Drafting Share Purchase Agreements, Nigeria, Company Law, SPA, Shares, CAC.
Introduction
Share Purchase Agreements (“SPAs”) are legal instruments that sit at the heart of the transfer of proprietary interests in shares held in companies. While parties express their intent to sell and buy shares, the legal procedure to effectively manifest the desires of each party is the concern of advisors and solicitors on both the sell-side and the buy-side. One of the key legal documents in this regard is the SPA, as it spells out the intents, rights, obligations among other pertinent considerations. This article will refresh your minds on some of the rules of thumb for contracts and explore the nuances to drafting and reviewing SPAs in line with extant Nigerian laws.
Some General Contractual Considerations
Clarity of Purpose
There is no prize for pulling off a wordsmith with the use of “big” vocabularies. The draftsman or reviewer of an SPA must bear in mind that the agreement may be subjected to interpretations in the near future. Hence, it is prudent to clearly couch clauses in simple and straightforward language, while also taking note of the legal effect of carefully selected choice of diction. When unsure about a party’s position, recourse may be made to the relevant term sheet, letter of intent or such similar document for that transaction. Another potent tool for achieving clarity in an SPA is by making good use of “Definitions and Interpretations” section of the SPA. This helps to give clarity to intended words or abbreviations. Also, in achieving clarity, certain elaborate documents that relate to the SPA should be reflected in the Schedule. Example of such documents are: Disclosure Letter, Schedule of Material Contracts, etc.
Parties’ Constitution
It is trite that parties that are not privy to a contract will not be bound by it, save for exceptional instances – agency relationship, covenants running with land, insurance, etc. However, instead of betting on exceptions to avail you, a better approach is to specifically state material party such as a Guarantor that has obligations and liabilities in line with an SPA. Meanwhile, misnomers should be avoided in description of parties. Though, there are ways around a misnomer in the event of interpretation but the mere occurrence of it questions the professionalism of the Solicitor.
Effective Date & Lifespan
Some General Contractual Considerations It is trite that parties that are not privy to a contract will not be bound by it, save for exceptional instances – agency relationship, covenants running with land, insurance, etc. However, instead of betting on exceptions to avail you, a better approach is to specifically state material party such as a Guarantor that has obligations and liabilities in line with an SPA. Meanwhile, misnomers should be avoided in description of parties. Though, there are ways around a misnomer in the event of interpretation but the mere occurrence of it questions the professionalism of the Solicitor. The rule on effective date is that where parties fail to state an effective date, the date of execution will take effect. However, SPAs are too crucial to be left to chances. Certain obligations in an SPA such as payment date, membership rights, issuance of share certificates may be tied to the effective date. This makes it important for a specific date to be stated. Perhaps, the date can be subject to the occurrence of certain things. On lifespan, an SPA typically subsists as long as the company exists or up till the buyer under the SPA disposes the shares, but the SPA can be determined in the event of breach of terms of the SPA, or any such legal arrangement provided for in the SPA.
Execution
As simple as execution may be, you will be surprised at the sight of errors in some contracts, especially given that laws continue to evolve. For instance, as per section 102 of the Companies and Allied Matters Act 2020, execution of contracts on behalf of a company should be done by: “(a) a director of the company and the secretary of the company; or (b) at least two directors of the company; or (c) a director of the company in the presence of at least one witness who shall attest the signature”. Although, exceptional instances like when the other party benefits from the agreement may avail the erring party in the event of non-execution, but why take such risk when you can simply elect to do the commercially prudent thing and avoid lacunae?
Key Considerations in SPAs
Now, this is where it gets more interesting. The rights, obligations, and liabilities of parties to an SPA are distinctively set out in subsequent paragraphs.
Number of Shares
The clauses to this effect require some calculations as to the share percentage that is being bought and the payment for same. It is typical to engage financial advisers to advise on this aspect ahead of documentation. There must also be a provision for the mode and medium of payment, and who bears the liability for incidental costs such as valuation costs. Besides, the tidier way to reflect specific details regarding figures is to state the particulars of sellers and buyers alongside the number of shares and price in a Schedule to the SPA
Governing Law & Dispute Resolution
The choice of law is for parties to determine and this largely depends on the bargaining strength of parties or where the contract is to be executed. Nevertheless, the SPA should be clear on laws and jurisdictions where the agreement is enforceable. For instance, it is not enough to just simply state that Nigerian Laws are applicable to an SPA, because with that, the possibility of foreign parties enforcing such agreement in their own courts or elsewhere is not taken care of. Thus, the governing law clause should not stop at mentioning the applicable law but also state precisely where the laws can be enforced as regards the SPA.
For dispute resolution, the normative practice is to explore arbitration as an initial measure. Well, the good news here is that mediation now enjoys a substantive and procedural legal framework in Nigeria. So, you might want to consider this as well. Also, it is important to note that the extant law regarding arbitration in Nigeria is now the Arbitration and Mediation Act, 2023.
Tax Concerns
Parties are at liberty to factor tax concerns in their negotiations and share liabilities as they deem fit. The party responsible for the payment of each tax such as capital gains tax, stamp duties, etc. should be stated in the SPA with timeline(s) for providing the other party with evidence of compliance. For instance, it is typical that the seller pays capital gains tax, while the buyer pays stamp duties. Tax exemptions that are applicable to the transaction must also be factored. For example, pursuant to section 31 of Finance Act 2021 which amended relevant provisions of Capital Gains Tax Act, gains on disposal of shares will only be subjected to Capital Gains Tax (“CGT”) if the shares were held for 12 consecutive months and proceeds from the disposal is not more than 100 million naira. However, where the proceeds are reinvested in a Nigerian company in the same year of sale; or if the aggregate of sale proceeds is less than 100 million naira; or if the sale of shares is done in line with SEC rules, then CGT will not apply to the transaction.
Representations and Warrant
This duo are constant victims of conjunctive usage in commercial agreements, but a strong wall of difference exist between them, especially in terms of their legal effects. While representations give assurances of existing facts, warranties assure the other party of future facts.
For the sell-side in an SPA, there must be full disclosure of facts regarding the seller’s legal status, regularity of relevant transaction documents, necessary resolutions or approvals for the sale, validity of shares being sold, title to the shares, etc. These can all be spelt out in the SPA or in a referenced Disclosure Letter. For the buy-side, common representations and warranties that are: the legal standing of the buyer, financial strength and capacity, mode of payments, etc.
Meanwhile, it is important to note that the representations and warranties do not relinquish the need for independent due diligence by each party. They are only a means of holding each party to his words. In addition, it is prudent to limit the liabilities of parties (especially the seller) via these disclosures. For instance, the seller can put a cap on the amount the buyer can claim in the event of breach of a warranty and the buyer can equally seek to substantially reduce payable consideration where there’s a breach of a representation. Also, given the buyer’s potential exposure to undisclosed liabilities, the SPA may contain a clause to the effect that the seller has exhaustively listed all his liabilities. Consequently, the seller would be liable for undisclosed liabilities that are discovered after execution of the agreement.
Prior Liabilities & Obligations – Host Communities, Employees’ Concerns, Etc.
Unlike acquisition of assets where the liabilities of the acquirer are to the extent of the asset acquired, the buyer in a sale of shares must have carefully couched clauses to address the existing liabilities of the seller, especially where the sale translates to transfer of business. For instance, oil and gas companies are mandated under Chapter 3 of the Petroleum Industry Act 2021, Nigeria Upstream Petroleum Host Communities Development Regulations, 2022, and Host Communities’ Development Trust Implementation Template, to set up Host Communities Development Trust Fund. This obligation has fallen due and as such, in the event of sale of shares which constitute business transfer of an oil company, it will be prudent to have a clause that addresses who bears such liability going forward. By default, the seller is liable. But where the seller is incapable, parties can elect to offset the potential liability exposure from the purchase price of the shares. Also, in share purchase that constitutes business transfer, a clause on the subsequent determination of employees’ contracts must be spelt out with attendant structure post-acquisition.
Dealing with Pre-Emptive Right in Allotment of Newly Issued Shares
Pursuant to section 4, part 1 of the schedule to the Business Facilitation Act 2023, shareholders of public companies no longer have a right of first refusal where new shares are to be allotted to new buyers. And for private companies where this is still applicable, the timeline for giving the pre-emption notice is 21 days. However, going forward, parties may elect to include a clause on right of first refusal on subsequent sale of the shares being sold, especially when such future sale may vary the rights of the buyer.
Procedure for Exit
In the case of a private company, the law is already clear on how shares can be subsequently sold. It is important to note that by virtue of section 22 (2) (b) and (c), CAMA 2020, private companies’ article of association may provide for pre-emptive rights prior to subsequent sale of share, tag along and drag along rights. Thus, where the articles of a private company provide for these rights, shares that are subject of a sale must first be offered to existing shareholders and where the shares are more than 50% of the shares in the company, the new buyer must offer to buy the remaining shares on the same terms. On the flipside, parties in a share purchase in a public company can elect to entrench the above stated protective exit strategies in the SPA in order to secure their interests in the event of subsequent sale.
Security for Payment
For the avoidance of unpleasant stories that insufficient funds may cause, it is always advisable for the SPA to spell out how the consideration for the share purchase and how same will be furnished. It is common practice in market-defining transactions to have bank guarantees, indemnities, etc as security for payment. Payment method could also be stated to spread over a period of time. This will essentially enable the purchaser to duly meet payment obligations.
Completion
Like in other commercial contracts, the SPA must carefully address the pre-closing, closing and postclosing obligations of parties. This is necessary for finalizing and giving effect to the intents of parties as expressed in the SPA. The pre-closing conditions are usually to require that parties to not do anything that will inhibit material status or facts relied upon for the transactions such as requiring the seller to maintain its business status and comply with regulatory requirements. For the covenants on closing, they spell out the documents, receipts and evidence of obtained approvals relevant to the SPA, e.g share certificates, regulatory approvals, executed copies of transaction documents are to be provided at the closing stage. And as regards post-closing stage, the SPA will contain obligations for regulatory filings such as notification to the Corporate Affairs Commission (“CAC”), and other applicable filings/approvals from sector-relevant regulators like the Federal Competition and Consumer Protection Commission, etc
Final Remarks
Whether as a draftsman or reviewer, the importance of asking the right questions and logically presenting legal positions in every transaction cannot be overemphasized. While transactions may be similar, no two transactions are the same. As such, the common practice of using templates should be done with a lot of caution. A diligent draftsman or reviewer of an SPA should also bear in mind that our laws are not static. Thus, if at all you must use templates, such usage should be adapted to current legal realities and relevant facts of the transaction. Also, it is advisable to engage experts in relevant areas of law such as tax where the draftsman/reviewer is not specialized. NOTE: Kindly bear in mind that this piece is only for informative purposes. While the contents herein may be instructive, they are not exhaustive. Actual legal service may be procured for specific needs and particular circumstances. Thank you for your time & engagements. Cheers!
Musa Kalejaiye is a Nigerian Lawyer. Click here to connect with him on LinkedIn or shoot an email via: kalejaiyemusa@gmail.com
Originally published by Musa Kalejaiye on LinkedIn
Drafting & Reviewing Share Purchase Agreements: Key Considerations Under Extant Nigerian Laws
Oyemaja Law,
A division of The Oyemaja Group.