Doing Business With Related Parties

The Nigerian Stock Exchange (NSE), in a bid towards safeguarding against influence on Issuers by interested persons, issued the Rules Governing Transactions with Related Parties or Interested Persons (the “Rules”). The main objective of these Rules is to ensure that the interests of an Issuer listed on the Stock Exchange (and its securities holders) or its subsidiaries or associated companies which are not listed on the Exchange but controlled by the listed group (these three categories are regarded as “Entity at risk” under the Rules), are not adversely affected following engagements in transactions with interested persons. For the purposes of application of these Rules, a foreign company with only secondary listing on the NSE will not be considered an Issuer. Interested persons, under the Rules in case of a company, includes a director, chief executive officer, controlling shareholder of the Issuer or any person connected to the aforementioned persons; the Rules however do not specify the nature of such a ‘connection’.

The Rules require that, upon engaging in any interested person transaction equaling or exceeding 5% of the group’s latest audited net tangible assets (hereinafter the ‘Value’), an Issuer must promptly effect an announcement of such transaction via disclosure in its accounts AND a formal disclosure to the NSE. There is no further indication as to when such disclosure must be made to the NSE as the Rules merely state that the announcement must be “immediate”. Where multiple transactions with the same interested person are contemplated within a financial year, disclosure of all proposed transactions with such person must be made if the aggregate value of all said transactions amounts to or exceeds the Value. The Rules further require that shareholders’ approval be obtained for interested person transaction/s amounting or exceeding the Value or 5% of the issued share capital of the Issuer. Transactions in this context include provision of financial assistance, acquisition/disposal of assets, provision/receipt of services, issuance/subscription of securities and establishment of joint ventures/investments. Similar disclosure will be mandatory in a sale or proposed sale of property units by an Entity at risk to an interested person and such disclosure must be effected within two weeks of said sale. Shareholders’ approval must also be obtained not later than six weeks prior to the sale. The Rules direct that an interested person or its nominee should abstain from voting on all resolutions to approve the sale and also specify that in resolving to effect such a sale, an Issuer’s Board of directors is responsible for ensuring that it is satisfied that the terms of sale are not prejudicial to the interests of the Issuer and its minority shareholders. The audit committee is also expected to bear this responsibility by reviewing and approving the sale upon satisfaction that the terms are fair and reasonable.

A general mandate for recurrent transactions of revenue and trading nature/day-to-day operations (but not purchase/sale of assets or business) may be sought from the shareholders insofar as such general mandate is disclosed in the Issuer’s annual report and subject to annual renewal. The circular to the shareholders seeking a general mandate must include, amongst other information, a statement that the interested person and its associates shall abstain from voting on the resolution approving the transaction.

Where an Issuer does proceed to engage in an interested person transaction, it is required upon approval by the Securities and Exchange Commission (“SEC”) to issue, within 28 days of such approval, the SEC-approved Circular containing the Scheme of Transaction. This Circular should include: the bases on which the terms of the transaction were determined, the benefit to the entity at risk, an opinion from an independent financial adviser, an opinion from the audit committee if different from that of the independent financial adviser and information on taxation consequence.

Where an Issuer is contemplating a transaction with an interested person, the Rules allow for consultation with the NSE at an early stage in order to determine whether a proposed transaction will be classified as an interested party transaction and consequently make the provisions of the Rules applicable. Applicability of the Rules will result in additional disclosure requirements in the accounts of a listed company including inter-company transactions with entities in which it has control over, provided such deals meet the Value threshold as identified in the discourse above. The NSE places significant emphasis on timeliness, adequacy and accuracy of disclosure; where there are possible rule breaches, it will investigate and take appropriate actions, however, there are currently no known instances in which the NSE has queried an Issuer on grounds of not complying with the provisions of the Rules.

Series 2 of our synopsis on the Nigerian Stock Exchange’s Regulation will focus on the Rules pertaining to Board meetings and General Meetings of Issuers.