Regulatory amendments to takeover: Process and impact of the new rules
These revisions have been provided to improve on the perceived lacunas within the existing laws.
On April 2nd, 2015, the Securities and Exchange Commission (“SEC” or the “Commission”) as the apex regulator of the Nigerian capital market, released amendments to the existing Securities and Exchange Commission Rules and Regulations, 2013 (the “Rules”).
These revisions are well timed as they have brought significant advantages, some of which should improve the appetite for takeovers in Nigeria. A focal point of these revisions is that they were made to supplement the existing Rules with the purpose of ensuring a more efficient approval process.
This article primarily considers the changes made to the Rules with respect to takeovers by emphasising the effect, areas of interest and concern to Nigerian capital market participants and businesses.
B. The concept of takeover
In Nigeria, the principal law governing capital market transactions, and which regulates takeovers, the Investments and Securities Act (“ISA”) 2007, defines a takeover as the acquisition by one company (the “Bidder”) of sufficient shares in another company (the “Target”) to give the Bidder control over the Target (Section 117 ISA 2007).
Under the ISA 2007, it is important to note that Takeovers only apply to public companies and a Bidder cannot be made to purchase shares in a company with fewer than 20 (twenty) members (Section 131 and 132 ISA 2007). A takeover of a Target by a Bidder can occur by a mandatory takeover process, this occurs where a person:
a. acquires up to 30 per cent or more of the voting rights alone or in concert with others to make a mandatory offer to buy the shares of other shareholders in the class of shares that he has bought the 30 per cent or more shares; or
b. acting alone or in concert with other persons, already has up to 30 per cent but not more than 50 per cent of the voting rights, but subsequently acquires additional shares which would increase his percentage of voting rights, a mandatory offer must be made to buy the shares of other shareholders in the same class of equity share capital that he owns shares.
C. The revised takeover provisions of the SEC rules
The revised provisions of the Rules as amended ensure: (i) tighter control on fluctuations in share prices due to market speculations; (ii) an obligation on directors to act at all times, during takeovers, for the benefit of the company's shareholders; and (iii) better oversight by the Commission relating to aggrieved shareholder situations.
I. Share price movement (Rule 445 (5))
As a general rule, a Bidder is required to publish its takeover bid in at least 2 (two) national daily newspapers (Rule 445 (4) SEC Rules 2013). The essence of this is for the Bidder to inform the general public of its intention to offer a takeover bid for the Target.
It has become evident that this Rule does not sufficiently prevent unconfirmed rumours. An example of this occurred in December 2014, where ahead of any confirmation of a takeover bid, the shares in Afren Plc. surged on the London Stock Exchange following speculation of a received takeover bid from a keenly interested SEPLAT Petroleum Development Company.
In an effort to bridge this gap, SEC has made the reporting obligation a two-layered approach. In addition to the requirement for a Bidder to publish the takeover bid in at least two national daily newspapers, the amended Rule mandates that a Bidder shall also make an announcement on the floor of the relevant securities exchange.
This revision is a timely and prudent development. The impact of which is to curb any artificial increase or decrease in the movement of share prices, which is a direct result of unconfirmed speculations and rumours.
The new provision aims to reduce the risk of a fake market being created with respect to the Target Company's securities, as it operates to seal any leakages and create an extra layer of protection for market participants.
II. Directors' circular (Rule 446 (3))
Prior to the current amendments, Directors were required upon receipt of a Takeover bid to issue a circular to each shareholder in the Target Company and to the SEC. The changes made to the Rules, with respect to the issuance of a directors' circular, is the additional requirement for directors' to disclose specific information to the shareholders upon receipt of a takeover bid. The directors' circular must state:
I. the particulars of the Bidder;
II. the number of shares sought to be acquired;
III. the effect of the takeover bid on the company's operations and its employees; and
IV. The directors' opinions and recommendations on the takeover bid.
The impact of this amendment is that the directors of the Target are required to provide an opinion and recommendations to shareholders particularly on the impact of the takeover to the company's operations. It is notable that this obligation is in conjunction with their fiduciary duties to the shareholders,(Section 279 (1) – (2) Companies and Allied Matters Act, 1990 Cap. 20 LFN, 2004), in which they must observe the utmost good faith towards the company in any transaction entered with it or on its behalf.
III. Dissenting and aggrieved shareholders (Rule 448 (8))
Prior to the amendment of the Rules, the ISA 2007 provided guidelines with respect to dealing with dissenting and aggrieved shareholders.
Under the ISA 2007, a Bidder is required to send the prescribed notice to the Target, the Commission and all dissenting and aggrieved shareholders (Section 146 ISA 2007). This prescribed notice is required to inform all parties that: (i) the takeover bid has been accepted; (ii) the Bidder is bound to take up and pay for (or has been taken up and paid for) the shares of shareholders who have accepted the takeover bid; and (iii) dissenting shareholders can oppose the takeover bid and the process for such dissent.
Upon receipt of the prescribed notice, dissenting and aggrieved shareholders may elect to:
a. accept the takeover bid by transferring their shares to the Bidder and receive payment for their shares; or
b. apply to court to fix the fair value of their shares.
While the ISA 2007 created an oversight for the Commission with respect to these provisions, the Rules remained silent. This means that although the Commission was able to intervene where dissenting and aggrieved shareholders opposed a takeover bid (as provided for under the ISA 2007), the Rules were not harmonized.
It is this lacuna that the revised Rules seek to cure by requesting that dissenting and aggrieved shareholders lodge a complaint with the Commission by: (i) informing the Commission of the treatment of their shares; (ii) obtaining and submitting a court order to the Commission for the determination of the fair value of their shares; and (iii) submitting documentary evidence of payment to the Commission.
These revisions are timely and reaffirm the prevailing statutory beneficial governance with respect to the treatment of the shares of dissenting shareholders and complaints of aggrieved shareholders. Whilst this amendment is a step in the right direction, from a practical perspective and in consideration of the time constrains applicants/litigants encounter in obtaining court judgements, it is worth considering that the Commission be given a more dominant role in determining the fair value for shares with the court being a last resort.
IV. Contents of bid (Rule 446 (1) (g))
This new Rule was created to expand the contents of a takeover bid, `which will now include an expert report, opinion or statement, so far the expert has consented (in writing) to the inclusion. Additionally, the Bidder must forward a copy of the expert report, opinion or statement and the expert's written consent to the Commission.
This revision seeks to clearly align the Rules with the provisions under the ISA 2007 (Section 141 ISA 2007). This is a good development to the extent that, prior to the revision, there seemed to be potential for confusion as to who should bear the onus of forwarding a copy of the expert's opinion to the Commission, as the Rules were silent in this regard.
It is important to note that the general process for takeovers is not changed by the amended SEC Rules; these revisions have been provided to improve on the perceived lacunas within the existing laws.
The amended provisions with respect to dissenting and aggrieved shareholders (Rule 448 (8) SEC Rules 2013) and the regulatory framework for the mandatory takeover process (Section 131 and 132 ISA 2007) demonstrate that the Commission has paid attention to issues surrounding the protection of minority shareholders.
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