HOW TO CONVERT YOUR DEBT FINANCING TO EQUITY INVESTMENTS IN NIGERIA

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BY SEUN TIMI-KOLEOLU AND SHARON OKPO

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INTRODUCTION

In light of recent economic realities, many companies have found it difficult to repay their debts. In order to manage this situation, companies have considered, and some have taken steps towards relieving themselves of this liability, one of which is initiating a debt conversion arrangement. This is a lifeline utilized  by many companies to restructure their finances and manage their debt profile.

If as a business you have considered or are currently in the process of swapping your debts to equity, this newsletter provides some guidance for you.

A. What is a Debt-to-Equity Swap Transaction?

A debt-equity swap is a type of financial arrangement or restructuring where a company that obtained debt financing (“Debtor Company”) offers its creditors an equity interest (i.e. shares) in the company in exchange for the repayment of the debt. A debtor wishing to restructure its company by offering its equity as a way of paying off its debt would have to show to the creditors that the equity is valuable upon carrying out an independent valuation of its equity.

The creditors will have to accept the offer for the restructuring to take effect.

B. What are the steps to take to give effect to a Debt-to-Equity Restructuring?

  1. Consent of the Shareholders: Prior to the commencement of the restructuring, it is important for the directors to obtain the consent of the shareholders, particularly as the restructuring may result in the dilution of the shares of the existing shareholders. The shareholders’ approval can be signified by the execution of a resolution to this effect.

It will also be necessary to conduct a review of the Memorandum of Association and Articles of Association  of the Debtor Company; and shareholders’ agreement to ensure that provisions relating to the issuance and allotment of new shares are adhered to when carrying out the restructuring.

In Nigeria, under the Companies and Allied Matters Act, 2020 (CAMA) all shares of a company are required to be fully allotted. Therefore, in order to give effect to the restructuring, the shareholders will have to decide if they will relinquish some of their shares for the purpose of the restructuring or whether new shares are to be issued by the Debtor Company for the purpose of granting such shares to the creditors.

Where new shares are to be issued, the shareholders will also have to formally waive their pre-emptive rights with respect to the new shares to be issued.

  1. Documentation: The initial documents required for the realization of the debt-to-equity transaction will be dependent on the structure of the contemplated transaction-

a. Where there already exists a convertible debt agreement, which states the manner in which the facility will be swapped to equity, parties are to follow the terms of such an agreement.

  1. Where however, the parties had only executed a simple facility agreement, the parties may by an addendum, amend such loan agreement to reflect the new repayment terms by the debt-equity restructuring.
  2. Where there is only a simple facility agreement as stated above, parties may also choose to enter into a debt-to-equity swap agreement without amending the original facility agreement. The debt-to-equity swap agreement will outline the terms of the swap such as, amount of debt that parties intend to convert to equity, the value of the shares to be issued, and whether such equity will be issued at a discount. The agreement should also make provisions effectively terminating the Debtor Company’s liability to repay all or part of the debt after under the facility agreement such conversion.
  3. The new shareholder(s) will also be required to execute a deed of accession binding it/him to the company’s existing shareholders agreement.
  4. Where the shareholders have agreed to relinquish part of their shares, they will be required to execute a share transfer form individually, transferring the required number of shares to the new shareholder.
  5. Where, however, the Debtor Company intends to create new shares to accommodate the new shareholders, the shareholders will be required to execute a resolution approving the increase in share capital to such a number as may be required to give effect to the swap. The shareholders will be required to execute appropriate resolutions allotting the new shares. The directors may also execute these resolutions where they have been authorized to do so by the shareholders.
  1. Valuation of the Company: It is important while considering this debt restructuring to ascertain the value of the Debtor Company’s shares at the time of the swap. In some instances, especially where there is a converbitle debt agreement in existence, parties may have agreed on the value of the shares to be allotted to the creditor prior to the execution of the agreement. Where the parties did not agree on the value of the shares at the time of executing the applicable agreement, the Debtor Company is advised to conduct a valuation of its shares.

In conducting this valuation, certain factors should be considered, such as the company’s financial position, the value of its assets, and the potential future performance of the company.

A proper valuation will enable the parties to determine the number of shares that should be allotted to the creditor in order to reflect the actual debt amount being converted to equity.

  1. Regulatory Requirements: Following the completion of all negotiations relating to the debt-to-equity swap, the Debtor Company in compliance with the requirement of CAMA, is expected to make necessary filings at the Corporate Affairs Commission (“CAC”) to register the increase in its shares and allotment of same to the creditor(s) upon paying the necessary stamp duties and filing fees. The fees and stamp duty to be paid is largely dependent on the number of shares to be registered.

It is advisable to seek counsel from your legal adviser on the best way to structure and classify the shares to avoid incurring substantial costs and to properly reflect the intent of the parties to the transaction.

  1. Taxation: Debt-to-equity swap transactions may also present some tax concerns that need to be considered by both parties, especially in inter-company loans. It is advisable that you work closely with your tax advisers to provide more guidance on this.

CONCLUSION

Debt-to-equity swap is a tactical restructuring tool that may help provide relief to companies with great potential, going through a rough period in business. Creditors should consider accepting this offer from companies with good potential for success if given some time and support to grow.

REVIEW OF EMPLOYEE BENEFITS IN NIGERIA

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BY ADERONKE ALEX-ADEDIPE AND OLAWALE ATANDA

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Introduction

Employee benefits such as health insurance, pensions, annual leave, and work-life balance initiatives can greatly improve an employee’s overall job satisfaction and ultimately lead to increased productivity and loyalty.

In Nigeria, there are laws addressing benefits for employees such as the Pension Reform Act for pensions and Employees’ Compensation Act for employee compensation. In this newsletter, we will examine these laws and the obligations of employers as well as other ‘best-practice’ benefits employees may enjoy whilst in employment.

1. Pensions
The Pensions Reform Act requires employers with at least 15 employees to participate in a contributory pension scheme. Under the scheme, the employer contributes a minimum of 10% of the employee’s monthly emolument and the employee contributes, a maximum
of 8%.

However, the employer may opt to bear all the contribution to the pension scheme. In that case, the minimum contribution will be 20% of monthly emolument. It should be noted that these contributions are to be made monthly for the duration of employment.
Pension contributions are also tax deductible.

2. Employee Compensation
The Employee’s Compensation Act provides for the compensation of employees regarding disease, injury or death suffered in the course of employment. Injury under the Employee’s Compensation Act also refers to mental stress and hearing impairment suffered in the course of employment. To manage compensations, the Employee’s Compensation Act established the Employees’ Compensation Fund (the ‘Fund’) which is under the control of the Nigeria Social Insurance Trust Fund Management Board (the ‘Board’). The Board is charged with
ensuring employees or their dependents are paid periodic compensation for workplace incidents. Payments are calculated based on the monthly remuneration of the employee prior to the debilitating incident or death. The Fund is supported by the contribution of employers which is fixed at 1% of the total monthly payroll. It should be noted that an employer cannot deduct from the remuneration of an employee towards its contribution to the Fund. An employer cannot also require an employee to indemnify the employer against any liabilities which the employer may incur under the Employee’s Compensation Act.

3. Sick Leave, Maternity/Paternity Leave, and Annual Leave
The Labour Act provides for up to 12 days paid sick leave for employees and at least 6 days of paid leave for employees who have been in continuous service for at least a year.

The Labour Act gives women the right to take 6 weeks leave prior to delivery and 6 weeks leave after. Women are entitled to not less than 50% of their renumeration during this time. Upon resumption, nursing mothers are to be allowed an hour daily to attend to their infants. Employers are also restrained from terminating the employment of women who are unable to resume work after the leave period due to pregnancy-related illness.

Improving on the provisions of the Labour Act, the Federal Government has a 16-week paid leave policy for women in the civil service while Lagos State doubled the time provided in the Labour Act to 6 months for female workers in its civil service. Although the Labour Act is silent on paternity leave for fathers, the Federal Government provides fathers in the civil service a 14-working-day leave following the birth of their child which is limited to 4 children. Likewise, the Lagos State Government has a 10-working-day leave policy for fathers working in the state civil service.

The provisions for paid leave targeted at both parents is an expression of the importance which the governments at both federal and state level place on the wellbeing of the parent and infant. Some private companies also follow the maternity/paternity leave policy of the
government in formulating their leave policies for employees.

4. Health Insurance
The National Health Insurance Authority Act mandates health insurance for every employee resident in Nigeria. Under the law, employers with a staff strength above 5 are required to participate in a health insurance scheme. The Act also states that employers shall have the responsibility of paying their contributions and those of their employees into the public health insurance scheme of the state where they operate. Employers may also place their employees on private health insurance schemes under the act.

5. Share Options
Recently, the trend of compensating and incentivizing employees with shares has gained popularity, particularly as a means to encourage their contribution toward the long-term goals of the company. To facilitate this, many companies use what is called an Employee Share Option Plan/Scheme (ESOP).

An ESOP provides an employee a right to purchase a certain number of shares in a company at no charge, or a nominal value, or a price below the fair market value after a specified period of time, during the course of employment.

ESOPs are especially beneficial for early-stage companies that may not have ample cash flow to compensate experienced employees whose services are required to help the company scale. With ESOPs, startups are able to incur minimal expenditure on employee compensation while creating a sense of ownership.

For a more detailed exploration of ESOPs, their benefits, and how they can be effectively implemented, you can read our comprehensive article on the subject here – ESOPs for Startups in Nigeria.

Conclusion
Employee benefits play an important role in attracting and retaining talent in a global marketplace. Offering a comprehensive benefits package is considered best practice in many countries around the world. It not only helps companies to stay competitive in attracting top talent but also shows employees that their well-being and overall satisfaction are a priority for the organization.

RECENT CBN REFORMS IN THE NIGERIA FOREIGN EXCHANGE MARKET

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BY SEUN TIMI-KOLEOLU AND KOFOWOROLA AYOOLA

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Introduction

Previously, navigating the Nigerian Foreign Exchange market could be a challenge for foreign businesses and investors. Fluctuations in the Naira exchange rate meant investors received less when converting profits back to their home currency. Repatriating funds could be hindered by a shortage of foreign currency, rendering Certificates of Capital Importation (CCIs) less useful due to limited liquidity. Backlogs in accessing FX further complicated matters. However, recent reforms by the Central Bank of Nigeria (CBN) paint a brighter picture. The Naira has strengthened vis-a-vis the US dollar by approximately 22.42% over the past 3 months (February to April 2024).

The Central Bank of Nigeria in line with its objectives to promote a market-based price discovery system in Nigeria’s Foreign Exchange market, has recently implemented a series of reforms aimed at improving the valueof the Nigerian Naira, stabilizing the Nigerian foreign exchange (FX) market and fostering a mor etransparent business environment. These reforms hold significant implications for foreign investors and business owners operating in Nigeria.

For ease of reference, we have collated in this newsletter recent FX policies issued by the CBN

1. Prohibition of Dollar-Denominated Collateral for Naira Loans
The Central Bank of Nigeria, through a directive issued on April 8, 2024, now prohibits the use of foreign-currency denominated collaterals suchasUSDollars or non-export domiciliary accounts for loans issued in Nigerian Naira, with exceptions for specific types of foreign currency collateral such as federal government issued eurobonds or guarantees of foreign banks, including stand by letters of credit.

All loans secured by prohibited dollar-denominated collaterals aretobewounddown within the next 90 days. Failure to comply withthis directive poses significant implications. Defaulting loans would be regarded as being hig hrisk (risk-weighted 150% for capital adequacy ratio computation).

This CBN’s directive aims to curb further dependence on US Dollars and boos ttheNaira’s role in the Nigerian economy. By encouraging Naira-denominated collateral for loans, it will further strengthen the Naira.

2. Sale of FX to Bureau De Change Operators (BDCs) at the Rate of N1101 per $1

The CBN has made available $10,000 which may be bought by eligible BDCs at N1101 per $1 (sale price) and must be resold to the retail market atnomorethan 1.5% of the sale price. All eligible BDCs can now make purchases and pay into designated CBN accounts.

CBN’s injection of FX into the system through BDCs, will increase the availability of foreign currency for retail transactions. This will be helpful for individuals and businesses that need dollars for travel, education, orsmall-scale imports.

3. Discontinuation of Limits on Interbank FX Transactions and Removal of Restrictions on Interbank Proceeds
The CBN by a circular issued on February 8, 2024 removed the ±2.5% cap spread on interbank FX transactions it had imposed in the previous year.The circular also removed the restrictions placed on sale of interbank proceeds to BDCs.

The implication of this is that authorised dealers (financial institutions licensed by the CBN to trade FX) in the interbank FX market would be able to sell the proceeds from the market to BDC operators and a wider range of buyers outside the market. Also, with more buyers and sellers able to participate, FX transactions can happen faster and with less friction.

4. Removal of Exchange Rate Limits for International Money Transfer Operators (IMTOs)
The CBN on January 31, 2024 removed the ±2.5% exchange rate cap for IMTOs and also enabled IMTOs to quote exchange rates for naira payout to beneficiaries based on prevailing market rates. IMTOs were previously required to quote rates within an allowable limit of -2.5% to +2.5% around the previous day’s closing rate of the Nigerian Foreign Exchange Market. CBN’s removal of the exchange rate cap for IMTOs is in line with its continued efforts to liberalize the Nigerian FX market.

The removal will allow IMTOs to offer market-drivenrates, increasing transparency and potentially leading to more competition and innovation in the money transfer market. By allowing IMTOs to set market-drivenrates, the CBN is improving the efficiency of the Nigerian FX market for money transfers.

IMTOs can now offer more competitive rates, which can benefit both senders and receivers of money, internationally. Also, IMTOs may be incentivized to develop new products and services to better serve their customers. This could include faster transfer times or lower fees.

5. Reintroduction of the “Willing Buyer, Willing Seller” FX Market Based Pricing Model at the Investors & Exporters (I & E) FX Window

The CBN in a press release last year abolished all other foreign exchange windows, collapsing all FX market segments into the I & E window and mandated authorized dealers to conduct their foreign exchange transactions on a “WillingBuyer and Willing Seller” basis. Market participants were previously required to sell foreign currency at the CBN rate. This implies that exchange rates would now be determined by market forces of demand and supply.

What are the possible implications of these policies for you and your businesses?

1. A stronger and more stable Naira value minimizes the risk of losses due to currency fluctuations when converting profits into your home currency.

2. Increased FX liquidity should allow for easier repatriation of your capital and profits thereby allowing you to put your CCIs to good use again. This is possible because CBN in a bid to restore credibility and confidence in theNigerian economy, recently concluded the payment of $1.5 billion to clear and settle outstanding FX obligations/backlog.

3. The CBN’s reforms promote a more transparent FXmarket, allowing you to make informed decisions with greater confidence.

Conclusion
Nigeria boasts a vast and growing market, offering foreign investors a chance to tap into its immense potential. The recent reforms introduced by the CBN are all concerted efforts to stabilize, strengthen and enhance transparency in the Nigerian foreign exchange market. These initiatives represent a positive step towards aligning Nigeria’s foreign exchange market with global best practices, offering a positive outlook for foreign investors seeking to enter the Nigerian market, and we expect that it would ultimately support sustainable economic development. To read more articles on foreign exchange in Nigeria, click here.

REGULATORY UPDATE: REVIEW OF THE MINIMUM CAPITAL REQUIREMENT FOR BANKS BY THE CENTRAL BANK OF NIGERIA

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BY ADERONKE ALEX-ADEDIPE AND HILLARY OKOROTIE

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Introduction

The Central Bank of Nigeria (“CBN”) on March 28, 2024, published a circular reviewing the minimum capital requirements for Commercial, Merchant, and Non-interest Banks in Nigeria. This upward review according to the CBN, aims to ensure that financial institutions maintain the capacity to support the growth of the Nigerian economy, given current economic challenges. This newsletter highlights the revised capital requirements and consequential legal considerations.

Commercial Banks
Previously, International Operators were required to hold a minimum capital of N50 Billion. This minimum capital has now been increased significantly to N500 Billion. Similarly, National Operators are now required to have a minimum of N200 Billion, while Regional Operators have increased from N10 Billion to N50 Billion..

Merchant Banks
The minimum capital requirement for Merchant Banks has also increased from N15 Billion to N50 Billion, reflecting a substantial elevation in the financial threshold for these institutions.

Non-Interest Banks
For Non-Interest Banks, both National and Regional entities are affected. The minimum capital requirement for National Non-Interest Banks has been doubled from N10 Billion to N20 Billion,  while Regional Non-Interest Banks now need to maintain a minimum capital of N10 Billion, up from N5 Billion.

Options Available to the Affected Financial Institution
The circular suggests options which the affected Banks may explore in order for them to meet the new capital requirements. The Banks may explore one or a combination of these options:

1. Mergers or Acquisitions: Banks have the option to consolidate their operations through mergers or acquisitions, thereby combining resources to meet the increased capital requirements.

Adopting this model requires a number of legal considerations including (i) tax, (ii) contractual obligations, (iii) employee rights and (iv) shareholder approval. In addition, the provisions of the primary regulations which must be complied with are identified below:

a. The Federal Competition and Consumer Protection Commission(“FCCPC”) Act, with the FCCPC as the authority in charge of enforcing its provisions. The Act makes provision for anti competition, regulation of mergers and acquisitions, regulatory approval and general oversight in transactions involving mergers and acquisitions.

b. The Companies and Allied Matters Act (“CAMA”) regulated by the Corporate Affairs Commission. CAMA provides for share acquisitions, preemptive rights, and regulatory approvals which must be sought in the successful completion of mergers.

c. The Securities and Exchange Commission (“SEC”) Rules which are within the purview of the SEC also provide for disclosure requirements, shareholder approvals, regulatory consent, amongst others.

2. Downgrading of License: Banks that do not wish to merge or be acquired may opt to downgrade their license to align with their financial capacity.

3. Capital Injection: Banks may also choose to where possible, inject capital through (a) private placements which involves offering a select pool of investors with the opportunity to take up shares in the Bank, (b) a rights issue which involves issuing new shares and providing existing shareholders with the rights to acquire those new shares, or (c) in the case of a Bank which is a
public company, an offer for subscription, inviting investors to subscribe to new shares in the Bank.

Compliance Period and Submission Requirements
The CBN has set the compliance period between April 1, 2024, and March 31, 2026, thereby giving the Banks a 24-month timeline to fully comply with the capital increase. All Banks are however mandated to submit a comprehensive plan outlining their strategy for achieving compliance to the Director of the Banking and Supervision Department by April 30, 2024.

In the case of existing financial institutions, the minimum capital requirement shall comprise both their paid-up capital and share premium only. Bonus shares shall not be considered for the purpose of recapitalization. While in the case of new applications submitted after April 1, 2024, the minimum required capital shall be fully paid up.

Conclusion
The revised capital requirements introduced by the CBN mark a significant shift in the regulatory landscape for Banks operating in the country. With higher thresholds for minimum capital, Banks are compelled to reassess their business strategies and explore various avenues to meet the new requirements. Ultimately, by imposing higher capital requirements, these measures are expected to
strengthen the banking sector and safeguard financial stability in Nigeria.

ESTATE PLANNING OTHER THAN WILLS

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BY SEUN TIMI-KOLEOLU AND OMOWUMI OLONADE

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Introduction

As we grow our assets and wealth either as entrepreneurs, employees or investors, in the tech, banking, manufacturing, energy, agricultural, and all other sectors, it is important that we are intentional about putting structures in place to ensure our loved ones are well provided for in our lifetime and beyond. It is key that we understand how to properly plan our estate to guarantee the transfer of our wealth from generation to generation.

In this newsletter, we share useful information on estate planning beyond traditional wills.

What is Estate Planning
Estate planning refers to the systemized way of handling the assets of individuals or financial matters in the event of their incapacity or demise.

Methods of Estate Planning:
While wills remain the most prevalent method of estate planning as they are often perceived as providing comprehensive control over the distribution of assets upon demise, the process of transferring assets (according to the directives outlined) in a will can be complex and protracted.

There are several types of estate planning besides utilizing a will. Some of these methods include:
a. Living Trusts: Living Trusts are legal arrangements where a trustee holds assets for the benefit of one or more beneficiary. Trusts can provide greater control over how assets are managed and distributed compared to wills, this is because, unlike wills, which typically go through probate, trusts can provide a greater level of privacy. Trustees are legally bound to follow the terms set forth in the trust document, ensuring that assets are used in accordance with the wishes of the grantor. It is pertinent to state that a Trust must be in writing and in the proper legal form.

b. Joint Ownership: Assets can be jointly held with rights of survivorship, a legal arrangement where joint owners possess undivided shares and are viewed as a single entity in the eyes of the law. In this setup, when one owner passes away, the surviving owner automatically inherits the portion of the property of deceased coowner, bypassing the probate process. Individuals may choose to acquire assets jointly with their intended beneficiaries, ensuring that upon their demise, the assets transfer to the co-owner, who also serves as the beneficiary. This arrangement provides a straightforward means of asset transfer while avoiding the complexities associated with probate. An agreement can be put in place to achieve joint ownership
rights.

c. Gifts: Individuals can gift assets to their intended beneficiaries during their lifetime. This can be a strategy to reduce the size of the taxable estate and facilitate the transfer of assets to loved ones. This transfer of assets must be by a Deed of Gift.

d. Power of Attorney (POA): This document serves as a legally enforceable agreement in which one party, referred to as the principal, designates another individual, known as the agent, to oversee the management of the assets or financial matters of the principal. The power of attorney empowers the agent to make decisions on behalf of the principal in specific areas of his or her life, particularly in situations where the principal is incapacitated. The validity of the power of attorney is established when it is properly executed in accordance with applicable laws and regulations.

Advantages of other methods of Estate Planning
a. Asset Protection: Certain estate planning vehicles, such as trusts, can provide asset protection benefits by shielding assets from creditors’ claims and lawsuits. By placing assets into these protective structures, individuals can help safeguard their wealth for themselves and their intended beneficiaries.

b. Flexibility and Control: Trusts and other alternative estate planning methods offer greater flexibility and control over how assets are managed and distributed compared to wills. Individuals can specify detailed instructions for asset management, dictate the timing and conditions of distributions to beneficiaries, and appoint trustees or fiduciaries to carry out their wishes according to their unique preferences.

c. Probate Avoidance: Probate, often characterized by its time-consuming and costly nature, entails court supervision and potential delays in asset distribution. To circumvent or mitigate these challenges, individuals may explore alternative methods of estate planning, such as trusts, joint ownership, and more. These alternatives offer the advantage of bypassing probate entirely or minimizing its impact, resulting in expedited asset distribution to beneficiaries. By employing these strategies, individuals can streamline the transfer of assets while reducing the associated complexities and delays.

d. Tax Efficiency: Alternative estate planning methods can offer tax planning advantages, helping to minimize estate taxes, gift taxes, and income taxes. For example, trusts can be used to transfer assets to future generations in a tax-efficient manner.

e. Reduced Risk of Challenges: Alternative methods of estate planning may be less susceptible to legal challenges compared to wills. By structuring the transfer of assets through trusts and the other alternative methods, individuals can minimize the risk of disputes among beneficiaries and potential challenges to the validity of the estate plan.

Conclusion
Estate planning is essential for ensuring asset disposition according to wishes of an individual upon demise. Exploring alternative estate planning methods provides individuals with privacy, control, asset protection, and tax efficiency. By considering these methods alongside traditional wills, individuals can effectively achieve their estate planning goals.