Section 92(3) of the extant Federal Competition and Consumer Protection Act ( the “Act”) suggests that, certain types of “acquisition” transactions by banks and private equity/ venture capital firms[1] (“Private Equity Firms“) would be exempt from merger clearance by the Federal Competition and Consumer Protection (the “Commission”/”FCCPC“). There has been some debate, as to whether or not and to what extent, section 92(3) of the Act applies to mergers and acquisition transactions by Private Equity Firms. What follows is our analysis of this section.
Why a “Competition” analysis of Section 92(3) is important?
Firstly, merger clearance comes with significant expense in the form of notification fees payable to the Commission. In Nigeria, notification fees are usually calculated as a percentage of the consideration paid by a buyer to a seller in the subject transaction or as a percentage of the combined turnover of the merging parties, whichever is higher. Secondly, merger notifications have implications in terms of timing as the parties to a transaction will have to wait to receive merger clearance from one or more competition authorities. It is illegal[2] in Nigeria to proceed with the closing of a notifiable transaction without merger clearance. Thirdly, submitting a transaction for merger clearance presents a risk that the transaction may not be allowed by the Commission or may be allowed only on certain conditions. There could also be contractual liability for parties, where for instance, a failure to identify a competition law issue during the clearance process, triggers a breach of competition-related warranties in the relevant transaction documents. For these reasons, it is often prudent for parties to seek legal opinion/analysis early on, with a view to determining the extent to which their transactions are notifiable and the exact amount payable as notification fees.
Please see also our article titled “Turnover and Control Considerations for Merger Clearance in Nigeria”
Sections 92(3) provides as follows:
“For the purposes of subsection ( I ), an undertaking shall not be deemed to exercise control over the business of another undertaking where – (a) credit institutions or other financial institutions or insurance companies, the normal activities of which include transactions and dealing in securities for their own accord or for the account of others, hold on a temporary basis, securities which they have acquired in an undertaking, with a view to reselling them, provided that they do not exercise voting rights in respect of those securities with a view to determining the competitive behaviour of that undertaking or provided that they exercise such voting rights only with a view to preparing the disposal of all or part of that undertaking or of its assets or the disposal of those securities and that any such disposal takes place within one year of the date of acquisition; that period may be extended by the Commission on request where such institutions or companies can show that the disposal was not reasonably possible within the period set; or (b) control is acquired by an office-holder according to the laws of the Federation relating to liquidation, winding up, insolvency, cessation of payments, compositions or analogous proceedings”.
The fundamental principle of Nigerian merger control law is that mergers and acquisitions where a buyer intends to exercise “control”[3] over another business, must be notified to the Commission for review and approval[4]. The ordinary implication of this principle is that, where, in a proposed mergers or acquisition transaction, there is no intention to or evidence of, “control” as between a buyer and a seller, such transaction ought not be notifiable to the FCCPC, as a general matter. This is the context in which section 92(3) finds expression. Essentially, Section 92(3) excludes certain financial institutions from the requirement to obtain merger clearance, even if such institutions exercise “control”.[5]
Banks and other Lending Institutions
We take the view that the substantive intention in 92(3) is to exempt deposit-taking/lending institutions from the need to obtain merger clearance, where such financial institutions come into “control” of another business within the context of a debt financing, security enforcement or debt restructuring transaction.[6] If for instance, a bank lender takes control of the assets, business or shares of an obligor who has defaulted on a loan pursuant to a facility agreement, a bank need not submit such “control” event for merger review and approval by the FCCPC. The assumption here is that the bank is not holding the assets or securities on a lasting basis. Rather, the bank lender holds such securities or assets on a temporary basis and ought to dispose them within a short period of time. Where a bank lender (a) does not intend to sell such assets, business, interests or shares within a short period of time, or (b) uses or intends to use its contractual voting powers towards “determining the competitive behavior” of an obligor, such transaction should ordinarily be notifiable.
Bank lenders should not assume that all exercise of contractual rights within the context of a financing, security enforcement or debt restructuring will not require merger review or clearance. There are at least three important considerations to note here. Firstly, a bank that seeks to rely on 92(3) needs to be able to demonstrate that it did or will not exercise its voting powers in a obligor entity with a “view to determining the competitive behaviour” of an obligor. The determination of what will constitute “determining competitive behaviour” will likely require the reasoned opinion of a competition lawyer. Secondly, a bank may have to seek for an extension of time, from the FCCPC, where the disposal of the assets, business or shares of an obligor are not possible within one year. The other point to note is that the exception in 92(3) does not cover follow-on mergers and acquisition as would be the case, where a bank lender ultimately sells the shares, interest or assets of an obligor to another party. Such follow-on transactions will generally be notifiable if they meet the relevant jurisdictional thresholds.
Is a Private Equity Firm an Exempted Financial Institution under Section 92(3)
We answer in the affirmative. Our reasoning is summarized as follows:
(1) A Private Equity Firm is a type of financial institution[9]. Although, the FCCPA does not define “other financial institution” as used in Section 92(3), the Nigerian Central Bank as per section 57 the extant Bank and Other Financial Institutions Act 2020, considers an “investment” management” firm as a type of financial institution. To this extent, a Private Equity Firm is a type of financial institution under Nigerian law.
(2)In very simple terms, the primary business of a Private Equity Firm is to essentially sell securities in an investment fund typically structured as a limited partnership, to institutional investors (“Limited Partners“). The proceeds of such sale of securities are then invested into a portfolio of businesses in accordance with the relevant partnership agreement on behalf of the Limited Partners and a Private Equity Firm, who typically also contributes to the capital of the fund using a General Partner entity. Such investments are typically held by the private equity fund ( or through an SPV) on a temporary basis with a view to resale for a financial return. On the basis of the foregoing, a Private Equity Firm deals with securities both at the fund level and at the portfolio level on behalf of itself and for the account of the Limited Partners.
(3) The sale and purchase of securities is “ordinary course” for a Private Equity Firm. A Private Equity Firm often exercises its voting rights with a view to determining the competitive behavior of its portfolio companies. However, this may not always be the case. Where a Private Equity Firms exercises its voting powers in a competitive manner, such exercise is often with the ultimate intention to sell. Whilst holding periods for private equity investments usually exceed one year, it is not impossible for a Private Equity Firm to want to dispose of its interests within a year. Within the context of section 92(3), such a Private Equity Firm can also legitimately seek for an extension of time.
For Private Equity Firms, the ordinary implication of the 92(3) is that, in deserving cases, Private Equity Firms ought to be able to claim the benefit of the exemption in 92(3). Accordingly, it would be prudent for Private Equity Firms to conduct a competition review of their transactions with a view to determining the extent to which their transactions are notifiable and the exact amount payable as notification fees.
The FCCPC
There are indications that the FCCPC may take the view that the exemption in section 92(3) does not apply to Private Equity Firms. However, there are doubts as to whether such position is supportable in law given the express wording of the Act. Although, the FCCPC may be able to issue interpretive guidance consistent with a different interpretation of 92(3), such guidance has to be consistent the provisions of the Act, which is an act of parliament and therefore controls the scope of any administrative or interpretive guidance.
[1] The term “private equity firm” as used in this article is used for convenience and contemplates both venture capital firms and private equity firms. We recognize the practical distinction between both investment strategies
[2] Upon conviction, parties can be liable to pay a fine of up to 10% of the relevant turnover or such other percentage as prescribed by Nigerian Courts given the circumstances of the case.
[3] “Control” is a legal term. Please see our article titled “Turnover and Control Considerations for Merger Clearance in Nigeria”
[4] The purpose of Nigerian Merger control is to prevent mergers and/or acquisition transactions that may substantially weaken competition.
[5] There could also be other exceptions from merger clearance based on the sector and the size of a proposed merger
[6] There are a variety of situations where bank lenders can assume control of an obligor’s assets or securities. Within the context of a financing, a bank lender can assume control where that bank determines the business policies of an obligor, where it acquires the majority shares of an obligor or where the bank exercises/has veto rights on key strategic matters of an obligor
This legal update is not intended to be taken as legal advice. Please seek professional legal advice specific to your situation. For more information or consultation regarding the content of this article, please reach out to the undersigned or to your usual Balogun Harold.
