Raising a private equity fund in frontier markets is a tough business. There are a number of considerations, particularly for first-time fund managers, which range from fund formation to growing an investible pipeline, investing and monitoring and exit - all of which can be overwhelming.
With sustained efforts from industry bodies like AVCA, in the area of regulatory engagement, capacity building and perception management, coupled with the recent improvements in local macro-economic conditions, we expect that the fundraising environment will ease up in the short term. However, private equity fund managers will also face new regulatory challenges in 2018, and going forward.
This update highlights some of the legal, regulatory and deal-structuring considerations that should be on the top of every private equity fund manager's list for 2018.
Merger Regulation - the Rise of the Consumer We expect to see a markedly different approach to merger regulation in Nigeria in 2018, and going forward. The expected change in approach will be driven by the new Federal Competition and Consumer Protection Bill (the Bill), which was recently passed by Nigeria's Senate, with the overall objective of protecting Nigerian consumers. The Bill is Nigeria's first, sector-wide competition law and provides criminal sanctions against persons involved in agreements with competitors that fix prices and restrict supply or allocate customers or markets.
What does this mean for private equity? First, the scope of the Bill is wide and has significant implications for private equity dealmakers on a deal-structuring level, as well as from a portfolio risk perspective. For instance, the scope of the Bill covers 'all businesses and all commercial activities within, or having effect within Nigeria'. The ordinary legal implication that this provision will have is to bring offshore acquisitions within the regulatory purview of the new Federal Competition and Consumer Protection Commission (the Commission). Accordingly, private equity dealmakers who prefer to structure investments in Nigerian companies as 'offshore acquisitions', may no longer be able to complete such transactions, without a layer of regulatory scrutiny from local regulators.
In relation to mergers, the Commission will now, effectively, take over the merger control functions of the Securities and Exchange Commission (SEC). As defined in the Bill, a merger occurs when one or more entities directly or indirectly acquire or establish indirect or direct control over the whole or part of the business of another undertaking. In terms of process, the Commission will now have to be notified of all qualifying mergers, which cannot generally be implemented without the approval of the Commission. The Bill adopts a threshold mechanism to determine which mergers are subject to merger control. With the new regime, private equity fund managers will need to implement an additional layer of diligence around the merger control implications of a private equity investment in, or exit from, a Nigerian company, based on the provisions of the Bill and on merger guidelines to be subsequently issued by the Commission.
Private equity fund managers will also need to pay close attention to the provisions of the Bill governing restrictive agreements, prohibition of minimum resale price maintenance, agreements containing exclusionary provisions, monopoly and price regulation. Based on a review of the Bill, a majority of Nigerian corporates will have to adjust their operations to meet the standards set by the Bill. The management of portfolio companies, and promoters of public-private partnerships, are advised to commission a full-scale review of existing business arrangements and of the prospective portfolio, within the context of the provisions of the Bill, to insure that portfolio company business arrangements will not be in conflict with the provisions of the Bill. It is useful to note that the Bill imposes an amount that is up to 10% of a company's annual turnover, in a preceding business year, for offences committed by Nigerian corporates.
Employment Law - The Rise of the Employee Employment law in Nigeria is travelling at break neck speed. There is definitely something to be said about the judicial activism that Nigeria's employment court - the National Industrial Court (NIC) - has now become associated with. In the last five years, the NIC has upturned a significant portion of the corpus of traditional employment practices in Nigeria and is now installing a growing novelty of employment law standards and practices.
In doing this, the NIC has largely relied on two ground rules - the first is the position that the jurisdiction of the NIC is invoked not for the enforcement of mere contractual rights, but also for preventing labour practices regarded as unfair. The ordinary implication of this, is that the NIC will be willing to go beyond the letters of a contract, or established doctrines, to reach a finding in favour of an employee who may have been treated unfairly. The NIC also relies heavily on section 7(6) of the NIC Act 2006 and s254C(1)(f) and (h), and (2) of the 1999 Constitution, which empowers the NIC to apply international best practice in labour and conventions, treaties, recommendations and protocols ratified by Nigeria. For instance, Nigerian employers can generally no longer terminate an employment with immediate effect, as this action will suggest wrongdoing on the part of the employee. For that reason, an employer must now justify such action or risk being saddled with more than one month's pay in lieu of notice. (See the case of Andrew Monye v. Ecobank Nigeria Plc.) The NIC is gradually moving away from the common law doctrine that employers can terminate an employment without adducing any reason, and employers are now required to give a valid reason for terminating an employment relationship (as in the case of Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) v. Schlumberger Anadrill Nigeria Limited). Also, employers can no longer generally dictate to an employee where to invest his/her computed gratuity benefit (Aghata N. Onuorah v. Access Bank Plc).
There are a number of other noteworthy decisions - employers can no longer compel an employee to bank with a specified bank chosen by the employer (Olabode Ogunyale & ors v. Globacom Nigeria Ltd); an employer now has an obligation to give an accurate, non-misleading work reference for its previous or existing employees (Kelvin Nwaigwe v. Fidelity Bank Plc) and can no longer vindictively deny promotion to a deserving employee (Mrs Abdulrahaman Yetunde Mariam v. University of Ilorin Teaching Hospital Management Board & anor ); an employer no longer has the general right to reject an employee's letter of resignation (Ineh Monday v. Unity Bank). The NIC has also now acknowledged and applied the concept of constructive dismissal to the corpus of labour jurisprudence in Nigeria.
What does this mean for private equity? For private equity fund managers, the developments at the NIC are particularly significant, especially within the context of the extent to which a private equity investor and fund manager can be held liable for the liabilities or obligations of its portfolio companies. This brings to mind developments in the American case of Sun Capital Partners III, L.P., et. al. v. New England Teamsters and Trucking Industry Pension Fund. In this case, the court reached the decision that two separate private equity funds managed by Sun Capital Partners (Fund III & Fund IV, collectively "the Funds") were jointly and severally liable for the pension liabilities of a bankrupt portfolio company owned by the Funds. It is instructive to note that the court held the Funds liable, despite the fact that each had an indirect ownership interest in the portfolio company that was less than the 80% ownership threshold for purposes of the controlled group liability rules of Title IV of the Employee Retirement Income Security Act of 1974 (ERISA). Based on recent developments at the NIC, it doesn't appear that traditional corporate law doctrines will afford much defence to portfolio companies or their private equity investors, where the NIC considers that an employee will be subject to some level of unfair treatment. As it is, the international best practices rule can be deployed with maximum effect across a number of employee-related issues.
More so than was previously the case, private equity firms looking to do deals in Nigeria now have to subject employment law and workforce management issues to a higher level of diligence as part of the M&A process and also, as an ongoing compliance point for portfolio companies. From a deal - structuring standpoint, private equity fund managers must anticipate and exhaustively evaluate employer liability scenarios and build outcomes into the transaction structures to be adopted on deals.
Olubunmi Abayomi-Olukunle is Lead Counsel and Partner with Balogun Harold, Nigeria.
(This article first appeared in DealMakers, SA's quarterly M&A publication)
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