THE MERGERS & ACQUISITION (M&A) OPTION TO THE RECAPITALIZATION CHALLENGE: KEY CONSIDERATIONS IN A LESS THAN 12 MONTHS WINDOW IN NIGERIA

INTRODUCTION

The Nigerian banking sector, a vital artery of our national economy, is once again poised on the cusp of transformation. The Central Bank of Nigeria (CBN), driven by its unwavering mandate to safeguard the integrity and stability of our financial system as enshrined in Section 9 of the Banks and Other Financial Institutions Act (BOFIA) 2020, via its circular[1] is toeing a path of radical restructuring, by announcing a sweeping, and indeed substantial, upward revision of the minimum capital requirements for all categories of banks operating in Nigeria. The impending recapitalization directive, set with a formidable deadline in 2026, has created a sense of both anxiety and anticipation among industry professionals. The challenges of meeting this directive within a compressed timeframe of less than 12 months present both urgent considerations and significant opportunities.

This article explores the nuances of this regulatory shift and its implications, highlighting key industry dynamics. It urges bank decision-makers to collaborate with a forward-thinking advisory partner who can provide expert guidance through the complexities of Mergers & Acquisitions (M&A) in the context of imminent recapitalization. This collaboration will not only strengthen our banking industry and consequently the economy but also create business opportunities for financial institutions and their stakeholders.

A.   THE RECAPITALIZATION POLICY OF THE CENTRAL BANK OF NIGERIA

The apex bank, in its circular, reviewed upward the minimum threshold capital for banks as follows:

CBN has set a timeline of 24 months for banks to comply with the new requirements, commencing from the 1^st of April 2024, and its deadline is March 31, 2026.

The CBN’s directive for bank recapitalization is aimed at strengthening the resilience of our financial institutions, boosting investors’ confidence, and aligning the banks with global standards. By increasing capital requirements, banks are better placed to absorb economic shocks and support larger transactions, which ultimately will prepare the sector for future challenges and opportunities. Relying solely on internal operations may not be enough for banks needing quick recapitalization and a stronger market presence, making mergers and acquisitions a strategic option for faster expansion and competitiveness.

B.   CONCEPT OF MERGERS & ACQUISITIONS (M&A)

Mergers and acquisitions (M&A) involve one company joining with or acquiring another to form a single entity. Generally, M&A transactions require the approval of the Securities and Exchange Commission, and in certain cases, must also be sanctioned by the Federal High Court.

The Nigerian banking sector is ripe for consolidation due to increased competition and technological advancements, and M&A is one of the safest and fastest methods to meet regulatory requirements and enhance competitive positioning. M&A will enable the banks to achieve economies of scale, gain market share, accelerate innovation, and boost shareholder value. However, banks must carefully evaluate M&A opportunities to comply with capitalization mandates and deploy innovative solutions for recapitalization.

C.    REGULATORY BODIES & REQUIREMENTS FOR M&A IN NIGERIA

The Central Bank of Nigeria (CBN) is the primary regulator for Banks in Nigeria, alongside the Securities and Exchange Commission (SEC), the Corporate Affairs Commission (CAC), the Federal Competition and Consumer Protection Commission (FCCPC), due to the financial regulatory ecosystem in Nigeria, are vested with oversight for M&A transactions. The following regulatory requirements should be noted:

1. Central Bank of Nigeria (CBN): Authorization from the CBN is essential for any merger or acquisition between banks. The CBN guidelines stipulate the submission of a detailed proposal outlining the rationale for the transaction and expected synergies of the banks, and upon the completion of an M&A, banks must adhere to ongoing reporting obligations to CBN, including financial disclosures and capital adequacy metrics, and a post-M&A integration plan. A breach of Post-Transaction Reporting might create issues for any bank. Applications for mergers must be in 3 (three) stages: Pre-Merger Consent (PMC), Approval-In-Principle (AIP), and Final Approval (FA), and 2 (two) stages of Approval for takeovers – Approval-In-Principle (AIP), and Final Approval (FA).
2. Securities and Exchange Commission (SEC): For any public companies about to engage in M&A, compliance with the SEC’s rules regarding filings, disclosures, and shareholder approvals is crucial. This may involve preparing a scheme of arrangements or a takeover bid, ensuring transparency and fairness for all stakeholders to ensure a smooth, effective, and efficient transition. To obtain SEC approval for a merger, acquisition, or business combination, companies must file notification of a merger for evaluation with the SEC, comply with regulatory requirements, submit detailed documentation, publish notices of the mergers and acquisitions in national newspapers, and comply with post-approval requirements as required by SEC, regulations or provisions of law.
3. Corporate Affairs Commission (CAC): The CAC is another regulatory body that provides approval for mergers and acquisitions pursuant to the provisions of the law; should be notified of any such mergers or acquisitions before proceeding. This ensures that the M&A complies with legal requirements and that there is proper documentation before the completion of the M&A.
4. Federal Competition and Consumer Protection Commission (FCCPC): The merging parties or banks must notify the FCCPC of the proposed merger. The FCCPC reviews the merger and assesses its potential anti-competitive effects, after which it issues a report with its decision. Where parties are dissatisfied with the decision of the FCCPC, they can appeal to the Competition and Consumer Protection Tribunal. The essence is to avoid a situation where there would be less competition in the banking sector.
5. Nigerian Stock Exchange (NSE): Where the involved banks are listed on the Nigerian Stock Exchange, they have additional reporting obligations, which include timely announcements of significant corporate actions, including mergers, acquisitions, and recapitalization initiatives. Presentation of periodically updated financial reports that reflect the new structure and the capital position after the merger or acquisition.

D.   THE IMPLICATIONS OF NON-COMPLIANCE WITH THE CBN RECAPITALIZATION REQUIREMENT AT THE DEADLINE

Failure to meet the Central Bank of Nigeria’s (CBN) recapitalization requirements at the deadline can have far-reaching consequences for banks. The key implications are stated below:

1.    Regulatory Sanctions: Penalties, fines, and potential license revocation by CBN.

2.    Financial Consequences: Loss of investors’ confidence, reduced access to capital, and decreased lending capacity.

3.    Operational Risks: Increased risk of insolvency and reputational damage.

4.    Legal Ramifications: Litigation, disputes with stakeholders, and potential legal action.

E.    KEY CONSIDERATIONS FOR BANKS FOR AN EFFECTIVE M&A EXECUTION

1. Target Identification and Due Diligence: Banks should identify other banks or financial institutions that align with their strategic goals and also exhibit sound financial health. Thorough due diligence can uncover hidden liabilities or risks that may affect the viability of the merger.
2. Regulatory Compliance: Engaging with the CBN early, before the commencement of the process for further clarity or guidance as per the regulatory landscape, and complying with existing and future/futuristic regulations is critical to executing a successful M&A strategy for banks.
3. Valuation and Negotiation: Conduct a robust valuation analysis to ensure fair acquisition terms. Given the volatility in financial markets, a meticulous approach will mitigate the risks associated with the overvaluation or undervaluation of any bank or financial institution that a bank intends to merge with or acquire.
4. Cultural Synergy: Evaluating a bank or financial institution to ensure that it has similar cultures that align with the merging bank ensures a seamless integration process post-merger is pivotal. where both banks’ ideologies are a cultural fit, it significantly influences employee engagement and client retention.
5. Integration Strategy: Develop a clear plan for integrating operational, technological, and administrative functions. A well-articulated integration strategy is fundamental to realizing synergies and minimizing disruption.

CONCLUSION

The window of opportunity to capitalize on M&A as a means of recapitalization is narrowing. CBN’s guidelines signal a decisive moment for the banking sector, compelling financial institutions to act swiftly and strategically. While the new regulation may superficially look difficult to meet, and put Nigerian banks at a critical point, the options or choices are simple: embrace transformation or risk being left behind.

The future of banking in Nigeria has never been brighter, thus presenting a unique opportunity for banks to reimagine their business models, fortify their operations, and unlock unprecedented opportunities for growth, innovation, financial stability, and prosperity. By seizing this moment, Nigerian banks can propel the national economy towards a brighter future. The clock is ticking, and the time to act is yesterday.  

At AO2LAW, we maintain a foremost financial services advisory practice situated within our Commercial and Criminal Law Practice Group (CCLP). Our Practice brings to bear our expertise in core Financial Services and Technology Advisory, Regulatory Compliance, Mergers and Acquisitions, and Capital Market services.   

For further information on the foregoing (none of which is legal advice) or related matters, please generally contact us at cclp@ao2law.com