Uncertainty remains about the timeline for a global economic recovery following the Covid-19 pandemic. Companies continue to fashion out ways to deal with its negative impacts on their operations, sales/revenue, costs and profits.
This is having mixed impacts on companies following unplanned emergency investments into their operations, new technologies, diversification of business formats among others to sustain their immediate business operations and in readiness for the future – increasing expenditure items and values, mostly on credit due to declining inflows.
Increasingly, several companies have had to shut down with many others facing imminent closures or continuous operations at unsustainable levels. Across the world, companies in competitive and complementary product or service industries are welcoming the idea of leveraging their capacities to create new entities or join forces, to increase their operational resilience, build scale and expand scope as their best bet to economic recovery – as consumer spending and investment/funding options are in distress.
The global economic uncertainty has caused a significant reduction in foreign direct investments (FDIs) into Africa and business operations across the continent. This means local businesses must pursue local solutions to strengthen their operational competencies and survivals.
The timely rollout of the African Continental Free Trade Area (AfCFTA) among other governmental interventions present a new window of economic survival for companies across Africa. Whilst the AfCFTA opportunities are enormous, many companies will require alignments to their operations to drive down cost, improve standards and quality of goods and services to be able to compete at the continental level following the expected market disruptions or close down earlier than expected.
As the next line of action, local companies especially the vulnerable ones must begin the search for collaborations and partnerships that will deliver strong, solvent and competitive companies in order to survive the turbulent outlook – although such efforts are not only encouraged in distressing times. Mergers and Acquisitions (M&A) are one sure way to achieve a solvent and resilient company and managers of companies must anticipate the potential roadblocks in any M&A transaction relative to the Companies Act, 2019 (Act 992).
The power of creditors to (dis)approve a merger proposal presents one such roadblock a company must understand and plan to deal with. In this article, I shall discuss the importance of merger transactions to companies, creditors and how the grant of creditors’ (dis)approval power of a merger proposal under Act 992 is a usurpation of the powers of a company and its officers/shareholders. Also, I shall assess the impact of this provision on future merger transactions and offer some solutions for dealing with this potential roadblock.
Merger transactions and why companies undertake them
According to John C. Coates IV, a Merger & Acquisition “is a deliberate transfer of control and ownership of a business” as an entirety to an existing company or new one formed for such purposes. Fundamentally, a merger involves companies coming together either by way of absorption of an existing company or incorporation of a new one.
Although Act 992 did not specifically define a merger, it, however, acknowledges that the coming together of companies through an absorption of undertaking, property and liabilities or the formation of a new company by which the undertaking, property and liabilities of two or more companies are transferred to the new company as a merger transaction.
Many reasons may account for the deliberate decision to transfer control and ownership of companies including growth, synergy, diversification and other economic motives. To grow, companies may seek to use a merger to expand their operations either within the same industry or in pursuit of new opportunities outside their current industries – by the process of diversification.
Also, the decision to grow could involve expansion into new geographical territories thus demanding a merger with an existing company that understands or has built operational competence in response to the complexities of the new territory. Ultimately, monopolies or near-monopolies enjoy the advantage of market control and expansion with little or no competition. In order to remain in control, companies may undertake a merger transaction as a way of killing off competition or harmonising their goods and services delivery.
Further, the benefits of operational synergies and diversification could lead companies to undertake a merger. The advantages of revenue enhancement and cost reduction associated with operational efficiency and effectiveness, greater pricing control and strong purchasing power could motivate companies to consider merger transactions. By combining technologies, human resources, goods and services etc in a coordinated fashion, merged companies can derive the full benefits of economies of scale and scope – involving the ability to utilise one set of inputs to produce a broader range of products and services.
For whatever considered reason, Act 992 provides for a merger transaction to be undertaken either by way of short-form mergers – involving related companies, mergers by the sale of undertaking for securities to be distributed or as a regular merger. Discussions in this article pertain to approval requirements for a regular merger proposal under Act 992.
Who are Creditors of a company?
Creditors encompass a broad group with different kinds of interest in debts owed by a company. Simply, a creditor is someone owed a debt/money by a debtor (a company).
Often, the circumstances of debt determine the type of creditors. Debts owed trade creditors will be for the supply of goods and services on credit, lenders for sums of money borrowed by the company and judgment debts as awards secured against a company either in an action in tort or other civil claims. Others may include, statutory debts, for example, outstanding tax obligations, social security contributions, permits/licences and employees’ debts for outstanding remuneration payments among others.
These debts create liabilities for a company and could be secured or unsecured. Secured creditors are granted proprietary rights over assets of a company enabling them to exert some action over those assets where necessary and on the failure of a company to meet its debt obligations or when a company goes into insolvency – liquidation. On the other hand, unsecured creditors comprising a vast majority of creditors primarily rely on their contracts with a company regarding the fulfilment of debt obligations toward them – they have no proprietary rights over any assets of a company.
Debt financing in any form provides critical funding for a company’s operations. The law in recognising this contribution makes provisions for the protection of the interest of creditors to ensure companies honour their debt obligations. Primarily, contractual obligations and security agreements offer protection for creditors. Also, creditors have the right to enforce using all lawful means, the payment of debts owed them by companies. Additionally, Act 992 offers protections in the form of capital maintenance and unlawful distributions imposing on officers of a company, specific obligations at all times including in merger situations to ensure creditors’ interest are protected and no debt is unaccounted for and unreported.
No breach of creditors’ protection arrangements shall be entertained as civil and criminal liabilities have been provided against the same. Creditors themselves have been given the power to seek redress in court in circumstances of the breach of these protection arrangements. These arrangements represent a significant step by the law to ensure creditors' interests in the payment of debts owed by a company are not compromised by a company and its officers/shareholders.
It is therefore excessive and counter-productive to grant approval powers to creditors in a merger situation as a way of safeguarding their interest despite the substantial protections already available to them in all circumstances including a merger.
The (dis)approval power of Creditors in a merger transaction – the potential roadblock
Creditors have been clothed with the power to (dis)approve a merger proposal under Act 992. The grant of this power runs contrary to well-established principles on the powers of a company and the exercise of same thus creating a substantive legal problem.
Further, procedural challenges can be anticipated from the exercise of this power by creditors in a merger proposal (dis)approval going forward.
Companies act through their officers. Directors and shareholders or their authorised officers or agents are the only group of persons with the power to act on behalf of a company. This implies that all decisions of a company including a merger transaction must be subjected only to the approval of these persons.
Invariably, directors and shareholders or their authorised officers or agents are the only corporate decision-makers for a company. When they decide in unison, their decision should not to be subjected to any external body's approval before taking effect. A decision (an approval or a disapproval) regularly taken by a company means these persons (dis)approve of same in line with Act 992 or the registered constitution of a company.
Creditors remain creditors. They are not officers of a company and have no power to act on a company's behalf. Their rights are limited to their respective claims in debts owed by a company. Elevating creditors to the position of an officer of a company in the manner done by Act 992 with the power to act on a company's behalf creates a substantive legal problem for the exercise of the powers of a company.
With this provision, Act 992 has succeeded in clothing an "unknown person" at law with the power to (dis)approve a company's merger proposal and thereby acting on its behalf. This mandatory requirement is a clear attempt to usurp the powers of a company and its officers/shareholders who are the only group of persons with the power to act on behalf of and in the best interest of a company. The continued existence of this provision on Ghana's Companies law book is a ticking time bomb waiting to explode into needless litigation on the powers of a company and persons who can exercise such powers in a merger (dis)approval processes.
Generally, companies resort to a merger to build synergies, improve operations and to become solvent and competitive among others. It is officers and shareholders of a company that are best placed to make such assessments as to whether a merger proposal furthers these objectives, amongst others and approve of same. Moreover, officers are duty-bound to make this decision in compliance with their fiduciary obligation to a company.
Creditors are under no such obligations and solely act in their interest
Allowing the exercise of creditors' (dis)approval power in any merger process will result in subjecting a merger proposal regularly approved by a company (by implication; its directors and shareholders) to the pleasure of creditors, a practice which will run contrary to established principles on the exercise of a company's powers by its officers/shareholders and prone to litigation.
The argument is not to discount protection for creditors in merger transactions. A merger by its nature involves the absorption of undertaking and liabilities. Further, the provisions of Act 992 require the passage of resolution of directors of each merging company that on reasonable grounds, the transferee company shall be solvent immediately after the merger becomes effective, the signing of certificate by directors who voted in favour of the resolution and the sending of a copy of the merger proposal to every secured creditor within the stated time frame. These demonstrate a strong commitment to ensuring creditors’ interest are protected. The motivation for creditors' protection beyond these measures should not have resulted in the grant of the power to (dis)approve a merger proposal.
Also, Act 992 failed to provide for the type of creditors to participate in the approval process, thus putting the entire creditors' list of a company in line for the exercise of the (dis)approval power. The complexity of the type of creditors on a company's creditors list presents a procedural challenge for any regular merger proposal approval process under the Companies Act.
Securing a merger proposal approval from a majority in number representing seventy-five per cent (75%) in value of creditors of each merging company has procedural challenges. The cumbersome and practical challenges of who to originate and give notices, the decision on venue and the holding of meetings for a large number of creditors (although new technologies are evolving for large online meetings) for approval by a majority in number representing seventy-five per cent (75%) in value of the two merging companies is a procedural barrier to anticipate in any future merger approval process. The absence of provisions regulating these creditors' meeting and other important factors like their funding in the Companies Act further creates challenges for its implementation.
Presently, whether these creditors' meetings are to be considered as meetings of a company remain unclear.
Further, any rationale for this provision is commercially untenable. To have a new Act aimed at enhancing significantly, the legal and regulatory framework for doing corporate business in Ghana contain this provision is a significant setback and roadblock for the facilitation of merger transactions going forward. This cannot be said to be an adaptation of best practices as advanced jurisdictions such as the United Kingdom do not have this approval procedure for merger transactions.
It will make "commercial nonsense" of our laws to have a merger transaction regularly approved by a company be disapproved by creditors and hence cannot be implemented.
How to deal with the potential roadblock
One way of dealing with the associated problems of this provision is to amend it and remove the creditors' approval power. Whilst this legislative step may take a longer time to realise, companies planning or executing a merger transaction may proceed to implement a merger proposal regularly approved by a company - its officers and shareholders without subjection same to the unusual mandatory approval requirements of creditors. I argue that the adoption of this procedure by a company should not be invalidated by any Court given the full effects of the provisions of Act 992 on the powers of a company and the exercise of same by its officers/shareholders and the persuasive precedent values of decided cases in this regard.
The Courts in any litigation for non-compliance by Creditors should in bold commercial spirit and fidelity to established legal principles on the exercise of the powers of a company and particularly in deference to the Court's power under the Act uphold the approval and implementation of a merger proposal without subjecting it to creditors’ approval as valid.
Equally, companies must begin to pay particular attention to their creditors' list. It is inevitable to run companies without liabilities. However, companies may through deliberate policies control or set profiles for its creditors' list. Creditor management involving the decision of who and of what values a company may become indebted, is a must going forward. Such management plan will ensure only creditors with a commercial appreciation for management decisions such as mergers are maintained on a company’s creditors list to avoid “hostage” situations by creditors during a merger transaction should the provision granting creditors the approval power remain in force and the courts defer to its strict compliance.
Companies have not been spared the raging economic losses in the fight against the Covid-19 pandemic. All legitimate options of survival and sustainability are on many management decision-making tables. One such route to sustained operations is through mergers. Although mergers are permitted under Act 992, the provision on the grant of creditors’ approval power of a merger proposal seems to present a clear roadblock to any successful completion of a merger transaction. This may result in needless litigations and procedural challenges with attendant increased transactional cost and delays – if not aborted merger transactions.
It is therefore important for managers of companies to take remedial steps to avoid such challenges through creditors management systems or organised advocacy for the removal of this provision from the Companies Act, 2019 (Act 992) immediately.
Author – Richard Nunekpeku – a corporate and commercial lawyer.
Reachable at [email protected]