By Omoh GabrielBusiness Editor
Bank Directors Association of Nigeria, on Wednesday rose from its one day Executive Forum and Briefing on Merger and Acquisitions in the banking industry, Legal Issues with a four point resolution stating that the Central Bank’s December 31st deadline for all banks to consolidate and raise their capital to N25billion was not feasible as the time frame for the exercise is two short. This is the first time that banks officials are making a categorical statement on the issue.
The body which is housed in the Financial Institution Training Centre has Alhaji Aliyu A. Salman(SAN) as President, Ambassador Moses O. Ihonde, vice President, Kola Awodein, SAN secretary, Mr. Olayinka Omoloye, Financial Secretary, Mrs M. O. Onasanya, Treasurer, Mr. Goodie M. Ibru (OON) Publicity Secretary, Professor Theo A. J. Ogunbiyi Member, Mrs. A.T O. Akingbola member, Dr. Timothy Menakaya member, Mr Isaac Ajilima Representative Of FITC, Mr. S. O. Alashi representative of NDIC and Alhaji Hassan Ahmed representative of CBN.
The members who were present at the forum were taken through step by step the legal procedures for merger and acquisition in Nigeria by Alhaji Aliyu A. Salman(SAN) of SARAA Chambers which formed the basis of the day’s discussion. .
According to him the procedure for merger and acquisitions is regulated by several enactments principal among which are:
Company and Allied Matters Act. 1990, Cap 59.
Security and Exchange Commission Act, 1990 CAP 406.
Securities and Exchange Commission Guidelines on Mergers, Acquisitions and Combinations.
By these provisions, Alhaji Salman said the particular facts of each case of the merging or acquiring companies determines what type of scheme for Merger or acquisitions is to be adopted among the major forms of procedure available.
He told the forum that by paragraphs 6 and. 7. of the Securities and Exchange Commissions Guidelines on Mergers Acquisitions, the commission (SEC) requires a notice of an intention to arrange a merger to be given to it (commission). Before the notice is given, the directors of the acquiring company must have satisfied themselves of the need for the merger. There must be consultations, with the directors of the target company. This of course is where the first problem is as most merger going on in the banks is a marriage of strange bed fellows they observe. The banking consolidation is an imposition. so far the merging banks has not notified the Securities and Exchange Commission.
The pre-merger notice Alhaji Salman said is required to contain the following information and documents:
Letter of intent signed by the merging Companies, a detailed description of the proposed transaction including all the background studies relating to the merger and the justification for it, a detailed information, about the product line of the companies, a list of the major competitors in that product market and the market position or market share of each company including the merging companies, the structure and organizations of the merging companies, revenue information about the operations of the merging companies, the latest financial statement of the companies. an analysis of the effect of the acquisition on the relevant market including the post-acquisition market politics of the acquiring or surviving company.
After the consideration and approval of the notice by the Securities and Exchange Commission, it will grant permission for a formal application to be made. Before a formal application for approval of the scheme is made, the merging companies or acquiring companies must comply with the provision of section 591 companies and Allied Matters Act guides as follows:
“Where a scheme is proposed for a compromise arrangement or reconstruction between two or more companies or the merger of any two or more companies, whereby the whole or any part of the undertaking or the property of any company concerned in the scheme (i.e the transfer company) is to be transferred to another company (i.e the transfers company), any of the companies to be affected by the compromise arrangement or reconstruction may apply in a summary way to the court for an order that separate meetings of the companies be summoned in such manner as the court directs”
According to Salman the application required to be made should be by originating summons by both or all the companies as the case may be. It is after . three- forth majority of shareholders at the meeting agree to the scheme that it is referred to Securities and Exchange Commission for its approval.
The requiring company generally files the application for approval of the scheme, but if a merger or acquisition is to result into a new company any of the constituent companies may file the application.
By paragraph 8 (1) of the securities and Exchange commissionsÃì guidelines on mergers, acquisitions and combinations, the application seeking approval must be accompanied by the following::
An agreement for a proposed merger, acquisition or combination, which must contain among other thing:: Terms and conditions of mergers, etc. (ii)Mode of carrying out the merger, iii) .any amendment or changes in the certificate of incorporation or Articles of Association of the surviving company as a result of the merger, iv)A statement that the certificate of incorporation of one of the constituent companies shall be the certificate of the surviving or resulting company, if applicable v)the mode of converting the shares of each constituent company into shares or other securities of the • surviving or resulting company and if there are no exchanges of shares or securities, the cash, property, rights or securities of surrender of their share certificates, which cash, property, rights, or securities of another company may be in addition to or in lieu of shares or other securities of the surviving or resulting company, (v)Such other details or provisions are deemed necessary and material, (.vi) the signature of the Chairman of the Board of Directors or the Chief Executive and attested to by the Secretary of each of the constituent company, a resolution adopted by the Board of Directors of each of the companies involved in the merger or acquisition approving the agreement of merger or acquisition, a comprehensive joint write-up by the issuing houses in respect of the proposals in the merger packages indicating business lines and stating reasons for the merger, five . years audited accounts of all the enterprises involved (including detailed profits and less account) if the fusion will involve exchange of shares or if it will involve cash, then only the accounts of the enterprises being taking over will be required, draft scheme of arrangement. Evidence of increase in capital of the acquiring company to accommodate any anticipated increase in paid-up capital following the share exchange, g) Valuation fees based on the share capital of the company to be acquired, draft prospectus (if necessary) or draft particulars in the case of listing of the stock market.
The matters to .be considered by the Securities and Exchange commission before the application is approved are those as set out in paragraphs 12 to 17 of the SEC Guidelines, these include:
(a) the geographical and product market, (b) the market shares and (c) the concentration ratio.
If the securities and Exchange commission is satisfied that all the standards required have been met, the application will be approved.
After the approval of the Security and Exchange Commission (SEC) and the shareholders of each of the affected companies section 591(3) of CAMA 1990 requires another application to be made by originating summons joining all, the companies affected as parties to be made to the Court to sanction the scheme. The courts will approve the scheme if it is satisfied that it, has been approved by the Securities and Exchange Commission.
In addition to sanctioning the scheme, the court is required to make provisions for any of the following;
the transfer to the transferee company of the whole or any part of the undertaking and the property or liabilities of any transferor company, the allotting or appropriation by the transferee company of shares, debenture, policies or other live interest in that company which under the compromise or arrangement are to be allotted or appropriated by that company to any person. the combination by our against the transferee company of any legal proceedings pending by or against any transfer or company, the dissolution without winding up of any transferor company the provision to be made for any person, who within such time and in such manner as the court directs.. dissent from the compromise or arrangement-such incidental, consequential and supplemental matters as are necessary to ensure that the reconstruction or merger will be fully and effectively carried out.
The lead paper stimulated discussions in which the directors present saw that the consolidation exercise will jeopardise their hard earned investment in banking and concluded that the timing of thye exercise is wrong and much too expensive for the industry.
Summarising the conclusions of the discussions yesterday Chief A. S Awomolo (SAN) said that the body agreed that the December 31st deadline set by the CBN for all banks to consolidate and meet the minimum capital base was too short a period to realise. He said considering the requirement of the Security and Exchange Commission in which merging banks are required to apply to the courts for court ordered Extra Ordinary General meeting of the institutions involved it is apparent that the time available is short as the courts have to set their own time frame.
The body said that the CBN seem not to have thought through the policy and its implication before announcing it more so as most other regulatory bodies that have one thing or the other to do with the ongoing consolidation exercise appears not to be carried along by the CBN.
The Directors also bemoan the high cost of the consolidation exercise asking that since the exercise was foist on banks the CBN must come out with a clear cut policy on how to reduce the cost. Members argue that research findings has shown that the initial public offer done by banks so far show that on the average each cost a minimum of one billion naira. According to them merging banks have already paid a stamp duties on their paid up capital. They wonder whether the banks will be required to pay stamp duty on N25 billion to the Corporate Affair Commission when registering the new outfit that will emerge from the consolidation exercise or the difference between their current capital and the N25billion. The directors further said that banks are required by law to raise their authorised capital which will involved some further payment. They said that at the moment they are paying fees to financial advisers, legal advisers, accounting firms undertaking due diligence on their behalf. The directors said as things stand banks may end up spending all their resources on cost of consolidation. The banks director rejected the 50 per cent discount being offered by the Securities and Exchange Commission stating that it is too meager for the over all cost associated with the merger exercise.
The bank director raised the vex issue of huge debt owed banks by the various tier of government and parastatals that are non performing saying that the CBN has chosen to be silent on the issue. They urged the CBN to write off all such loans in order to give the banks a clean slate.
The bankers agreed that it is time for the Association to bring the issue before the CBN and asked that an all stakeholders forum be conveyed to address the issue of consolidation.
In his opening remark the chairman of the occasion Chief A. S Awomolo SAN said “Contemporary research confirms that efficiency improvements through mergers are frequently overestimated. Worldwide, two-thirds of mergers end in failure — some because of staff hostility and others because of insufficient preparation and inability to integrate personnel and system.
“Even more failures are due to irreconcilable differences in corporate cultures and management.
“Most retail banks try to obtain economies of scale by expanding — either by extending their networks or widening their range of products and services. “However, there is no automatic link between size and profitability.
“In fact, this attempt to expand can often produce the opposite effect. “The complexity of managing large operations which can nullify the benefits and losses related to top-heavy organization are often underestimated.
“The lack of transparency of financial activities and the fragmented nature of debts and capital, especially for megabanks, impede creditors, shareholders and regulators from imposing discipline. “Internet banking is also a challenge with which large banks have to contend.
“There is no question that, public policy requires banks, as well as other financial institutions, to be closely supervised because their activities have such impact on the financial system and the economy as a whole. Strong, efficient and profitable financial institutions are vital to economic success, especially as an engine of economic vitality through their role in creating and maintaining credit systems for other sectors, not only nationally but globally. In this framework, regulation is essential to avoid system failures that have devastating consequences, as was the case in South-East Asia in 1997. “National regulatory frameworks should therefore be revised to ensure financial services adhere to prudential principles and competitive imperatives.
“This forum has been designed to examine particularly in the Nigerian context, the legal issues associated with mergers and acquisitions in the banking and finance sector. “It is my hope that at the end of the programme our members will go back to their organizations to address this issue more critically and evolve sound policies while maximizing returns on investor̓s funds”.