The Securities and Exchange Commission (“SEC”), established under the Investments and Securities Act, 2007 (“ISA”) is the body charged with the overall regulation of capital market activities in Nigeria. The SEC has also unwittingly become a competition regulator. Accordingly, the SEC has the responsibility of reviewing, approving and regulating mergers, acquisitions, takeovers and all forms of business combinations. (ISA, s. 13.) Thus, every merger, acquisition or business combination between or among companies is subject to the prior review and approval of the SEC.
There are two topical issues among practitioners relating to the requirement for SEC’s approval for asset acquisitions: (A) whether the SEC’s approval is required for an asset acquisition; and (B) if the SEC’s approval is required, whether there is or there should be a monetary threshold or asset value that would trigger the SEC approval requirement? The ISA is not altogether clear on these and the lack of clarity is due largely to the language used in the SEC Rules and Regulations, 2013 (the “SEC Rules”).
(A) SEC APPROVAL FOR ASSET ACQUISITIONS?
Rule 421(1) of the SEC Rules defines “acquisition” as “the take-over by one company of sufficient shares in another company to give the acquiring company control over that other company” (emphasis supplied). Further, Rule 433 of the SEC Rules also defines “acquisition” as “where a person or group of persons buys most (if not all) of a company’s ownership stake in order to assume control of a target company” (emphasis supplied). Rule 421(1) is limited to shares acquisitions. Rule 433 suggests that for there to be an “acquisition” the acquirer must assume control of the acquiree after the acquisition. The assumption of control of the acquiree does not necessarily occur in asset acquisition transactions. It is fair to say that both Rule 421(1) and Rule 433 do not contemplate SEC approval for asset acquisitions.
It is however arguable that the SEC’s approval is required for asset acquisitions for at least three reasons. First, there are copious references to “asset(s)” under Part I of the SEC Rules that deals with “take-overs”, “mergers” and “acquisition”. Rule 422 of the SEC Rules sets out the scope of SEC’s regulation under Part I of the SEC Rules to include “every merger, acquisition or combination between or among companies, involving acquisition of shares or assets of another company” (emphasis supplied). Further, Rule 423(2) of the SEC Rules states that the SEC shall approve a merger, acquisition or external restructuring if SEC finds that “such acquisition, whether directly or indirectly, of the whole or any part of the equity or other share capital or of the assets of another company, is not likely to cause substantial restraint of competition to create monopoly in any line of business” (emphasis supplied).
One of the documents that is required to accompany a letter of intent to be submitted by an applicant seeking approval from the SEC under Rule 434 of the SEC Rules is a report of valuation of shares/assets to be acquired. (SEC Rules rule 434(xvii).) Again, Rule 436 of the SEC Rules sets out the contents of Information Memorandum for an acquisition. Part of the background information to be contained in an Information Memorandum is the “list of assets to be acquired and their value (where applicable)”. (SEC Rules rule 436(1)(d). Moreover, Rule 437 of the SEC Rules requires that an executed share/asset purchase agreement should be forwarded to the SEC post-acquisition.
The definitions of “acquisition” under the SEC Rules suggest that the scope of acquisition under the SEC Rules is limited to shares and does not cover asset acquisitions, notwithstanding, numerous references to “asset” under Part I (on take-overs, mergers and acquisition) of the SEC Rules which clearly show that the term “acquisition” as used in the SEC Rules also involves asset acquisition and therefore subject to the SEC’s prior review and approval. It is settled law that in the interpretation of statutes, every clause of a statute must be construed with reference to other clauses/provisions of that statute in order to have a consistent enactment. Nigerian Ports Plc v Okoh (2006) All FWLR 1145 at 1157H and Canada Sugar Refining Co. Ltd. v R (1898) AC 735.
Second, assuming that the term “acquisition” as defined in Rule 421(1) is limited to share acquisitions, asset acquisitions will still be subject to the SEC’s prior review and approval. This is because asset(s) acquisition is unarguably a form of business combination which falls within the SEC’s scope of regulation. By section 13(p) of ISA, one of the functions/powers of the SEC is to “review, approve, regulate mergers, acquisitions, take-overs and all forms of business combination and affected transactions of all companies” (emphasis supplied). Also, Rule 422(2) of the SEC Rules states specifically that the provisions of Part I (on take-overs, mergers and acquisition) of the SEC Rules shall apply to “every merger, acquisition or combination between or among companies, involving acquisition of shares or assets of another company” (emphasis supplied). Thus, all take-overs, mergers, acquisitions, business combinations undertaken by companies, partnerships or agencies of the federal government are subject to the SEC’s approval.
Third, SEC’s competition regulator status makes it incumbent for the SEC to review and approve every asset acquisition between companies in order to ensure that such asset acquisition will not cause substantial restraint of competition or tend to create monopoly in that line of business enterprise. (SEC Rules, rule 423(2)(a).) Even where the SEC’s prior approval is not obtained for an asset acquisition, the SEC has the power to break up such a company where it considers that such an acquisition constitutes a restraint to competition or creates a monopoly in a particular industry. (SEC Rules, rule 432.) A ground for the SEC to order a break-up of a company is where the company enters into an agreement or business undertaking which has the effect of preventing, restricting or distorting competition in any part of the Nigerian market. (SEC Rules, rule 432(3)(a).) It is, therefore, prudent (assuming it is not mandatorily required) to seek the SEC’s approval before entering into any agreement for asset acquisition which may have the effect of preventing, restricting or distorting competition in any part of the Nigerian market. If the SEC reviews the transaction documentation and comes to the determination that its approval is not required, it [the SEC] would issue a “No Objection” to the transaction.
(B) WHEN SHOULD THE SEC APPROVAL REQUIREMENT APPLY?
The writer is of the strong view that it is not every asset acquisition transaction that requires the SEC’s approval. Otherwise, the SEC will be inundated with applications/requests for approval and the SEC will be unable to perform its other functions as the sale of a company’s asset, irrespective of the value, would require the SEC’s prior review and approval. There are at least three tests that could be adopted for determining when the SEC’s prior review and approval will be required for an asset(s) acquisition transaction. These tests are: (1) the asset value test; (2) the operating asset test; and (3) the competition test.
Asset Value Test. This test involves setting a threshold in terms of the value of the assets to be sold/transferred. The SEC’s prior review and approval will be required where the value of such asset is above the set threshold.
Operating Asset(s) Test. The SEC’s prior review and approval should be required in an asset(s) acquisition transaction where all or substantial part of the operating asset(s) (that is, asset(s) constituting the business of a company) of a company are to be sold or transferred to another entity. For example, the sale/transfer of all or substantial number of telecommunications masts/towers by a telecommunications company will require the SEC’s prior review and approval under this test as telecommunications masts/towers are the operating assets of telecommunication companies.
Competition Test. As stated above, the SEC in reviewing approving acquisitions or any business combinations has the obligation to ensure that such transaction would not cause substantial restraint of competition or create a monopoly in a particular line of business enterprise. Thus, where the asset(s) to be sold/transferred does not constitute the substantial part of the operating asset(s) of a company but one with competitive significance, the SEC’s prior review and approval of such transaction should be required. For instance, the SEC Rules could provide that an asset or set of assets would be of competitive significance where the acquisition of such an asset or set of assets will likely result in the acquirer having ten per cent of the market share in that line of business in addition to the acquirer’s current market share.
The current state of the law is not altogether clear as to whether asset(s) acquisition transactions are subject to the SEC’s prior review and approval. It is, therefore, imperative to amend the SEC Rules to clearly cover asset(s) acquisition and provide clear parameters or thresholds for determining what asset acquisition will be subject to SEC’s review and approval.
 The SEC is empowered under s. 313 of ISA to make rules and regulations for the purpose of giving effect to the provisions of ISA.