Day 7: Mergers and Acquisitions

DAY 7: Mergers and Acquisitions

DATE: March 12, 2024

MODERATOR: Peace Eseyin

TIME: 6PM

SPEAKER: Olayanju Phillips

Biography of the speaker

Olayanju is a dual qualified (England & Wales and Nigeria) lawyer within the corporate team at Brabners advising on M&A, venture capital, and private equity transactions.

His publications have been featured by Financier Worldwide, Mondaq, Business Day, and Nairametrics. He has contributed to the Fintech Africa Legal Guide, published by the South African Law firm of Cliffe Dekker Hofmeyr, as an expert on Nigerian FinTech Law.

Furthermore, he has been a speaker at global and regional conferences, including the International Money Transfers & Cross-Border Payments Conference and South African Impact Investment Forum. He has also been featured as a guest on the BBC Newsday Programme and interviewed by BBC Africa on regulations in Nigeria.

Conceptual clarifications

Mergers: 

A merger occurs when two entities of equal strength join or come together to form a new entity. For example, where Entity A joins with Entity B, it forms a new entity called Entity C. In order for it to be a merger, the joining entities have to be of contemporary strength or be contemporaries in the market. That is, they should have similar income from sales or consumer brackets. This is done in order to consolidate their strength. For example, the Diamond-Access merger.

Acquisitions: 

Most people use mergers and acquisitions interchangeably. However, there is a difference between the two concepts. In acquisitions, a bigger entity "swallows" the smaller entity. Since this two companies are not of equal strength, the entity which is larger in strength subsumes the smaller entity into itself.

Joint venture: 

A joint venture occurs when two entities come together through a joint venture agreement to achieve a specific purpose or aim. These entities may form a third company and each entity will have equal shares in the said company.

What differentiates a merger from a joint venture is the fact that mergers are long term and mostly permanent. Whereas, a joint venture is temporarily to achieve the set out goal. When the goal is achieved, the entities can part ways and the third company that was created can wind up.

The purposes of joint ventures may include the achievement of commercial purposes such as growing market base, growing consumers of the said product.

Management Buy in/out:

A management Buy in occurs when the management of a different company buys into the shares of another company when the said company which is bought into is insolvent. For example, Entity A is insolvent, therefore the management of Entity B, buys into the shares of Entity A.

A management Buy out occurs when the management of the insolvent company acquires the company shares from the directors or shareholders in order to offset the indebtedness. The directors of a company may intend to buy out the company using external indebtedness, however, the management of the company then buys the shares to offset the indebtedness. For example, Entity A is insolvent, the management of Entity A buys out the company shares.

Types of Mergers

1. Based on the market:
2. Private mergers: this is when private companies merge.
3. Public mergers: this is when public companies merge.

Structuring a merger

Share purchase/sale: as the name implies, it is the acquiring or the selling of shares. When buying shares, one is acquiring the assets or liabilities of the company being bought. In buying shares, the fees paid may include the stamp duties fees.

Asset purchase/sale: this involves the buying or selling of assets. One benefit of asset purchase is that the buyer can pick out the most invaluable assets and leave the ones which are not valuable. For example: if a company produces a vaccine for a certain disease, a person can acquire the asset of intellectual property for the vaccine without having to buy the entire company.

There are a lot of tax considerations in asset purchase and they include: Capital gain tax, Stamp duty tax, Value Added Tax (VAT).

Contractual mergers: a private merger is usually contractual.

Mergers by scheme: it was introduced in Nigeria as a way to check public companies or a public company that wants to merge with another. It is done in such a way that the merge can be possible without the voluntary accent of some of the shareholders, this is possible through court orders.

Example: a bank running into debts needs the assent of 1,000 shareholders, due to the unfeasible nature of this, the company intending to buy the bank can get an order from a court to merge with the company without the complete assent.

Market participants

Merging entities:

This includes the buying entity (the company buying the other); the individual buying the shares or assets; or the merging companies. It refers to all the entities involved in the process of merging or acquisition.

Targets: 

This refers to the entity being bought or the company whose shares or assets are being bought.

Advisers: 

This includes professional bodies which offer aid to the parties involved. Such as, the accountants who estimate the increments in the tax of the company before purchase and the amount to be paid after purchase. They perform this role together with the tax advisers. They also conduct an evaluation of the deal, the price of the assets or the company. Escrow agents are third parties who hold the money for the contracting companies or the merging companies. This is to ensure that there is trust between the companies and none performs fraudulent activities. Insurers deal with warranties and indemnity insurance.

Regulators: 

Like the name suggests, they regulate the transaction. They ensure that the market is running properly and if the merger would lead to anticompetitive practice, it will be reviewed. They set thresholds, if the acquisition gains is beneath it, they review. They monitor the transaction to ensure that both parties are treated fairly depending on the agreement.

Types of regulators

1. Sector regulators
2. General regulators: such as the court which plays an overseeing function.

Dangers of not knowing the regulations

One of the dangers of not knowing what the regulations are or not understanding what it entails is that the timeline of acquisition is impacted negatively. When the process of acquisition has been conducted, if the regulations were unknown to the party, this can lengthen the process and stall the business of the company.

Transaction timeline of a private merger

Preliminary discussion, non-disclosure agreement and term sheet:

I. During the preliminary discussions, the effect or the results of the merger is talked about and addressed.

II. The term sheet on the other hand is a document which contains the details of the commercial agreements, the rights of the parties, and their duties.

III. Non-disclosure agreement is one where both entities undertake not to reveal the details of the agreement to the public. Most times, the employees of the various entities may not be aware of the merge and non-disclosure ensures that they are not aware in order to protect them.

IV. Due-diligence:

This is the opportunity for the client company to investigate and verify the veracity of the information available about the other company. Usually, if it be a public company, their information on their finances are published to the public, due diligence posits that the other company would conduct research to know how true it is. Also, an investigation would be done on the contracts the other company has signed, are they onerous? Would they backfire if they merge or acquire?

V. Drafting and negotiation of transaction and ancillary documents:

This depends on the structure of the process. The laws which govern the structure will be adhered to. Furthermore, during the draft of the commercial agreement, certain liabilities or indemnities may be added. Through due diligence, these terms are spotted and negotiated.

VI. Regulatory notifications

VII. Exchange: this involves the exchange of signed documents by the companies.

VIII. Completion.

Q&A

Q: Is a public company/private company acquisition/merger possible?

A: Yes. However, it may not be a merger but an acquisition. This is because one party, the public company, is stronger than the other. Also, a problem may arise after the merge whether the company will be converted to a public company or a private company.

Q: Can merging only occur between two companies? Is it possible for three or more mergers?

A: Although it is rare, I believe it is possible. But it will be done one after the other because the entities will require separate contracts unless a company is built under or into another.