We think that Public-to-Private transactions and Private-Investment-in-Public-Entities can essentially be a game changing strategy in 2018, for private equity firms looking to create distinctive value, especially, in frontier markets, where control investments are hard to execute and traditional equity market funding alternatives may not be available to a public company. In a new update to its Listing Rules, effective from November 1, 2017, the Nigerian Stock Exchange (NSE) issued certain amendments (New Amendments) to the procedure and thresholds required to carry a delisting and substantial divestments through, on the NSE.
Why This is Important For Private Equity
First, the view that we take internally, is that grasping as many data points as possible before opening discussions with a prospect can go a long way in driving a seamless deal. Secondly, a failure on the part of TargetCo directors to comply with their obligations pursuant to securities’ regulations or with good capital market practice in a delisting or divestment transaction can create personal liability problems for such directors. Where such affected directors remain directors or, possibly shareholders in the new board or company (as in the case of a management buy-out) post-investment, this can create additional operational issues for TargetCo. Also, understanding the scope of the New Amendments will help private equity investors and their advisers to accurately delimit the structure and direction of warranties to be obtained and the level of diligence to be carried out, in a Public-to-Private transaction and with respect to Private-Investment-in-Public-Entities in Nigeria.
Caveat: The foregoing must be conceived within the general context of the regulatory framework Public-to-Private transactions and Private-Investment-in-Public-Entities in Nigeria
Our Comments on the New Amendments
(a) The regulatory objective of the NSE is commendable to the extent it seeks to clarify the delisting and divestment process, to ensure that standard corporate governance procedures are complied with during a delisting or divestment process and to protect the interest of minority shareholders.
(b) The AGM/EGM, which forms part of a delisting transaction requires meticulous consideration. Although the New Amendments do not stipulate the minimum information to be provided to TargetCo’s shareholders during the delisting process, i.e. information to be disclosed in the explanatory statement prepared by the Board for TargetCo’s shareholders, it is good capital market practice for the Board to disclose all material facts in the explanatory statement to be shared with the shareholders in relation to such resolution and voting must be done only after full disclosure. Such information should include reasons for delisting (i.e. inability to access funds in the capital market, the burden of regulatory compliance etc) and any other matters relevant to shareholders reaching an informed decision on the issue of delisting.
(c) Escrowing funds for the purpose of buying our minority shareholders also requires careful consideration because of the potential to infringe the share buy-back provisions of the Companies and Allied Matters Act (CAMA) and the extant SEC rules, at the point share purchase by TargetCo. Even though the CAMA permits a company to buy back its shares where the purpose is to settle a dissenting shareholder, SEC Rules 398 provides a long list of requirements that a public company must satisfy where it intends to buy back its shares.
(d) With regard to the escrow account from which minority shareholders will be paid, we expect that it should be possible to use a bank guarantee or other financial instrument, as a cash substitute.
(e) Although there are no circumstances where the NSE may agree that shareholder consent is not required for delisting a company’s shares, we expect that it should be possible to secure a dispensation, where appropriate.
(f) The additional requirement of deciphering the intention of a buyer, being the second leg of the qualifying requirements for a block divestment classification, can create avoidable problems. This qualifying requirement suggests that the quantity of shares in a divestment transaction is not, considered alone, sufficient to determine an ‘intention to take control’ and that an ‘intention to take control‘ is a separate requirement that has to be proven.
Below, we share some of the key data points in the New Amendments as relates to Public-to-Private transactions and Private-Investments-in-Public-Entities.
1. Two-Stage Approval Process
i. The proposed delisting must be approved by the Board of Directors ( the Board) of the TargetCo, during a duly constituted Board meeting.
ii. The proposed delisting must be approved by atleast 75% of members present and voting during an Annual General Meeting (AGM) or Extraordinary General Meeting (EGM), in person or by proxy.
2. Notification & Publication
iii. As part of the approval process, the Board must officially notify the NSE of the proposed delisting and also submit a copy of the Board’s resolution approving the proposed delisting to the NSE. The Board is required to notify and to seek the approval of the NSE before convening the AGM/EGM.
iv. There is no requirement to give public notice of the proposed delisting. However, the Board must publish a notice of the AGM/EGM in two daily newspapers at least 2 days before AGM/EGM and must obtain the approval of the NSE to publish the said notice and also submit a draft notice of the AGM/EGM for the approval of the NSE. The Board is required to invite the NSE to the AGM/EGM.
3. Court Sanction
v. Where a proposed delisting is as a result of a merger or other reconstruction, the Board must apply to the relevant court for a court-ordered EGM/AGM and must also submit the resolutions passed at the said EGM/AGM to the court for sanction. There is a further requirement to file the Court’s sanction with the Corporate Affairs Commission.
4. Minority Shareholders & Exit Pricing
vi. The Board is required to set aside funds sufficient to purchase the interest of all shareholders who express their dissent to the resolution to de-list the TargetCo; and the funds must be domiciled with a Registrar or a Custodian duly registered by and in good standing with the Securities and Exchange Commission (SEC). The underlying expectation is that TargetCo will make reasonable arrangements to pay off minority shareholders who may not wish to continue with the entity as an unlisted entity.
vii. The New Regulations require that the share price at which the dissenting shareholders’ interests will bought be bought must not be less than the highest price at which the Issuer traded over the six (6) months immediately preceding the date on which the notice of the AGM/ EGM at which the resolution to de-list the Issuer was issued.
viii. The Board is required to procure the Registrar or Custodian to open and publish a register of dissenting shareholders and keep the register open for at least 3 (three) years. In addition, the Directors are required to publish the list of dissenting shareholders on the company’s website for the same duration and submit same to the NSE within three (3) months of the shareholders’ expression of their dissent.
ix. Delisting a company’s securities is not an absolute bar on the TargetCo’s access to the NSE. TargetCo may relist a delisted security after a period of three (3) years from the date of its de-listing. Other things being equal, the 3-year Rule effectively secures the exit opportunities of private equity investors.
5. Effective Date of Delisting
x. The effective date of delisting is crucial because this is the date when the entire listed shares of TargetCo will be de-listed from the Daily Official List of the NSE. The New Amendments provide that this date shall be the date when the Registrar or Custodian provides evidence that the interests of all dissenting shareholders have been purchased by TargetCo.
6. Block Divestment
xi. The determination of a block divestment has historically been a matter for the discretion of the NSE. The prior position was that a block divestment will be deemed to have occurred if in the opinion of the Exchange the divestment will lead to a material change in the Board and Management of a divesting company.
xii. Following from the New Amendments, a trade will now be treated as a block divestment where it involves: (a) a transfer of shares amounting to thirty percent (30%) or more of the company’s total listed shares and the transferee shareholder intends to take control of the listed company; or (b) the acquisition of additional shares by a shareholder of a listed company, that would result in an increase in the shareholder’s total holdings to thirty percent (30%) or more of the company’s total listed shares; and the shareholder intends to take control of the listed company; or (c) Less than thirty percent (30%) of a company’s total listed shares but will lead to a material change in the Board and/or Management of a listed company.
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