THE PLACE OF DUE DILIGENCE IN MERGERS AND ACQUISITION; THE NIGERIAN EXPERIENCE
Corporate restructuring is essentially a corporate action taken to significantly modify the structure or the operations of a company. There are a number of methods available with the most common being Mergers and Acquisitions.
A merger occurs when two separate entities combine forces to create a new joint organization, whilst an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company’s reach or to gain market share in an attempt to create shareholder value. This article seeks to discuss the concept of Mergers and Acquisition and the place of due diligence in achieving this common method of corporate restructuring in Nigeria.
The principal laws governing mergers and acquisitions in Nigeria include the following; Federal Competition and Consumer Protection Act (FCCPA) 2019; Investment and Securities Act (ISA) 2007; Securities and Exchange Commission Rules and Regulations 2013 (SEC Rules); and Companies and Allied Matters Act 2020 (CAMA).
These legislations are not exhaustive as there are also sector specific laws governing Mergers and Acquisitions, such as; Central Bank Act (banking sector); Banks and other Financial Institution Act (banking sector); and Electricity Power Sector Reform Act (power sector).
Mergers – In Nigeria, the Commission regulating mergers and acquisition is the Security and Exchange Commission (SEC). The Federal Competition and Consumer Protection Act (FCCPA) 2019 recognizes two types of mergers, namely; Small merger and Large merger.
The SEC rules provided for specific thresholds determining the type of merger transactions being entered into. However, the FCCPA does not provide any threshold. Instead, it empowers SEC to determine the threshold through a number of steps which involves written submission of proposals from the public and publication in the gazette.
Rule 427 of theSecurity and Exchange Commission (SEC) Rules provides the following thresholds:
- Small Mergers – This is the smallest scale to be considered as it is based on the combination of assets and turnovers of below
N1,000,000,000 (One Billion Naira). This threshold does not mandate the parties involved to notify SEC of the intended transaction.
- Intermediate Mergers – This threshold involves a combination of assets and turnovers between
N1,000,000,000 (One Billion Naira) and N5,000,000,000 (Five Billion Naira).
- Large Mergers – This involves a combination of assets and turnovers above the threshold sum of
N5,000,000,000 (Five Billion Naira).
Acquisition – In respect of acquisitions, the acquirer will apply to SEC by filing a letter of intent accompanied by additional documents such as; Information Memorandum containing background information, the offer, history of the parties and effects of the acquisition on the relevant industry; and the companies’ constitutional documents such as extracts of Board Resolution, certified true copy of the Memorandum and Articles of Association, and the Certificate of Incorporation certified by the company secretary.
Upon a successful acquisition, the following documents are to be forwarded to SEC: Executed Share/Asset Purchase Agreement; Evidence of Settlement Purchase Agreement; Evidence of settlement of severance benefits of employees who may lose their job as a result of the acquisition; and Evidence of Settlement of dissenting shareholders.
The Seven-Step Process: Mergers & Acquisition
A proven process for evaluating and executing mergers and acquisitions includes seven essential activities that occur as sequential steps. A description of each step is as follows;
- Determine Growth Markets/Services: Leaders start the acquisition evaluation process by identifying growth opportunities in business or service lines, markets served, or any combination thereof. To determine growth markets and services, leaders must collect and analyze extensive data, including the following: client origin; demographics (population, age, employment/unemployment rates, income); employers; other competitors; business, program, and service mix (performance and profitability by service line); field staff; employees; utilization/case mix (demand projections); competitive cost/charge position; and consumer preferences/ opinions.
- Identify Merger and Acquisition Candidates: The second step of the acquisition process involves the proactive identification of the universe of potential merger or acquisition candidates that could meet strategic financial growth objectives in identified markets or service lines. This involves methodically identifying “likely suspects” as well as “outside the box” possibilities based on management experience, research, the use of consultants, and other methods.
- Assess Strategic Financial Position and Fit: At this stage following questions shall be answered; What are the likely benefits of a transaction with this acquisition target? What are the risks? How does this target compare to other targeted opportunities?
A comprehensive evaluation of the financial and credit position of the target and the combined entities is based on solid utilization and financial forecasts. The assessment focuses on volume, revenue, cost, and balance sheet considerations.
- Make a Go/No-Go Decision: Corporate leadership must determine the likely benefits and drawbacks of the proposed acquisition or merger according to the questions discussed earlier and make a high-quality decision. During the decision-making process, leaders identify whether the strategic value-added case for a combined entity is compelling enough to proceed (or not).
- Conduct Valuation: The fifth step in the acquisition process involves assessing the value of the target, identifying alternatives for structuring the merger or acquisition transactions, evaluating these, and selecting the structure that would best enable the organization to achieve its objectives, and developing an offer.
- Perform Due Diligence, negotiate a Definitive Agreement, and Execute Transaction: Once an offer on the table is accepted, leaders of the acquiring organization must ensure a complete and comprehensive due diligence review of the target entity in order to fully understand the issues, opportunities, and risks associated with the transaction. Due diligence involves a review of the target’s financial, legal, and operational position to ensure an accuracy of information obtained earlier in the acquisition process and full disclosure of all information relevant to the transaction.
- Implement Transaction and Monitor Ongoing Performance: The analysis seeks answers to such questions as: Will management make the tough operational changes required to achieve the financial benefits? What are the HR implications? Is there constituent support (management, board, service providers, community, and employees)? What are the legal and regulatory challenges (Court approvals, SEC Regulations, Tax implications, etc.)? What are the financial, organizational, and community-related risks of failure?
A successful merger or acquisition involves combining two organizations in an expedient manner to maximize strategic value while minimizing distraction or disruption to existing operations.
The place of Due Diligence in Mergers and Acquisition
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. It is an audit or investigation of a potential investment to confirm facts that may have a direct impact on a buyer’s decision to merge or make a purchase.
During the due diligence process, research is conducted to ensure that all facts pan out before entering into a financial transaction or agreement with another party. In a company acquisition, due diligence typically includes the full understanding of a company’s obligations, such as their debts, leases, distribution agreements, pending and potential lawsuits, long-term customer agreements, warranties, compensation agreements, employment contracts, and similar business components.
There are many advantages to undergoing Mergers and Acquisition due diligence, chief of which is that the buyer is better able to adjust its expectations as it review the unique details of a company. This information can also come in useful during negotiations. When a buyer is able to gather important data on a company, there is a lower risk of unexpected legal and financial problems. Due diligence is essentially an effective way for buyers to protect themselves from risky business deals. As the due diligence process requires a great amount of communication between the two parties, the businesses are also able to form a working relationship.
Mergers and acquisitions are not always black and white. In fact, these complex transactions can be lengthy and often requires a lot of back and forth between the buyer and seller before the transaction can be completed. Without due diligence, companies may fail to disclose important information that could ultimately affect a buyer’s decision to follow through with a deal and which in turn will lead to a severe breakdown in the business scheme and plans of the seller. Due diligence portends being meticulous during mergers and acquisition. It follows therefore, that it is a key stage of the Merger and Acquisition transaction if not the most important one.
Author: JULIET ISI IKHAYERE
 http: www.berkeleylegal.com.ng/2019/07/31/mergers-and-acquisition-under-current-nigeria-law/ accessed on 29th October, 2020
 Section 92 of the FCCPA
 http://huconsultancy.com/7-steps-to-successful-merger-acquisition/ assessed on 29th October, 2020
 F.A. Ajogwu, Mergers & Acquisitions in Nigeria: Law & Practice, ( Centre for Commercial Law Development, 2014).
 https://www.bbgbroker.com/due-diligence-in-mergers/assessed on 29th October, 2020.