The role of target management in a tender offer: The position in nigerian law

Journal of African Law

Volumn 40, Issue 1, 1996, Pages 1-18

  Ogowewo, Tunde I ^a  

^a UNIVERSITY OF LEICESTER   (United Kingdom)

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EID: 0008652472     PISSN: 00218553     EISSN: 14643731     Source Type: Journal    
DOI: 10.1017/S0021855300007099     Document Type: Article

References (82)

1. See D. Johnston, Canadian Securities Regulation, Toronto, 1977, 318. This is because it is an effective way of taking control of a company from its managers, even when the bidder is unwelcome. Essentially, its mechanics involve the bidder making a public declaration to all the relevant security holders of the target company that if they tendered their securities to a designated depository within a limited period they will receive a premium. Target security holders may find the premium irresistible, as it is the added value in excess of the prevailing market price of the securities. If the bidder obtains enough securities to give it control, the bidder will use die securities to vote out the existing board and install its own.
2. Empirical evidence shows that target firms experience statistically significant positive stock price responses following the commencement of a tender offer. See M. Jensen and R. Ruback, “The market for corporate control: the scientific evidence”, (1985) 11 J. Fin. Earn. 3.
3. For a study of the U.S. federal regulatory scheme and the regulatory scheme in the U.K., see T. Hurst, “Self regulation versus legal regulation”, (1984) 5 Co. Law 161
4. D. DeMott, “Current issues in tender offer regulation: lessons from the British”, (1983) 58 N.T.U. Law Rev. 945
5. and T.I. Ogowewo, “The underlying Uiemes of tender offer regulation in the UK and the US”, Journal of Business Law (forthcoming, 1996).
6. Uncoal Corp. v. Mesa Petroleum Co. 493 A. 2d 946, 954 (1985).
7. The impacting provisions outside Chapter IV are based on Gower's Draft Code on Company Law in Ghana: Final Report of the Commission of Enquiry into the Working and Administration of the Present Company Law of Ghana (1961).
8. See D. Ekineh, “Stimulating corporate growdi and development dirough business combinations”, (1992) 9 SEC Quarterly (No. 3) 1.
9. For a critique of die scheme of arrangements provisions, see T.I. Ogowewo, “The dual statutory procedure for effecting a scheme of arrangement in Nigeria: law reform or retrogression”, (1994) 6 R.A.D.I.C. 594.
10. Apart from a tender offer and a scheme of arrangement, a take-over or merger can be effected by means of a stock market purchase or a reconstruction dirough a voluntary liquidation. For a comparative analysis of die British and Nigerian procedures for effecting a reconstruction dirough a voluntary liquidation, see T.I. Ogowewo, “Reconstructions by a voluntary liquidation in Nigeria: a step ahead of the British”, (1995) 16 Company Lawyer 317. Of course, where control is concentrated in a few hands, men a transfer of control may be effected by means of a private treaty.
11. Non-executive directors and auditors do not seem to be particularly good monitors. One interesting recent phenomenon, however, has been die role diat die Nigerian Shareholders Solidarity Association has played in monitoring management. This association (inspired by notions of corporate governance) founded and led by Akintunde Asalu has played a leading role in monitoring management, such mat its presence during annual general meetings and extraordinary general meetings acts as a restraining influence on directors: interview widi Mr A. Asalu, 9 January, 1993. See “Shareholders give firms' directors ultimatum on AGM”, Business Times, 14 August, 1995, 30.
12. Traditionally, take-overs in Nigeria have always been friendly and were informed by a desire to realize synergies and not to replace incumbents. This has now began to change. Of late, mere have been successful attempts to gain control of blue-chip companies by means of stock market purchases—a key indicator that die acquisition was not motivated by considerations of synergy. Incidentally, in one of me cases (Alaye Investments and Owena Bank), management resisted crassly by refusing to register the shares in favour of die purchaser: see New Nigerian Newspaper, 15 December, 1994, 13. The most recent text in diis area emphasizes die displacement potential of the tender offer. See G. Gbede, A Guide to Mergers and Acquisitions in Nigeria, Lagos, 1992,1–2.
13. It is possible to argue that since Nigerian shareholders have a “buy and hold” attitude, tender offers are unlikely. This does not necessarily follow. First, stock prices on die Nigerian Stock Exchange (which were once a study in rigidity) are now more responsive. See “Stock price revolution”, Business Times, 30 August, 1995, 6.
14. See also “Brokers say No Way to complacent managements”, The Vanguard, 6 November, 1995, 12. Secondly, to argue that shareholders will refuse a premium bid because of a “buy and hold” attitude is tantamount to saying mat shareholders are not rational maximizers, a clearly untenable proposition, since rational choice is the economist's model of behaviour. It is contended that the so-called “buy and hold” attitude will give way in the face of a premium bid. True, shareholders have traditionally held on to their shares; but only for the simple reason that no one offered a good price! Another possible argument, aligned to that above and which has some force, is that there is not sufficient market liquidity, thus affecting the feasibility of the tender offer. But liquidity only affects the feasibility of the tender offer if exit from the market—a defining factor of liquidity—is difficult. In recent years, exit from the Nigerian capital market has not posed a problem.
15. With the repeal of the Exchange Control Act, 1962, Cap. 113, Laws of the Federation of Nigeria, 1990 and the Nigerian Enterprises Promotion Act, Cap. 303, Laws of the Federation of Nigeria, 1990, the Nigerian investment market is now more accessible to foreign investors. See Nigerian Investment Promotion Commission Decree (No. 16), 1995 and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree (No. 17), 1995. For a critique of the former foreign investment policy and a rationalization of the recent change, see T.I. Ogowewo, “The shift to the classical theory of foreign investment: opening up the Nigerian market”, (1995) 44 I.C.L.Q. 915.
16. A foreign investor, or indeed any bidder, that successfully acquires control and wishes to squeeze-out a dissentient minority may utilize the compulsory acquisition procedure in s. 608 of the CAMA. For a critique of this procedure and other squeeze-out procedures in Nigerian company law, see T.I. Ogowewo, “Compulsory expropriation of a dissentient minority: reform or retrogression in Nigerian company law”, (1996) 7 International Company and Commercial Law Review No. 2, 55.
17. S. 63(3) of the CAMA. Although this provision codifies the decision in Atewologun v. Metro Motors Ltd [1978] LRN 46 at 49, it goes further by providing a statutory base for management power. This is similar to the position in most U.S. jurisdictions: see e.g. s. 141(a) of the Delaware General Corporation Law.
18. [1990] 4 N.W.L.R. 422 at 463.
19. S. 279(1) provides: “A director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in any transaction with it or on its behalf.” See also Okeowo v. Mighre (1979) 11 S.C. 138, 245–255.
20. SEC v. Chenery Corp. 318 U.S. 80, 85–86 (1943).
21. S. 279(4). See also s. 279(9) which makes it clear that the duties in s. 279 are enforceable against the director by die company. This may cause problems when one considers diat die other provisions on directors' duties do not contain such a provision: expressio unius est exclusio alterius. For example, will it then mean diat die duty to exercise care, diligence and skill in s. 282 can now be enforceable against the director by any person other dian the company? However, the rule in Foss v. Harbottk (1843) 2 Hare 461 (codified in s. 299) suggests a negative answer.
22. For the codified rule in Foss v. Harbottle, see below, n. 84.
23. S. 280(2). This is a consequence of the fiduciary position of die director: Nasr v. Berini-Beirut Riyad (Nig) Bank Ltd [1969] 2 A.L.R. Coram. 7. S. 280(2)
24. provides that: “A director shall not—(a) in die course of management of affairs [sic] of the company; or (b) in the utilisation of die company's property, make any secret profit or achieve odier unnecessary benefits.” S. 280(3) uien provides that: “A director shall be accountable to die company for any secret profit made by him or any unnecessary benefit derived by him contrary to die provisions of subsection (2) of diis section.” Quaere: since an “unnecessary benefit” presupposes die existence of a necessary benefit, when then is a benefit necessary? A possible answer (one diat managers would certainly prefer) is diat a benefit that accrues to a director in circumstances similar to diat which occurred in Regal Hastings v. Gulliver [1942] 1 All E.R. 378, would be a necessary benefit. In Regal Hastings, die directors, who acted bona fide, made a profit out of a scheme diat was wholly in the company's interest, and diere was, in fact, no ouier way of effecting the scheme without tiieir making a profit. The directors were nevertheless ordered by die court to account since the profit tiiey made was one made in die course of their position as fiduciaries. Under s. 280(3) it is arguable diat directors would be able to keep such benefits.
25. This fulfils die prophecy of Olawoyin who had warned against codification as far back as 1977: see Status and Duties of Company Directors, Ile-Ife, 1977, 32.
26. After die codification in 1990, a commentator remarked that, “die decision to codify in spite of [objections] may have been courageous but die many defects present in diis part of die [Act] … bear testimony to die enormity of the task of codification. These defects are compounded by irritating drafting and printing errors, carelessness or plain ignorance diat very sadly run through much of die Act. Many sections of it are potential sources of confusion, needless litigation and unnecessary controversy. This is especially true of tiiose sections where die [Act] aimed at some originality.” See O.A. Osunbor, “The company director: his appointment, powers and duties” in O. Akanki (ed.), Essays on Company Law, Lagos, 1992, 130.
27. [1891] A.C. 107, 144–145.
28. See, for example, Mills v. Sarjem Corporation 133 F.Supp. 753 (1955).
29. A contract uberrimae fidei is an obvious exception. Regulatory codes may also mandate disclosure. See, for example, the U.S. Securities Exchange Commission's anti-fraud provision, rule 10b-5, 17 C.F.R. 240.10b-5 and the Nigerian equivalent, regulation 7(1), S.I. 11 of 1989. For a study of the Nigerian anti-fraud provision, see T.I. Ogowewo, “Transposition of securities legislation to an emerging market: die case of the U.S. Federal Securities Law and Nigeria”, J.I.B.L. (forthcoming, 1996).
30. See A Report on the Reform of Nigerian Company Law, 1988, 201–202.
31. The intention was therefore to introduce a sort of “special facts” exception of the type formulated in Strong v. Repute 213 U.S. 419, 431 (1909). The U.S. Supreme Court in this case articulated this doctrine for the purpose of imposing liability on insiders for non-disclosure.
32. (1914) 30 T.L.R. 444.
33. See Leimburg v. Merrill, Lynch, Pierce, Fenner & Beam 54 N.W. 2d 626 (1952).
34. See also P. Davies, The Regulation of Take-Oners and Mergers, London, 1976, 23.
35. Re Smith, Knight and Co. (1868) 4 Ch. App. 20. Section 115 of the CAMA provides: “The shares or other interests of a member in a company shall be property transferable in the manner provided in the articles of the company.” A public company does not restrict the transfer of its shares: see ss. 24 & 22(2) of the CAMA.
36. Getking v. Kilner [1972] 1 W.L.R. 337.
37. Hedley Byrne & Co. Ltd v. Heller & Partners Ltd [1964] A.C. 465.
38. See Re Savoy Hotel Ltd [1981] Ch. 351.
39. Punt v. Symons & Co. Ltd [1903] 2 Ch. 506, 515.
40. Mills v. Mille [1937–1938] 60 C.L.R. 150 at 185.
41. (1973) 4 S.C. 63.
42. See also F.A.T.B. v. Ezegbu [1994] 9 N.W.L.R. 149.
43. [1974] A.C. 821 (PC).
44. Unreported (12 August, 1982, Lexis Transcript).
45. (1968) 121 C.L.R. 483, 493.
46. C.L.R., at 493–494.
47. (1938) 60 C.L.R. 150.
48. C.L.R., at 165.
49. (1972) 33 D.L.R. (3d) 288.
50. D.L.R., at 315.
51. Cf. Greenhalgh v. Ardeme Cinema Ltd [1951] Ch. 286. For a view which supports this position, albeit in respect of the position under English case law
52. see R. Instone, “The duty of directors”, (1979) J.B.L. 221, 224–228.
53. “The board of directors genuinely considered that it would be injurious to the interests of the companies to discontinue the hotel business.” Report of Mr. E. Milner Holland, The Savoy Hotel Limited and The Berkeley Hotel Company Limited, H.M.S.O., 1954, 26.
54. [1983] 8 A.C.L.R. 199.
55. This provision can be undermined by exploiting a loophole created by s. 143. This section allows preference shares to have weighted voting rights during a period when the preferential dividend or any part of it is in arrears and unpaid, such period starting from a date not more than 12 mondis after the due date of the dividend; where the articles provide for a lesser period, it will suffice for the purposes of the section. See O.V. Onwaeze, “Some recent changes in Nigerian company law”, (1993) J.B.L. 409, at 412. It is therefore conceivable that directors of the target can place preference shares in the hands of friendly parties and leave a part of die dividend unpaid, for a period of time of up to 12 mondis, and men utilize die weighted voting rights to defeat any bidder.
56. See Bamford v. Bamford [1970] Ch. 212
57. where it was held that a defensive improper share issue can be ratified. This statement of law was followed by die Nigerian Supreme Court in Tika-Tore Press v. Abina, above, n. 61
58. and by the Court of Appeal in F.A.T.B. v. Ezegbu, above, n. 61.
59. If ratification is permissible, a derivative action under the codified “fraud on the minority” exception may not be allowed. The way to circumvent this will be to characterize die wrong as a breach of personal rights. See Re a Company [1987] B.C.L.C. 82.
60. A shareholder will dien be able to sue under the personal rights exception codified in s. 300(c). See Re Sherborne Park Residents Co. Ltd (1986) 2 B.C.C. 99,528.
61. Section 300(d) codifies this common law exception: see Burland v. Earle [1902] A.C. 83
62. and the Nigerian case of S.E. Ltd v. Ponmile [1986] 2 N.W.L.R. 516, 526. In Ponmile, the Court of Appeal pointed out mat it is not every case of fraud on a company Uiat comes within die exception; that to come under die exception there must be wrongdoer control. It would seem, however, that s. 300(d), by not mentioning wrongdoer control, dispenses widi the need to prove such control. The s. 300(d) exception is worded thus: “committing fraud on either the company or the minority shareholders where die directors fail to take appropriate action to redress the wrong done”.
63. S. 299. This section provides diat where an irregularity has been committed in the course of a company's affairs or any wrong has been done to the company, only the company has die right to sue. See Gombe v. P.W. (Nig) Ltd [1995] 6 N.W.L.R. 402.
64. This general rule is subject to the well known exceptions to Foss v. Harbottle codified in s. 300(a)(b)(c)(d) in addition to two further exceptions in s. 300(e) and (f) that do not read well widi die earlier part of s. 300. (I diank Dapo Akande for drawing my attention to this drafting error, which appeared to have escaped the notice of Uwaifo, J.C.A., in Tanimola v. S & Mapping Geodata Ltd [1995] 6 N.W.L.R. 617, 627–628.)
65. The two further exceptions are as follows: a shareholder can sue where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or to minority shareholders: s. 300(e) (codifying the decision in Hodgson v. Motional & Local Government Officers Association [1972] 1 W.L.R. 130);
66. a shareholder can also sue where the directors are likely to derive a profit or benefit, or have done so already, from dieir negligence or breach of duty: s. 300(f). This last exception actually falls under the “fraud on the minority” excetion codified in s. 300(d): see Daniels v. Daniels [1978] Ch.406.
67. S. 300(f). See, above, n. 84. In Daniels v. Daniels, W.L.R., it was held, at 414D-E, that “a minority shareholder who has no other remedy may sue where directors use dieir powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits them at die expense of the company”.
68. [1976] 3 W.W.R. 44.
69. W.W.R., at 52.
70. See, for example, Re a Company [1986] B.C.L.C. 382, where it was held that a failure by directors to advise shareholders impartially in regard to two competing bidders (in one of which the directors had an interest) is capable of constituting unfairly prejudicial conduct.
71. Ashby v. White (1703) 2 Ld Raym 938.
72. [1986] 5 N.W.L.R. 828.
73. In Doe d. Bishop of Rochester v. Bridges(1831) 1 B. Ad. 847,859, where Lord Tenterden observed mat “if an obligation is created, but no mode of enforcing its performance is ordained, die common law may, in general, find a mode suited to die particular nature of the case”.
74. B. Ad., at 890.
75. Lonrho v. Shell Petroleum Co. Ltd (No. 2), [1982] A.C. 173.
76. [1992] 6 N.W.L.R. 93, 115, Justice Tom observed that: “Where a plaintiff sues for breach of statutory duty, he must prove that he comes within the provisions of the enabling statute. He must prove that the provisions anticipate him.”
77. Cf. Touche Ross & Co. v. Redmgton 442 U.S. 560, 577 (1979), where the Supreme Court opined that s. 27 is simply a provision that confers jurisdiction on the District Courts to hear actions on the statute.
78. According to a leading authority on statutory interpretation, “if there is clearly no criminal sanction, die inference is stronger that a civil sanction is intended”. F. Bennion, Statutory Interpretation: a Code, London, 1992, 45.
79. However, see Governments Stock and other Securities Investment Trust v. Christopher [1956] 1 W.L.R. 237, where it was held that there could be no offer for the purchase of shares where the shares in question are unissued.
80. S. 29 of the SEC Act replicates die definition of the term in U.S. federal securities laws, and therefore uses the investment contract concept. See s. 2(1) of the Securities Act, 1933, 15 U.S.C.A. s. 77b(l).
81. The effect of this is that die “investment contract” jurisprudence in U.S. securities laws now forms a part of Nigerian securities laws. The Nigerian SEC, in fact, recendy relied on die U.S. Supreme Court's decision in SEC v. W.J. Howey Co. 328 U.S. 293 (1946)
82. for mis purpose in Re Proposed Dunis Investment Bond: Approval/Clearance [1992] 1 S.L.R. 95, 97–98.