[COMPANY LAW] CORPORATE RESTRUCTING: ARRANGEMENT OR COMPROMISE

CORPORATE RESTRUCTING: ARRANGEMENT OR COMPROMISE

A company may decide, for a number of reasons, to restructure its corporate outlook after incorporation.  This may be as a result of the Company’s buoyancy or because of a downward turn of its economic fortune.  The restructuring may sometimes only require the company to carry out an internal reorganization such as where its liabilities are in excess of its assets.  In this case, the Company may also consider a scheme of arrangement with another Company.  However in either case, there are a number of options opened to a Company planning to restructure.  We shall now consider the various possibilities under the law.

1.         INTERNAL REORGANIZATION UNDER CAMA:

This is an expedient option for a company experiencing economic hardship and whose liabilities outweigh its assets.  A compromise or an arrangement under Section 539 and 540 of CAMA is a veritable option in this regard.

A.        ARRANGEMENT OR COMPROMISE (S. 537)

Compromise and arrangement are used interchangeably.  A compromise is essentially an arrangement by a Company with the creditors and/or the shareholders or a class of them to accept less than what they are ordinarily entitled to as full satisfaction of their obligation.  It may require the company to negotiate with the creditors and request that they relinquish their security or to permit the creation of a prior or parri pasu charge in favour of other creditors.  It is also possible under a compromise, for a company to persuade its creditors to accept shares or part shares and part cash, in satisfaction of their debt.

Alternatively or simultaneously sometimes, shareholders or a class of them may be convinced to vary their rights.  An agreement may be reached with ordinary shareholders to surrender part of their shares to preference Shareholders in lieu of dividend arrears.  Conversely, holders of preference shares may be persuaded to cancel accrued dividends or reduce the fixed rate of dividend or to accept the conversion of their preference shares to ordinary shares.

In extreme cases, a company may resolve to sell all or part of its shares or undertakings to another company or agree with another company to give majority of its voting power to it in consideration for shares of the other company being issued to its shareholders after which it may be wound up if it has no assets left.

PROCEDURE FOR ARRANGEMENT OR COMPROMISE (SS. 539-540)

1.         Application to the Court [j1] to convene a meeting of the creditors, shareholders or a class of them to be affected by the scheme of arrangement or compromise (S. 539 (1)

2.         Preparation of a scheme of arrangement by the board of directors.

3.         Convene a meeting in a manner directed by the Court (S.540)

4.         Annex to the notice of meeting sent to members and creditors a statement explaining the effect of  the compromise or arrangement and particular interest of directors and the schemes effect on them (S. 540)

5.         At the meeting, pass a special resolution of the affected class of shareholders or creditors to sanction the scheme (S. 539 (2).  

6.         Report the convening of the meeting and the sanctioning of the scheme to the Court (S.539 (2).

7.         The court shall refer the scheme to SEC to investigate the fairness or otherwise of the scheme within a stipulated time.

8.         SEC shall appoint one or more inspectors to conduct the investigation and report to the Court

9.         The scheme is sanctioned by the Court provided SEC’s report is favourable.

B: ARRANGEMENT ON SALE UNDER S. 538 CAMA

This section empowers the members of a company to resolve by special resolution, in order to achieve an arrangement, that the company be wound up and that the liquidator be appointed to sell the whole or part of the company’s undertaking or assets to another company.  The consideration for such sale may be cash, shares or debentures which the liquidator will distribute proportionately to the members in accordance with their rights in liquidation.

PROCEDURE FOR ARRANGEMENT ON SALE

1. Members in general meeting pass a special resolution for members’ voluntary winding up of the company and appoint a liquidator pursuant to Sections 457 (b) and 538.

2. Liquidator empowered to “sell the whole or part of the company’s undertaking or assets to another corporate body in consideration or part consideration of fully paid shares, debentures, policies or other like interests in the transferee company and to distribute the same in species among the members of the company in accordance with their rights in liquidation”.

3. The directors will make a declaration of solvency as the basis for members voluntary winding up (S.462)

4. The Liquidator convenes a meeting of the shareholders or of the creditors or of the classes of either concerned for the purpose of considering and approving the proposed scheme of arrangement and compromise.

5. A dissenting member or creditor may have his share or interest purchased by the liquidator at a mutually agreed value in a private company in which there is no alien participation or as may be valued by SEC in a private company in which aliens are shareholders/creditors or public companies (S. 538(2) (b)  and (4).

6. The Liquidator convenes a final dissolution meeting where the accounts of the entire winding up exercise and his report on it would be considered by the members (S.478).

7. An application need not be made to the Court under this procedure unless:

1. a member obtains an order under Sections 310-312 within one year of the special resolution, granting relief on the ground that the affairs of the company have been or are being conducted in an illegal, unfairly prejudicial or oppressive manner; or

2. an order is obtained for a creditors voluntary winding up which is not obtainable is solvent as a matter of fact.

3.  

CORPORATE RESTRUCTURING: MERGERS AND

 TAKE-OVERS

One of the options a company has in corporate restructuring is going beyond itself through reconstruction.  Unlike an arrangement or a compromise which, as earlier discussed, are internally affected within a company in accordance with the provisions of CAMA a reconstruction in the form of a merger or take-over will involve two or more companies acting in concert in accordance with the provisions of the ISA.   Reconstruction is a general term indicating a reorganization in the equity holding of a company.  It usually takes the form of a merger or take-over. 

MERGER

‘Merger’ is an amalgamation of the undertaking or part of the undertaking or interest of two or more companies or the undertaking or part of the undertaking of one or more companies and one or more bodies corporate.

‘Merger’ means the uniting of two or more companies but, as this is possibly done through an acquisition by one company of a controlling holding of shares in another, it is not surprising that the terms ‘takeover’ and ‘merger’ have almost become synonymous.

‘Merger’ is used to describe a recommended rather than a hostile takeover bid which is opposed by the board of the offeree company.

The first discernible period, in company law, of growth by merger was in the late nineteenth century, which was a period of rapid technological change, declining profits and growing international competition.  After the first World War there was an increase in mergers across Europe and other industrialized nations due to depression and the need to reduce competition and rationalize production.[1]

In Nigeria, the post-Civil War oil boom of the 1970s led to increased commercial activities and consequent formation of more companies.  Until the most recent economic reforms of the Olusegun Obasanjo government in Nigeria, mergers were rare occurrences in the country.  However, direct government intervention requiring recapitalization in sectors like banking, insurance and aviation has increased incidents of merger in the country.

Some recent examples of Mergers in Nigeria:

TYPES OF MERGER

a.         Vertical Merger: This is a merger of companies

b.         Horizontal Merger: This is a merger of companies dealing in essentially similar products.

c.         Conglomerate Merger: This occurs when companies in unrelated fields merge to expand their hold on the market.

d.         Pure Conglomerate merger:

THE BENEFITS OF MERGER

Merger of companies enormous benefits to investors, consumers, employees

and the society at large through the more efficient reallocation of resources. 

These benefits become more apparent with economics of scale in production

by greater specialization in plant and marketing economies through a

reduction in advertising costs and distribution outlets.[2]  Generally, corporate

growth by merger is faster.  It is easier to buy an existing business with

established name, structure and good will than to expand an existing one or

diversify.  The strict legal regulation of merger in an evolving economy like

Nigeria have several advantages.  First, it boosts confidence in the market.

Secondly, it provides a level playing ground for companies that desires to

merge regardless of its financial state.  Thirdly, it stimulates healthy

 competition for market control thereby improving the quality of production

 and service delivery.  Fourthly, by the pricing mechanism to achieve a

rational reallocation of resources.

Every company has inherent power to merge or take over another company

subject to the ISA.  An express power to this effect need not be inserted in

the memorandum and article of association. 

PROCEDURE FOR MERGER UNDER ISA

The steps under the ISA and the SEC merger rules are broadly divided into

three (3) thus:

1. The merger proposal should be considered and approved in principle by the separate Boards of Directors of the merging companies.

2. Due diligence by the legal department of the merging companies.  Although this is not a requirement of statute, it is mutually expedient to know the assets and liabilities of  the merging companies.

3. Application is made to the Court by any of the merging companies in a summary way to sanction the scheme.

4. Holding of Court ordered separate meeting of the merging companies.

5. If a majority representing not less than ¾ in value of the shares of members being present and voting either in person or by proxy at each of the separate meetings agree to the scheme, it shall be referred to SEC for approval.

6. SEC shall investigate the scheme to find out if it is likely to cause substantial restraint of competition or lead to a monopoly, or

7. If the merger involves transfer of shares or any class of shares in a transferor company and not less than ⁹/₁₀ in value of the shares involved, the transferee company may at any time within two months after the expiration of the four months, compulsorily acquire the shares of any dissenting shareholder.

8. If the scheme is approved by SEC, any of the merging companies will apply to Court that the scheme be sanctioned.

9. The order of Court to sanction the scheme shall provide for all or any of the following matters:

1. if the consideration for the merger is the issue of the transferee company’s shares to the shareholders of the target company, there will be a need to pass the necessary resolution for the increase of the transferee company’s share capital and an application made to the stock exchange for admission of the new shares to the list of quoted securities (where listing is required); or

2. if the shares are already listed, the NSE may require that its members be informed of a proposed scheme so as to curb speculative trading and insider abuses.  The scheme proposal or offer documents must then be submitted to the quotations department of NSE which will be supported with a detailed analysis of the effect, the scheme or offer is likely to have on the company’s securities and the shareholders’ rights under it.

10.       Incidental considerations such as contracts or other existing obligations to which the transferee company may be subject must be adverted to.

---

[1] See generally: Farah’s Company Law, 4^th edition, pg. 516.

[2] See K D George and C Joll, Industrial organization (3^rd edition, 1981) p. 71.

---

 [j1]Use of Originating motions.