LEGAL FRAMEWORK AND CONSEQUENCES FOR MERGERS AND ACQUISITIONS IN NIGERIAN BANKING INDUSTRY

LEGAL FRAMEWORK AND CONSEQUENCES FOR MERGERS AND ACQUISITIONS IN NIGERIAN BANKING INDUSTRY

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CHAPTER ONE

GENERAL INTRODUCTION

1.1.      Background of the Study 

The study examines the Legal Framework for Mergers and Acquisitions in Nigerian Banking Industry and how Mergers and Acquisition affect the performance of the Banking Industry in Nigeria. It also seeks to ascertain the improvements which ISA 2007 has made on the old law contained in part XI, ISA 1999 (now repealed). 

Mergers and Acquisitions are the latest solution to save the lives of banks, companies, and other industries that are collapsing in recent years. The year 2005 witnessed the reduction of 89 banks to 25 as a result of the re-capitalization policy of the Central Bank of Nigeria (CBN) from N2 billion to N25 billion in Nigeria. Also, many companies, banks, and business ventures have collapsed leaving those who invested in such ventures suffering. In the 1980s when the Co-operative and Commerce Bank (Nigeria) Ltd booming with golden advertisement on televisions and radios suddenly collapsed, many customers lost their deposits in that bank. Suddenly, Savannah Bank followed and other banks such as the All States Trust Bank, City Express Bank, ACB, International Bank, and Hallmark Bank. In the light of this, the failed Bank Tribunal was set up and some workers of such banks were tried and jailed, but this did not solve the problem of business collapse and banks liquidation. 

The Central Bank of Nigeria (CBN) sort for solutions to alleviate the sufferings of the customers, shareholders, debenture holders and creditors, etc. thus the idea to re-organise the banks. In achieving this, the banks in the country resorted to mergers, acquisitions, take-overs, compromise, and amalgamation in their restructuring.[1] The Federal Government of Nigeria was advised to undertake a consolidation programme that will result in mergers and acquisitions among banks in the country, strengthen them and put an end to the frequent collapse of banks in Nigeria. It is better to have few banks and other companies with reliable safety standards than numerous banks whose safety standards cannot be guaranteed. With recapitalization and consolidation in banks and insurance industries, it gradually extended to other sectors of the economy like the airline industry operators. The relevant laws were transferred to the Investment and Securities Act (ISA) 2007 No. 29 to have them in one body of legislation. Mergers and acquisitions, will involve preliminary steps, verification of corporate structure, verification of titles to assets, Banking/Financial taxation matters, Intellectual property, rights permits, and authorization, miscellaneous and deliverables. Also the ways of petitioning to the court for mergers and acquisitions by both 1st and 2nd petitioners became obvious and will be considered in this study.

1.2.       Statement of the Problem 

The incidence of mergers involving banks and companies has been on a gradual increase in recent times. The reasons for this include global economic recession, gross mismanagement of some banks and other companies; many harsh and stringent government policies, such as the regulatory fiat of the Central Bank of Nigeria and the National Insurance Commission forcing banks and insurance companies respectively to meet new minimum share capital requirements, the force of globalisation and the breaking of barrier to trade and movement of international capital.  

In a bid to overcome the spate of the banks and financial institutions collapsing, which is as a result of mismanagement, global recession, harsh and stringent government policies like the CBN regulation policies, mergers and acquisitions have become the recent remedy for the banking and other financial institutions.  Good as the proponent of mergers and acquisitions maintain, the effects on human and material resources on the mergering and acquiring banks have become manifest in the sharing of assets and liabilities of the mergering and acquiring banks, on the shareholders, share revaluation, organisational problems and employee problems.  

1.3.       Research Questions 

This study will address the following research questions: 

1.      Can the effects of mergers and acquisitions with regards to human and material resources, assets and liabilities sharing and shareholders justify its use for the banking sector in Nigeria? 

2.      Can the impacts of strategic mergers and acquisitions transform ailing banks from middle players to mega banks in Nigeria? 

3.      Are the roles of the financial institutions regulators proactive to banking failures and contributes to solving the problems in the sector?

1.4.       Objectives of the Study 

The main objective of this study is to examine the legal framework for mergers and acquisitions in Nigeria banking industry. Specifically, the study will evaluate the effects of mergers and acquisitions with regards to human and material resources, asset and liabilities sharing and shareholders as to justify its use for the banking sectors in Nigeria. It will ascertain the impact of mergers and acquisitions in the banks and other companies in other to know whether the banking system competes and transforms from middle player to mega players since the introduction of mergers and acquisitions in Nigeria banking industry, and finally, examine the roles of the financial institutions regulators to proactively stem banking failures and contributes to solving the problems in the sector.  

1.5.       Methodology 

The study adopts the descriptive, analytical and comparative study designs. The presentation of the comparison of Nigeria Banks with International Banks, and the discussion of mergers and acquisitions in other jurisdictions such as Ghana, China, Israel and India. These countries were selected randomly for comparison. The study relied essentially on primary and secondary source materials.  Primary source materials are interviews and case law; while secondary source materials relied on include journal articles, textbooks, magazines, newspapers, conference papers and relevant internet materials.

1.6.      Scope of Study 

This research is rooted in a study of legal framework for mergers and acquisitions in

Nigerian banking industry.  The work examines concept of banks and other companies in Nigeria and also some foreign banks and other companies that were used as comparison in other jurisdictions. Among the banks and other companies visited was include the Central Bank of Nigeria (CBN), United Bank for African, First Bank Plc, Diamond Bank, National Insurance Company, Bendel Line Company Limited, Total Nigeria Plc, Investments and Securities Tribunal Nigeria, MTN Company Limited.

It is however limited to banks and other companies who witnessed merger and acquisitions and both the managers, workers, shareholders, debenture holders were interviewed. Some contributions were made by others who suffered during the liquidation of some banks and other companies.

1.7.      Literature Review

Mergers and acquisitions are among the business combinations in Nigeria that set out to solve the problems of banks and companies collapse. Although there are other business combinations such as take-overs,[2] compromise,[3] amalgamation,[4][5] arrangement,5 reconstruction[6] and consolidation.[7] Mergers and acquisitions is however preferred to other methods of saving an ailing banks or companies because it appear to be the fastest method of solving the problems of banks and other companies collapse in Nigeria.[8] The Central Bank of Nigeria started looking for solutions to alleviate the sufferings of customers, shareholders, debenture holders, creditors, etc. The then Central Bank Governor, Professor Chukwuma Charles Soludo came up with the idea of re-organisation of Banks. In achieving this, the banks in the country used all the methods of Mergers, Acquisitions, Take-Overs, Compromise and Amalgamation. 

In no particular order, an understanding of these various could be stated thus:

Arrangement is simply a scheme under which rights of a company‟s shareholders or creditors (or any class of them) is altered. It is defined in Section 537 of Company and Allied Matters Act 2004 (CAMA) as: 

Any change in the rights or liabilities of members, debenture holders or creditors of a company or any class of them or in the regulation of a company, other than a change effected under any other provision of this Act or by the unarming agreement of all parties affected thereby.[9]

An arrangement often forms part of a reconstruction or merger. Reconstruction unlike

“arrangement,” is not defined in the CAMA 2004 or ISA 2007. Reconstruction of a company occurs when a company transfers its business and assets to a new company formed for that purpose in consideration of the issue of the shares of the new company to the members of the old company. If the debentures of the old company have not been paid off, then shares or debentures of the new company are issued to debenture holders of the old company to satisfy their claims. The result is that substantially the same business is carried on by the new company as the old, and substantially the same persons hold interest in the new company as did in the old company. Since the old company no longer has any business of its own, it is into liquidation.[10]  

Take-over means the acquisition by one company of sufficient shares in another company to give the acquiring company control over that one company.[11] While Take-over bid means a bid made for the purpose of a take-over as provided in Section 132 of this Act.[12]

Compromise,13 on the other hand is described as an agreement terminating between parties as to the rights of one or more of them or modifying the undoubted rights of a party which has difficulty in enforcing.[13]

The term “compromise” differs in meaning from the term “arrangement”, whereas the former involves an element of give and take, the latter does not. An agreement which enables the majority of the creditors to accept less than is due to them may be a compromise on the part of the creditors as a whole, but the shareholders do not give up anything, no compromise as such is involved, but only an arrangement resulted.15 

Consolidation is defined in Black‟s Law dictionary,[14] as the unification of two or more corporations (companies) or other organisations by dissolving the existing ones and creating a single new corporation (company) or organisation. 

Offeror means a person or two or more persons jointly or in concert who make a takeover bid.[15] While an Offeree company means a company whose shares is the subject of a take-over bid.[16]

A merger (or an amalgamation) occurs when two or more companies transfer their businesses and assets to a new company (or to one of the original companies) and in consideration, their members receive shares in the transferee company. It means any amalgamation of the undertaking or any part of the undertakings or interests of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate.19 

An acquisition occurs when one company acquires sufficient shares in another company so as to give it control of that other company. This may be by a take-over bid or by purchasing shares in the market. Usually the acquired company is a smaller company and becomes a subsidiary of the acquiring company.20  

Mergers and Acquisitions succeeds more than other business combinations in solving the problems of bank failures in Nigeria because the weak banks merged with the strong banks and some strong banks acquired some weak banks whole and entire. In the process of that, some banks started growing again. Mergers and Acquisitions in the banking sector restored confidence in the customers and bank workers, and shareholders started subscribing to shares in the banks. 

Many banks and other companies which were practically supposed to disappear from doing business are now enjoying the fruit of business combination. Okonkwo[17] is of the opinion that Mergers and Acquisitions appear to be the main stay in the restoration of banks failure in Nigeria. This is his view in conjunction with West African Institute for Financial and Economic Management (WAIFEM) together with Central Bank of Nigeria emphasized this in a seminar at Abuja Nigeria, entitled Legal Framework for Mergers and Acquisitions. This legal framework was contained mainly in the Companies and Allied Matters Act 1990 (CAMA) now repealed and called CAMA 2004. The Securities and Exchange Commission Act 1988 now repealed and called SEC Act 1999 and the Securities and Exchange Commission Guidelines of Mergers and Acquisitions and other combinations. The importance of Mergers and Acquisitions in the Banking Industry in Nigeria cannot be overstressed. 

Other industries and companies are now clamouring for such business combinations. There is a move to have such in Airlines Industries in the country. The Federal Government of Nigeria has been advised to undertake a consolidation programme that will result in mergers and acquisitions among airlines in the country to strengthen them and put an end to the frequent air mishaps and also restore confidence in their customers. It is better to have few companies with reliable safety standards than numerous whose safety standards cannot be guaranteed. 

Ogunleye,[18] noted the resolve of the Central Bank of Nigeria to strategically place the nation‟s banking system in regional and international context and promote soundness, stability and enhanced efficiency of the system. This led to the proposed increase of minimum capital base for all universal banks to N25 billion in July 2004. No doubt, the development had in turn prompted[19] a regulatory induced restructuring in the form of consolidation through Mergers and Acquisitions. Consolidation of banking institutions aims, amongst others at strengthening the banking sector to be more meaningful and to protect depositors, play development roles in the nation‟s economy, and become a competent and active player in the African regional and global financial system. It is also envisaged that the reform would over time, guarantee higher returns to the shareholders and other stakeholders of the bank industry. As observed   by Bossone, Honohan and Long observed that small banking systems under-perform. They suffer from a concentration of risks. The smaller the banking system, the more vulnerable it is to external shocks. Small banking systems provide fewer services at higher unit costs, largely because they cannot exploit economics of scale, and partly because of lack of effective competition. Regulation and supervision of small banking system have also been observed to be disproportionately costly.[20] 

Ofili, states some types and reasons why it should be necessary that companies should merge and acquire one another. Horizontal mergers and vertical acquisitions are advocated. Mergers and Acquisitions conglomerate. All those are to bring the banks and other companies to the limelight in the economy of Nigeria, so that people‟s lives will not collapse if the Banks or other companies collapse. Many reasons were advanced why there must be mergers and acquisitions in the companies in Nigeria. Such reasons are synergy, economies of scale, risk diversification, desire for growth, technological drive, management expertise‟s, increased market share, assets at a discount, financial advantages, steady supply of raw materials and control of sales outlet, stock exchange quotation, regulatory, fiat of an Apex Regulator and Personal interests. When all those things succeed in mergers and acquisitions system there will be rapid growth in the economy of Nigeria and foreign investors can comfortably invest in our companies which banks are among.                      

Williamson is of the opinion that mergers and acquisitions of banking sector can make Nigerians compete favourably with their counterparts in other jurisdictions such as the United Kingdom, United States of America, Canada, etc.[21] It seems to be true, because of the outcome of the consolidation exercise, which made the twenty-five banks emerge from 75 banks, out of a total of 89 banks that existed as at June 2004. The successful banks account for about 93.5% of the deposit liabilities of the banking system. In the process of complying with the minimum capital requirement, N406.4 billion was raised by banks from the capital market out of which N360 billion was verified and accepted by the Central Bank of Nigeria and also the process led to the inflow of FDI of US$652 million and 162,000 pounds sterling.  Apart from the shrinkage of banks to 25 and heavy capital mobilization, there are other benefits such as: 

-          The liquidity engendered by the inflow of funds into the banks induced interest rate to fall drastically while an unprecedented 40% increase has been recorded in lending to the real sector. 

-          Already, more banks now have access to credit lines from foreign banks (one recently received $250 million from two foreign banks – this is unprecedented).   

-          Ownership of the banks has been diluted. This will in no small way tame the monster of insider and corporate governance abuse.

-          With virtually all the banks now publicly quoted, there is wider regulatory oversight with SEC and NSE joining the team. Regulatory resurges would now be focused on fewer and more stable banks. 

-          Depositors confidence is bound to be greater and interest rate on deposit lower due to “safety in bigness” perception by depositors. 

-          The banks will of course enjoy economies of scale and consequently pass on the benefit in the form of reduced bank charges to their customers. 

-          The capital market deepened and consciousness about it increased significantly among the population. The market has become more liquid and the total capitalization markedly increased. 

Nwosu agrees that there is need for Corporate Mergers and Acquisitions in Nigeria economy to help in the rapid growth of banks and other companies.[22] As is to be expected, there are bound to be integration challenges in the new banks. In this regard, the Central Bank of Nigeria (CBN) is poised to address such concerns. Some of the measures intended to address the corporate governance and integration issues in the consolidation banks are: 

A new Draft Code of Corporate Governance for banks has been issued to the industry in the spirit of transparency and constructive consultation. There will be need for a stakeholder‟s forum to deliberate on the new code of conduct in order to save the lives of banks. 

The Central Bank of Nigeria (CBN) will closely monitor the banks to ensure that the provisions of the merger schemes documents are complied with. The Central Bank of Nigeria (CBN) maintains a black book of discredited practitioners in the system. The black book is being automated for easy identification of persons on the list. Meanwhile the list of debtors of banks is being screened to ensure that no non-performing debtor is left on the Boards of 25 Banks.     

There is zero tolerance regarding infractions, misreporting and non-transparency. This is one of the 3 points in the reform programme which the Central Bank of Nigeria (CBN) intends to strictly apply now that the first phase of the programme has been concluded.

The supervisory process is also being reformed. The prudential supervision arm of the Central Bank of Nigeria (CBN) is migrating to a risk based approach to supervision. The framework for this has been released and the implementation process is to be launched. The capacity of supervisors is being enhanced through training, especially in risk management. The supervision software deployed in the Central Bank of Nigeria has been significantly upgraded and is now being operationalised. 

A post consolidation due diligence exercise is slated to be carried out on all the banks as time goes on to ensure the successful mergers and acquisitions. This exercise would involve a re-verification of each bank‟s capital to prevent or eliminate any incidence of “bubble capital”. In the event that a bubble that had existed bursts, a contingency plan, which includes getting stronger banks to acquire any shaky bank, is in place and the Central Banks of Nigeria stands ready to play its role as lender of last resort. 

1.7.1. Forms of Mergers and Acquisitions 

Most mergers and acquisitions in Nigeria are regulatory driven. However, before the flurry of mergers and acquisitions witnessed in the banking and insurance sectors of the economy between 2005 and 2007 the major actors in the field were foreign-owned multinational companies which became Nigerian companies under the various Indigenisation Acts.[23] Very few wholly-owned Nigerian companies were involved in mergers and acquisitions as Nigerian business entrepreneurs usually shy away from business integration on account of our cultural background. Most of the Nigerian companies that merged either had the same foreign parent companies or the acquiring companies already were pre-merger shareholders in acquired companies. 

The fact that most mergers and acquisitions in Nigeria were consummated at the convenience of foreign parent companies explains why takeover bids have not been recorded in the history of the Nigerian Corporate World. This is owing to the fact that a greater percentage of the block-holdings of most quoted c


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