms and a  strategic partner or other equity co-investor is participating  in a deal? 

There are no restrictions preventing multiple private equity firms, or a  private equity firm and its strategic partner, from participating in a club  or group deal. 

The concerns, however, depend on the relative size and interests of  the parties to the transaction. In a takeover context, a key consideration  for parties to such transactions is that they will likely be scrutinised for  the purposes of assessing whether the obligation to make a mandatory  takeover offer is triggered. The threshold for triggering this obligation  is an aggregate holding of 30 percent of the voting shares.

20 Issues related to certainty of closing 

What are the key issues that arise between a seller and a private equity buyer related to certainty of closing? How are these issues typically resolved? 

Several issues may arise during the closing of a PE transaction. 

Such issues may include failure to obtain mandatory clearances or regulatory approvals and failure to satisfy financing closing conditions such as the provision of a comfort letter issued to the buyer by its lender. Where these closing issues arise, the non-defaulting party can grant an extension of time, with or without a provision for costs, to enable the resolution of the issues, or it can terminate the agreement in accordance with its terms. In the latter instance, the inclusion of a reverse termination fee clause in the agreement will be prudent. 

Tamuno Atekebo tamuno@sskohn.com

Eberechi Okoh eberechi@sskohn.com

Omolayo Latunji omolayo@sskohn.com

Oyeniyi Immanuel niyi@sskohn.com

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