CORPORATE RESTRUCTURING: AN INSIGHT TO THE ACQUIRER’S OBLIGATIONS

Experience has shown that growing up and staying afloat are routine stages of human life. Corporate entities are no exception. A company may decide, for a number of reasons to restructure. This may be as a result of the company’s buoyancy or a downturn in its economic fortunes. A going concern or buoyant company desirous of expansion could explore the option of corporate restructuring to achieve greater corporate growth.

Some of the restructuring options available are Arrangement and Compromise, Arrangement on Sale, Merger and Acquisition, Take-over, Management Buy-out, Purchase on Assumption, Cherry-picking amongst others.

This paper focuses on merger and acquisition with a view to revealing the obligation of the acquiring company with respect to the target company’s subsisting contracts. ??

Mergers and Acquisitions Defined

Although many people use the term merger and acquisition interchangeably, they have different meaning. The Federal Competition and Consumer Protection (FCCPC) Act[1] , defines merger to mean when one or more undertakings directly or indirectly acquires or establish direct or indirect control over the whole or part of the business of another undertakings[2] . A merger is the business combination of two separate entities combining force in equal terms to evolve into a joint corporate entity, while acquisition takes place where a company (most practical cases a larger company) acquires all or substantial interest in another (a smaller) company[3] .

In acquisition, a new company does not emerge when interest is acquired rather in most cases the acquired company ceases to exist and its assets become a part of the acquiring company, or the acquired company becomes a subsidiary of the acquiring company[4] .

Although, acquiring another company is a difficult process with many laws and principles to be complied with, corporate expansion and growth is better achieved acquiring an existing business with established name, structure, and goodwill than to expand an existing entity or diversify.

Merger and Acquisition Distinguished

It is not surprising that the terms merger and acquisition have almost become synonymous. The differences between mergers and acquisitions are significant when it comes to understanding the companies’ respective rights and liabilities after the merger or acquisition occurs. In a merger, the surviving corporation will assume all of the merged company’s liabilities and obligations, including tort liability, as well as any criminal penalties imposed for conduct that occurred before the effective date of the merger. Although a merged corporation ceases to exist, legal proceedings that were pending against it at the time of the merger may proceed without formal substitution of the surviving corporation as a named party in the suit. In addition, if a merging corporation has filed suit against another party before the date of the merger, the suit may be continued after the merger in the name of the merged corporation or the survivor[5] .

Laissez-Faire

Acquisition is effected by contracts in which the terms of the acquisition will be set out. Going by the common law principles of Laissez-faire, the acquiring company and target company can agree to whatever terms they want if such terms does not violate antitrust law, competition law, or some other overarching laws. Apart from the purchase price (value), major considerations on the offer by an acquirer includes effect of the acquisition on the management and employee of the acquired company, acquired company’s subsisting contracts with third parties, treatment of dissenting shareholders (if any), source of funding the acquisition amongst others.

Possible Reasons for Mergers and Acquisition

The goal of acquisition of an existing corporate entity is to create a new portfolio made of the best or proven parts of the target company. It also includes access to new technology and markets, being able to make new products and having access to new resources or fresh management talent. Some of the most valuable acquisitions fill a gap in the acquiring company that is critical for them to be able to execute on their overall strategy or keep up with competition[6] .

Obligation of the Acquiring Company with respect to the Target Company’s Subsisting Contracts

Contractors, Customers, and suppliers for several reasons are not always comfortable with the business turbulence associated with mergers and acquisitions. The unending question at that stage is what will happen to my contracts and investments?

These contractual undertakings include contracts with vendors, customers, distributors, business partners, software and technology licensors, employees, and agents, among others.

However, where the contract is silent?and the acquisition is a stock for stock or stock for cash acquisition, then the contracts are transferred to the acquiring entity. If the acquiring company buys the stock of the target company, the acquiring company owns the acquired entity, and that includes both the assets and liabilities. In other words, the acquiring company owns the target company. The acquisition would include all the existing obligations.

Sales and support agreements, employment agreements, prior actions both known and unknown, stock plans and their governance, all these undertakings become part of the package. It is important to note that mergers do require stockholder approval, and stockholders have the right to oppose the merger and to have the value of their stock appraised by a neutral and independent party. Often, the court is responsible for this appraisal.

If the acquisition is an asset sale or the target company remains a wholly owned subsidiary, then the contract likely stays with the original corporate entity (target company). The purchasing company is not generally responsible for the target company’s debts and liabilities. The acquirer could not exercise its rights directly, but could indirectly, by compelling the acquired entity to enforce its contractual rights[7] .

There are, however, several important exceptions:

When the purchasing company agrees to assume the target company’s debts and liabilities, perhaps in exchange for a lower sale price.

When the sale is a fraudulent one; this arises when the target company has insufficient funds or other assets to pay off its debt and its creditors cannot be paid off.

When the acquiring company is a continuation of the target company; this occurs when the directors, officers, and shareholders for the acquiring company and the target company are the same before and after the acquisition.

When a business is acquired through stock purchase, such acquisition amounts to a de facto merger as the acquisition is treated as a continuation of the target company. The acquiring company generally steps in for the target company with business continuing as usual. The purchaser will take on all of the target company’s debts and liabilities, whether they are known at the time of the sale or not. That is, even if a purchaser is not aware of a company’s debts and the time of the sale, they will still be held responsible for them after the acquisition[8] .

In a stock purchase transaction, formal approval by the target company’s shareholders is not necessary, because they are signaling their approval on an individual basis by consenting to sell their shares to the purchaser.

On the effective date of the acquisition, the surviving company takes over in law all the assets and liabilities of the target entity including those that are unknown, undisclosed, or unforeseen[9] .

Dealing with Subsisting Obligations. ?

The acquiring company do have the option to, over time, restructure the existing agreements, but until these agreements are reviewed, it will operate on what was there when the acquisition was perfected. In some cases, that is the only way to get the deal done. As to how that part works, the cash goes to the shareholders according to the liquidation preference schedule.

Typically, the last money in gets their money back (usually with a premium) first, then the next in line, then the next, then after all that is paid out, everyone’s preferred shares convert to common, all vested options convert to common, and the remainder is split on an equal pro-rata basis to the shareholders.

It means that individual contributors who have vested stock options make profit. Some employees may have what is known as “cliff vesting on change of control” clauses in their option plans. In that case, all of their unvested stock becomes instantly vested. For other employees, what they have got already vested is all they get.

Sometimes, in a distressed acquisition, the price paid is less than the money that went into the company and much less than the liquidation preferences that each series of Preferred Stock may have. In that case, the money flow stops before there’s payout to the common stockholders, and no one else sees a dime - not the seed investors, not the founders, not the employees.

In cases like that, there are typically some sort of employee retention package put in place to re-align the interests of the people who make the company valuable with the new owners. That usually means re-starting the vesting clock.

The Need for Professional Consultants

Navigating these processes can be difficult, and a corporate attorney can help provide you with guidance whether you are merging with another company or acquiring one through the purchase of stock or assets. In all successful mergers and acquisitions, there is a need for professional hands to be consulted.

The attorney’s role in an acquisition is threefold: First, the attorney must participate in the formulation of the business bargain so that it will comply with federal and state law. Second, the attorney must coordinate all investigations and analysis so that their results will be reflected in the purchase contract. Third, the attorney must document the business bargain and implement its terms[10] .

Relevant Regulatory Authorities

Merger and Acquisition are most common in the pharmaceutical sector, technology sector, financial, healthcare, consumer goods and retail sectors. Each sector has its own specific legislation and regulatory bodies that govern them in terms of merger and acquisition.

However, regulatory agencies that plays key roles in mergers and acquisitions includes but not limited to Central Bank of Nigeria (CBN), Federal High Court of Nigeria, Federal Inland Revenue Service (FIRS), Corporate affairs commission (CAC), Securities and Exchange Commission (SEC), The Federal Competition and Consumer Protection Commission (FCCPC)[11] .

Conclusion

Merger and acquisition are reliable strategy for business growth and expansion of a company’s production capacity in a surviving or evolving entity. It has been a major strategy employed in the modern business environment for competitive merits. It is important to point out that the law will not sanction any acquisition or merger where the acquisition or merger would cause substantial restraint of competition or monopolize any line of business. The purpose of a merger and acquisition should be for investment and not to monopolize a business environment.

The obligation on the acquiring company to assume the liabilities and subsisting contracts of the target entity is dependent on the nature of the acquisition. Where the contract is silent?and the acquisition is a stock for stock or stock for cash acquisition, then the subsisting contract is transferred to the acquiring entity. If the acquiring company buys the stock of the target company, the acquiring company owns the acquired entity, and that includes both the assets and liabilities. Sales and support agreements, employment agreements, prior actions both known and unknown, stock plans and their governance, all these undertakings become part of the package.

However, If the acquisition is an asset sale or the target company remains a wholly owned subsidiary, then the contract likely stays with the original corporate entity (target company). The acquirer could not exercise its rights directly, but could indirectly, by compelling the acquired entity to enforce its contractual rights.

[1] This Act has repealed sections 100 – 102 of the Investment and Securities Act, Cap 124, LFN 2004 and Rules 227-234 of the SEC Rules and Regulations.

[2] Section 92 of FCCPCA

[3] Nelson C.S Ogbuanya, “Essentials of Corporate Law Practice in Nigeria”, (Novena Publishers Limited, 2nd Edn, 2014) 615

[4] CAMA 2020 introduces in Section 22, a statutory “right of first offer”. In essence, subject to the provisions of the articles of association of a company, it is now prohibited for a member of a private company to transfer shares in said company to a non-member, without first offering the said shares to existing members. Also, a company cannot, without the approval of all its shareholders, sell assets having a value of more than 50% of the total assets of the company. Also, a shareholder or a group of shareholders, acting in concert, cannot agree to sell more than 50% of the shares of the company to a non-shareholder without such non-shareholder agreeing to buy the shares of the other existing shareholders on the same terms.

[5] Section 849 of the Companies and Allied Matters Act 2020

[6] Dimgba, N., “The Regulation of Competition through Merger Control: Case under the Investments and Securities Act 2007” being paper presented at the Nigerian Bar Association (NBA), Section on Business Law (SBL) conference, April 16, 2009, at Transcorp Hilton Hotel, Abuja, Nigeria; available at www.globalcompetitionforum.org (Africa, Nigeria); also published in the Guardian Newspapers of 21, 28 April, 2009; In coming to a conclusion whether a merger is likely to, or substantially prevents or lessens competition, SEC is to assess the following factors, to wit: (x) actual and potential level of import competition in the market; (y) ease of entry into the market, including tariff and regulatory barriers; (z) level and trends of concentration, and history of collusion, in the market; (xx) degree of countervailing power in the market; (yy) dynamic characteristics of the market, including growth, innovation, and product differentiation; (zz) nature and extent of vertical integration in the market.

Although, the coming into effect of the FCCPC Act has whittled down the powers of SEC in this regard, it is still a critical regulatory agency in mergers and acquisitions.

[7] Alix Partners, “M&A Litigation: The Upswing in Appraisal Rights Actions” Available on https://www.alixpartners.com/en/Publications/AllArticles/tabid/635/articleType/ArticleView/articleId/1184/MALitigation-The-Upswing-in-Appraisal-Rights-Actions.aspx#sthash.BsjIZhR2.dpuf Last accessed on August 10, 2022

[8] Sections 117 and 565 of the Companies and Allied Matters Act, 2020.

[9] Ibid

[10] Samuel A. Osamolu, “Corporate Law Practice in Nigeria”, (Lawlords Publications, 2nd Edn, 2019) 401.

[11] Section 104 of the FCCPA provides that in all matters affecting competition and consumer protection, the Act shall override the provisions of any other law (including the 2020 CAMA).