An exposé of some Commercial & Legal Aspects of the Nigerian Petroleum Industry Bill Part2-Rejigging the Fiscal Toolbox

Indeed, one of the three issues considered the “pillars” upon which upstream oil and gas investments are based is the fiscal regime of the host State. In other words, an investor in an international petroleum transaction intending to invest in a petroleum regime would conduct its due diligence before committing risk capital by looking at, amongst other things, the issue of ‘government take’ versus ‘ investor take’.

The Nigerian upstream fiscal tool box consists of taxes, bonuses (signature and production), rents, fees and royalties. Currently, in the Nigerian upstream oil and gas sector, taxes are paid upon profits derived from petroleum operations after making some allowable deductions, rents are also paid based on factors including size of the contract area and whether production has begun or not.

The signature bonus is paid when the instrument of grant/ the Host Government Contract such as the Production Sharing Contract (PSC) is signed or the letter of award is issued. A production bonus may also be payable when a production threshold is reached or a pre-determined cumulative production is achieved.

Royalties which are a part of production and are payable in actual production(crude oil) or cash equivalents are calculated based on a sliding scale depending on certain factors which include the location of the contract area (whether it is deep offshore or onshore/shallow offshore and the depth of the contract area if deep offshore), whether it is a marginal field or an Oil Mining Lease/Oil Prospecting Licence and with modern trends, recent Nigerian PSCs have introduced the concept of  an R-Factor. International market prices and volume of production also determine the Royalties payable.

Additionally, PSC Holders get tax rebates in form of Investment Tax Credits or Investment Tax Allowances depending on whether the PSCs were signed prior to or after July 1^st 1998.  The difference in practice is that an ITC creates a much lower tax liability on the part of an investor, than an ITA.

The gazetted version of the PIB proposes to maintain the current tax rates for crude oil operations applicable while increasing tax rates for gas operations by 5-10%. Interestingly, during the July 2009 public hearing on the PIB, an interagency committee comprising of the NNPC, tax authorities and the Ministry of Petroleum amongst others submitted a memo promoting the idea that upstream companies be charged a flat corporate tax rate as well as an additional “hydrocarbon tax” and/or “windfall tax” thereby significantly increasing taxes payable on upstream activities.

The interagency version also makes provision for the payment of Royalty based on value and production in order for the government to cream off windfall profits. This structure, which creams-off windfall profits is regarded by international petroleum transaction experts as a ‘progressive fiscal regime system’ because government take increases as crude oil prices increase in the international market.

Importantly, the PIB also seeks to alter the current cost recovery mechanisms now in practice by reducing the quantum of recoverable expenses by as much as 20% by for example reducing foreign related costs recoverable to 80%.

To further tighten the screws, the PIB also proposes to discard the use of Investment tax Credit and Investment Tax Allowances which were key fiscal incentives in getting the IOCs to consider exploring ultra deep water acreages. In its stead, the PIB seeks to introduce a petroleum investment allowance which rates are currently uncertain.

The fiscal regime as proposed is likely to challenge the viability of smaller discoveries particularly considering that these fields are marginally economic under existing terms due to the high development costs in Nigeria.

The members of the Oil Producers Trade Section of the Lagos Chamber of Commerce and Industry (the “OPTS”), have argued that the overall effect of the changes in the PIB would be to make investment in Nigeria’s upstream oil and gas unattractive and could increase government take from its current 92% to 98% thereby reducing investor take to 2% from 8%. This they argue would make Nigeria’s already onerous fiscal regime worse. The OPTS is therefore engaging the government in this regard.

It should be noted that the provisions reviewed above are proposals contained in draft legislation. These provisions may remain unchanged, be altered or even removed when the final version is passed into law as the industry stakeholders are currently engaging the Nigerian parliament  in this regard.

In spite of the caveat above, the Nigerian government has expressed (and demonstrated) its intention to push through the new law; so notwithstanding that there is an expectation that the stakeholders input will be reflected in the final version of the law, the Nigerian petroleum industry will never be the same again.

What’s the fuss about the Nigerian Petroleum Industry Bill

 

These are interesting times in the West African Emergent Cretaceous Petroleum Play Fairway. This is no less so in the Nigeria’s petroleum regime for a couple of reasons, chief amongst which are the current review of the Petroleum Industry legal and regulatory regime and the global economic melt-down. The global economic melt-down makes these times interesting because it creates an opportunity for discerning investors to acquire oil and gas assets with future high rate of returns at far less than their real value. Before investing however, a review of the legal regime is important.

Like every investor considering investing in any petroleum regime, three issues are considered the “pillars” upon which such investments are based. In other words, an investor in an international petroleum transaction intending to invest in a petroleum regime would conduct its due diligence before committing risk capital by looking at the geology, the fiscal terms and its legal regime.

The legal regime is the focal point of this article as it plays a key role in determining whether international oil companies and their lenders in particular would expend risk capital in a petroleum regime. The legal regime for example makes provisions regarding both the Government take and the returns to be made on investment by the relevant international oil company. This two part series explores some commercial and legal aspects of the Nigerian PIB.

State of the Nigerian Petroleum Legal Regime

Currently, the Nigerian oil and gas industry is primarily regulated by the Petroleum Act, Cap P10 Laws of the Federation of Nigeria (“LFN”) 2004 and the Petroleum Profits Tax Act, Cap P13 LFN 2004 (“PPTA”) both of which were enacted prior to 1970 (1969 and 1958 respectively).

Although the Petroleum Act at present has seven (7) regulations and both statutes have been amended severally over the past forty (40) years, nonetheless, both legislation remain substantially in the original forms in which they were enacted. The circumstances are therefore such that the primary laws regulating the industry, the Petroleum Act, Cap P10 LFN 2004 (and its Regulations), the Petroleum Profits Tax Act Cap P13 LFN 2004 and the NNPC Act Cap N123 LFN 2004 are 40, 50 and 32 years old respectively.

The fact that these legislation are out-of-date means that sectors and aspects of the industry (such as natural gas utilization and environmental issues), which have gained prominence over the last forty (40) years have remained outside their purview and are therefore subject to the arbitrariness of regulatory authorities.

The above being the case, change appears to be a welcome development.

The PIB

The PIB, a draft law currently under consideration by the Nigerian National Assembly which seeks to consolidate and/or repeal a number of existing legislation in the petroleum industry(the PIB replaces 16 different laws and amendments in an omnibus manner), was a key deliverable of the Oil & Gas Reforms Implementation Committee (OGIC). The PIB is also the primary vehicle for achieving the broader objectives stated in the OGIC report of July 2008 which include:

• Maximization of the nation’s economic rent from the Oil and Gas Sector while not jeopardizing the growth and development of the industry
• Separation and clarity of roles between the different public agencies operating in the industry
• Infusion of strict commercial orientation in all relevant aspects of the industry
• Fostering an enabling business environment with minimal political interference
• Reposition the nation’s Oil and Gas industry in view of contemporary challenges within the sector both globally and in the domestic sphere
• Meeting the nation’s needs for fuels at a competitive price
• Maximization of local content and development of Nigerian capacity

There are, however, issues in the PIB which this article seeks to throw up. Although there are press reports that there are up to three (3) versions of the PIB, the object of this article is that which was gazetted in the National Assembly Journal, No. 47, Vol. 5 of December 29, 2008

Incorporation of the Traditional Un-incorporated Joint Ventures

The Nigerian Government’s desire to participate actively in the petroleum sector led to the popularity and growth of the Traditional Joint Venture (“the TJV”) as they are usually tagged. Participation of the Government through the TJV meant Government was a participant in the day to day activities, derived all accruing benefits and bore all necessary costs corresponding to its interests through what is termed a “cash call”.

With the competition for funding which is shared by the three tiers of the Government under the federal system of governance operational in Nigeria, namely the Federal, State and local Governments; the idea of an incorporated joint venture appears welcome. The decision of the Nigerian Apex court stating that the NNPC joint ventures and priority funding could no longer be drawn in priority to the revenue allocations made in favor of the tiers of Government, has further exacerbated the funding challenge.

Under the unincorporated joint ventures each partner owns its own share of the hydrocarbon licenses. This means that all revenue generated by NNPC’s share of crude oil sales are deposited directly into the Federation Account and used by FGN for its budgetary needs. This therefore makes funds unavailable to the NNPC to meet its cash call obligations despite the huge revenue available to the corporation. In fact, as a result of shortage of funds, very little Joint Venture exploration has taken place in the last few years with a very negative impact on reserves replacement. New production projects have proceeded very slowly and have had to be financed by industry via alternative funding solutions as provided by the private sector operator.

With the change to an incorporated joint venture, revenues will go to the Incorporated Joint Venture and all shareholders inclusive of the NOC will be paid dividends that will be subject to the new 10% withholding dividend tax. NOC dividends will be paid into the Federation Account. However the majority of the Government’s cash flows will still be generated through taxes and royalties.

Although the introduction of an incorporated joint venture is laudable, issues that impact the bankability of such I-JVs and its ability to obtain independent funding, such as the World Bank negative pledge need to be properly addressed either by legislation or by agreement between the parties to the I-JVs. Additionally, government legislative requirements also impact bankability and key principles such as the right to independent dispute resolution are imperative. Appropriation of sufficient funds from all the shareholders (including the NOC) for the transition and start up period of the I-JVs until the earnings of the I-JVs are able to support external financings is also an issue that should be given prime consideration. A transition period that supports business continuity and does not threaten the integrity of the core production and cash flows is essential. Given the challenges in complex organizational transformational processes, it can take a reasonable length of time to set up the I-JV. Considering that the conversion is made obligatory by law and not on the election of the parties, a waiver of the potential capital gains, stamp duties and other transfer taxes and charges that may accrue on the transfer of assets to the IJV is also encouraged.

For more details please contact:

Oluseun Sodunke on 234 1 738 8369, 234 1 791 07 02

Email: oluseun.sodunke@bloomfield-law.com

Kunle Obebe on 234 1 738 8369, 234 1 791 07 02

Email: kunleobebe@bloomfield-law.com

Whistleblowers in Nigeria- Myth or reality

 

What is Whistleblowing

There have been various definitions for the phrase whistleblowing, however we can generally define whistleblowing as:

“the disclosure by organization members (former or current) of illegal, immoral or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action.” ¹

Simply put, someone blows the whistle when they tell their employer, a regulator, customers, the police or the media about a dangerous or illegal activity that they are aware of through their work.

We can draw out two key points from the foregoing definitions. The first concerns the topics ripe for whistleblowing. We can define it as wrongdoing (an illegal, immoral, or illegitimate act) which is liable to cause harm to persons outside of the organization from which the wrong emanates. Thus, purely internal matters would not tend to be ripe for whistleblowing, i.e. under this definition, one could not properly be said to be blowing the whistle on a manager who is engaging in workplace human rights violations. While this seems simple enough in practice, it does raise questions. For instance, surely at some point a department’s human relations climate becomes part of the public interest? There have been various cases of fraudulent practices as such; could an employee legitimately blow the whistle in such an instance?

Secondly the notion that whistleblowing must be directed outside an organization has a strong pedigree. Ralph Nader, for example, argues that the heart of the issue in whistleblowing is determining “at what point should an employee resolve that allegiance to society -must supersede allegiance to the organization’s policies -and then act on that resolve by informing outsiders or legal authorities?”³ In Nader’s understanding, whistleblowing is an activity which necessarily gives rise to a major ethical conflict -the decision about when one ought to turn against their employing organization in order to preserve the ‘public interest.’

The Employment Relationship

Duty of Loyalty

The common law holds that there is an implied terms of contract between employee and employer which set out “judges” prevailing conception of what an ideal employment relationship should be. One of the implied terms of the employment relationship, the duty of fidelity (or loyalty) is “the cornerstone.” It enjoys this central role as it allows employers to maintain control over their employees the duty holding “that within the terms of the contract the employee must serve the employer faithfully with a view to promoting those commercial interests for which he is employed.” In short, it is the employees’ job to do the job as asked, not to criticize.⁴

As it dates from prior to the Industrial Revolution, it is not surprising that the duty of fidelity has been moderated over time, no longer extending indefinitely. The bearing this process of limiting has had on whistleblowing stems from the notion, first enunciated in the mid-nineteenth century,

that confidential communications involving fraud are not privileged from disclosure…. The true doctrine is, that there is no confidence as to the disclosure of iniquity. You can not make me the confidant of a crime or a fraud, and be entitled to close up my lips upon a secret which you have the audacity to disclose to me relating to any fraudulent intention on your part; such a confidence can not exist.⁵

Thus, there is a whistleblowing exemption to the common law duties which emerge from an employment relationship. The question facing us is what sort of wrong gives rise to the exemption? Clearly the Gartside measure cited above is one of fraud. Perhaps the high-water mark for this expansion has been set by Lord Denning, who wrote that an employee may disclose “any misconduct of such a nature that it ought in the public interest to be disclosed to others.” Though the exact nature of what constitutes “the public interest” has proved to be of concern to numerous courts, some judgements have stated in dicta that the public interest exception “should be restricted to instances of wrongdoing of grave public importance.” The Law Reform Commission in England notes that the success of a common law whistleblowing defence to a breach of confidence is dependent on both the evidence backing the disclosure, as well as to whom the disclosure was made. With respect to what sort of evidence warrants disclosure, the Law Reform
Commission argues that there is minimal guidance from the Courts. However, authorities point to two considerations: (1) a disclosure is justified only if the whistleblower has a reasonable ground for believing that a crime or civil wrong has occurred or will take place, and (2) that good faith on the part of the whistleblower must be proven.

SPECIFIC CASES OF WHISTLEBLOWING

Corporate Nigeria has witnessed in the last five years a series of cases involving whistleblowing in blue chip companies, the most outstanding occurred in October 2006 when the board of Cadbury Nigeria PLC notified the world, which include its stockholders and regulatory bodies of the discovery of “Overstatements” in her accounts, which according to it, has spanned many years. The company in its release stated that the overstatements could be between N13billion and N15billion

In relation to the scandal, Mr Bunmi Oni, The Managing Director, and Mr Ayo Akadiri, the Finance Director, were relieved of their employment. Following suit, the Council of the Nigeria Stock Exchange barred the duo from running any publicly quoted company for life, whilst the apex regulatory body, The Securities and Exchange Commission, we understand is still undertaking a detailed investigation of the matter.

It came as quite a shock that a discovery of this magnitude occurred in a Company that prides itself with high corporate governance practice and standards. It is useful to point out that, these “Overstatements” were only discovered upon due-diligence undertaken at the prompting of Cadbury Schweppes PLC, the London confectionery giant, when it increased its stake in the company from 46% to 50%. ⁷

Another case that shocked the world was Enron. In just 15 years, Enron grew from nowhere to be America’s seventh largest company, employing 21,000 staff in more than 40 countries, but the firm’s success turned out to have involved an elaborate scam. Enron lied about its profits and stands accused of a range of shady dealings, including concealing debts so that did not show up in the company’s accounts. As the depth of the deception unfolded, investors and creditors retreated, forcing the firm into bankruptcy.

CONCLUSION

With the growth that has been experienced in Corporate Nigeria through the various restructuring programmes carried out by the last administration, many blue chip companies and financial institutions have published various incredible financial results which make one wonder; do we have another WorldCom or Enron in the making in Nigeria?  It is therefore suggested that regulatory bodies like the Securities and Exchange Commission, Nigeria Stock Exchange, Central bank of Nigeria and other bodies direct that all public quoted companies and financial institutions should have whistleblowing policy which would ensure that:

a. staff are aware of and trust the whistleblowing avenue;  b. make provision for realistic advice about what the whistleblowing process means for openness, confidentiality and anonymity; c. continually review how the process works in practice ;and d. regularly communicate to the staff the avenues open to them.

It is also suggested that the federal laws be passed which would provide the whistleblower protection from victimisation, countries like United Kingdom and the United States, laws have passed laws which provide legal protection for whistleblowers. It is therefore submitted that without a legal framework protecting whistleblowers, the fear of intimidation or victimisation would certainly override the moral duty to the society.

List of referrals

1.Janet P. Near & Marcia P. Miceli, “Organizational Dissidence: The Case of Whistle-Blowing”(1985) 4 Journal of Business Ethics 1 at 4.

2.Harry Arthurs, Richard Brown & Brian Langille, Labour and Employment Law, 6th ed.(Kingston: Industrial Relations Centre, 1998) at 106.

3.Ralph Nader, “An Anatomy of Whistle Blowing” in Ralph Nader, Peter J. Petkas & Kate Blackwell, eds. Whistle Blowing: The Report of the Conference on Professional Responsibility (New York: Grossman, 1972) 3 at 5.

4.Harry Arthurs, Richard Brown & Brian Langille, Labour and Employment Law, 6th ed. (Kingston: Industrial Relations Centre, 1998) at 106.

5.Gartside v. Outram (1856), 26 L.J. Ch. 113 [Gartside].)

6.Corporate Governance Issues in Financial Reporting-The Cadbury challenge By Oladele O Solanke paper delivered at the Nigeria Bar Association Business law Section workshop

Encouraging Investments in Nigerian Gas and Power through the Partial Risk Guarantee Mechanism

Preamble

It is typical for power industry experts to emphasize the importance of gas as a veritable source of fuel for the Nigerian electric power sector. This importance, for example, is buttressed by the fact that the Nigerian Electricity Regulatory Commission, the chief regulator of the electric power sector in Nigeria, has determined that the lowest-cost and most efficient new entrant generator in the power sector is an open cycle gas turbine (OCGT) power generator, using natural gas as fuel.

It would therefore appear to be the case that any investor in power generation wishing to run its business efficiently and at a profit should take a keen interest in the gas subsector of the Nigerian economy.

The Gas to Power Challenge

In spite of Nigeria’s large gas reserves there are claims that a number of power plants have been either completed or nearing completion but have no gas to ‘fire’ them. It is thus, a paradoxical situation that a country which has an abundance of gas (at over 184tcf P90) has insufficient domestic use.

It is on the premise of lack of sufficient supply of gas despite the country’s huge reserves and potentials, that the Federal Government of Nigeria (the “FGN”) has initiated a number of programs including the Nigerian Gas Master plan to deal with the challenge of achieving a gas driven economic growth with emphasis on gas to power. In furtherance of the overall policy, there is a domestic gas supply obligation for all gas suppliers with emphasis on supply of gas to government owned power plants for electricity generation.

Despite the FGN’s efforts, it has been difficult to achieve success, as every gas producer in the country is wary of the lack of credit worthiness of government owned entities, the Power Holding Company of Nigeria Plc and its proposed successor generator companies in particular. As a result of this, the FGN has been in talks with the World Bank to help initiate programs and products that would give comfort to gas producers who by the way, are willing to do business in Nigeria if the FGN provides the enabling environment.

The Partial Risk Guarantee (PRG) is therefore the mechanism expected to be utilized in the domestic gas sector to give comfort or “securitization” to gas producers under the Gas to Power policy of the FGN.  Although, the term “Securitization” traditionally has a single generally understood meaning to most lawyers and commercial persons, it has derived an additional meaning in the Nigerian energy lexicon. In Nigeria, the term is also understood to mean a credit risk management arrangement which gives comfort to investors in Nigeria’s energy sector.

What is the PRG?

The PRG is a Partial Risk Guarantee given by the World Bank (or “the Bank”) to protect private lenders or private sector investors against the risk of a government or a government-owned entity failing to perform its contractual obligations as regards a private project. The PRG is generally available to countries eligible to borrow from the International Bank for Reconstruction and Development (the “IBRD”) and the International Development Association (the “IDA”).

Since its first use by the Bank, in the Hub Power Project the Bank has considered the PRG together with its sister product, the Partial Credit Guarantee, a veritable tool in the Bank’s effort to increase private sector investment in infrastructure particularly in developing and less developed countries.

Simply put the PRG backstops government’s payment obligations to a private investor / lender. In this case, a private investor renders services to a government entity with the latter expected to make payment subsequent to the receipt or enjoyment of such services. The PRG tends to ensure that such an investor gets paid through the involvement of the World Bank which assures the private investor/lender of a payment by the Bank upon a payment default by the government entity.

How to obtain offshore safety permits in Nigeria

INTRODUCTION
The Permanent Secretary of the Nigerian Petroleum Ministry (the “Minister”), Engr.
Sheikh Musa Goni on behalf of the Minister of Petroleum Resources in the third
quarter of the year 2011, launched the Nigerian Petroleum Industry Offshore Safety
Permit (“OSP”). The launch of the OSP, was in furtherance of the Federal
Government’s resolve to ensure that the Nigerian Oil and Gas Industry is provided
with enforceable regulations, guidelines and standards among others for the primary
objective of ensuring its sustainability.

Very recently, however, the Department of Petroleum Resources (“DPR”) on behalf
of the Ministry, began the issuance of the OSP in connection with new safety and
personnel accountability measures in the offshore areas of the Nigerian oil and gas
industry (the “Petroleum Industry”). The OSPs are being issued pursuant to the powers
of the DPR by virtue of the Petroleum (Drilling & Production) Regulations and the
Mineral Oils (Safety) Regulations.

All Exploration and Production Companies, as well as Oil Services Companies
working in offshore areas of the Petroleum Industry are now obligated to obtain OSPs
in respect of personnel working offshore. The issuance of the OSPs is calculated to
guard against the loss of lives through effective training and also, to ensure
compliance with the provisions of the Nigerian Petroleum Industry regulations,
international standards and best practices to achieve the vision of zero offshore
incidents.

It is expected that further requirements will be introduced as the system develops,
including the requirement for eligible personnel to undergo basic safety offshore
training and certification. We are aware that the requirement for safety certification
will not be implemented until about the year 2016.

The DPR has appointed a company as its agent for the administration of the OSP
issuance process and for maintaining the requisite personnel safety records. The DPR agent shall also be responsible for issuing the OSPs, as well as maintaining Personnel on Board tracking system for the Petroleum Industry. OSPs are to be issued upon completion of the relevant information such as the offshore worker’s bio-data and employment information contained in the application form and payment of prescribed fees. The OSP is valid for a one (1) year period and is renewable every year.

The current application fee of Nine Hundred and Thirty Five United States Dollars
(US$935.00) is payable on each initial application. Subsequent renewals will attract a
renewal fee of One Hundred and Thirty Five United States Dollars (US$135.00).

For enquiries and assistance with the registration process, please contact:
Mr. Kunle Obebe
Partner and Head of Energy and Natural Resources Practice Group,
Bloomfield- Advocates & Solicitors
200 Muritala Mohammed Road,
Yaba, Lagos
Nigeria
Tel: 234 1 738 8369, 234 1 791 07 02
Fax: 234 1 496 0466
Email: kunleobebe@bloomfield-law.com
Website: http://www.bloomfield-law.com

NIGERIA AS AN EMERGING MARKET FOR PRIVATE EQUITY INVESTMENTS

INTRODUCTION
“Investing in emerging markets doesn’t mean that you have lost
faith in the U.S. market. The U.S. market could go on from here to
even new highs, baffling the experts much as it has done for the
last several years. But diversification into emerging markets,
though it hasn’t proved out to be worthwhile for a long time, may
make a lot of sense now.” A quote from ‘where there’s Risk,
there’s Opportunity: Revisiting Emerging Markets’
by Max Isaacman

Since 1999 Nigeria has experienced a profound level of structural, political
and economic changes that have made it one of the emerging markets in
Africa as well as a vital contributor to the world economy. Nigeria has
evolved to the point where there are excellent investment opportunities in
multiple asset classes, including public equities, debt, and private equity.
The key themes creating this opportunities are well known, including the                                                                                                      recapitalization of Financial institutions and Insurance Companies, the                                                                                                                                 trend towards privatization of state-owned companies, the emergence of                                                                                                                     world class companies and an overhaul of legal regulations guiding Investments.

WHY INVEST IN NIGERIA?
The fundamental case for Nigeria’s high economic growth combined with
valuations that are near historic lows is due to the various economic reform
programmes the Government has embarked on. Gross Domestic Product
(GDP) growth of Nigeria is almost double that of developed markets (In 2006
GDP growth rate of Nigeria was 5.6 percent and GDP growth rate of England
was 2.8 percent source Economist Intelligence Unit), The inflation rate has also
falling to a single digit of 7.5 percent and economists forecast that this trend is
likely to continue for the foreseeable future.

The private equity markets are still at an early stage of development
compared to public equity and debt, but this asset class offers substantial
opportunities to invest in a broad range of smaller, rapidly growing
companies. Various foreign companies have commenced to harness this
gold mine. For instance no fewer than six Nigerian banks have raised fresh
funds from foreign institutional investors.

While Nigeria may have significant risks, a number of developments have
reduced risk in the markets. Improvements in corporate governance,
accounting, local securities regulations, and the investment infrastructure,
such as the Investment and Securities Tribunal, have all seen steady
improvements and significantly reduced the risk factor.2

To fully appreciate the viability of the Nigerian economy, some structural
changes that have occurred over the years shall be intrinsically considered:

Improving Corporate Governance:
Poor corporate governance is often cited as a reason to avoid making
investments in Nigeria. But many emerging markets governments are moving
to enhance their regulatory frameworks with an eye toward maintaining
interest from foreign investors. Many companies are also moving on their own
to adopt U.S.-style corporate governance standards.

The Securities and Exchange Commission, the Nigerian regulatory body
saddled with the responsibility of regulating the investment market in
conjunction with the Corporate Affairs Commission published a code of best
practice for Corporate Governance. While attitudes towards corporate
governance vary substantially from country to country, the risks can be
managed by active portfolio managers who carefully evaluate individual
companies. In the wake of Enron and WorldCom, it has become more
difficult to make the case that corporate governance risk in at least some
emerging markets is greater than similar risks in developed markets.

Improving Legal Structure:
The investment infrastructure in Nigeria is rapidly evolving in addition to is
becoming friendlier to foreign investors .Many countries realize they need to
strictly enforce their securities rules and regulations if they want to boost
investor confidence. In the past, paperwork burdens created enormous
obstacles for foreign investors, but many countries are working to relax
restrictions.

Nigeria is not left out of this metamorphosis, in 1999 the Investment and
Securities Decree (now Act) was passed into law. An intricate part of this new
legislation was the freedom of any foreigner to invest, transfer and sell stocks
in Nigeria unlike the restriction in Section 7 of the old law. Furthermore to
enhance speedier resolution of disputes that arise from investment
transactions, the Investment and Securities Tribunal was established.

Reduced Trading Costs:
Commissions in Nigeria have decreased dramatically over the last eight
years, much more dramatically than in the developed markets. In some
instances, in percentage terms, emerging markets commission rates will be
below those of developed European countries as well as the U.S. and
Canada. In 1995 the rates for executing trades in Eastern European countries
ranged between 1% and 2%. Today the standard is below .5%, a 50% to 75%
decrease. In Nigeria the Securities and Exchange Commission recently
revised the transaction cost of the primary market for equities from 6.92% to
4.32 % which is a 45 percent decrease.

Commission rates for developed and emerging markets around the world
seem to be converging. The explicit transaction costs are nominally higher in
emerging markets, but this cost factor is not as significant as it once was.

There is no reason why commission rates should not continue to decline. They
may eventually approach parity across multiple markets. Transaction costs
can be expected to continue trending downward for several reasons, the
improved data transparency in a growing number of markets; and an
increased emphasis on “index” names for emerging countries, which allow for
improved risk hedging.

Low Correlation:
Diversifying across countries and industries can reduce risk, yet increase
potential returns. Despite their reputation for volatility, investments in
emerging markets could actually lower portfolio risk assuming a low
correlation either to developed markets or to each other.
Historically, developed markets and emerging markets have not moved in
unison. Market leadership has changed year to year from one market to
another. For the five-year period ended August 25, 2003, the correlation
coefficient of the emerging markets (as measured by the MSCI Emerging
Markets Free Index) to the U.S. (as measured by the Standard & Poor’s 500
Stock Index) was 0.35. Emerging markets have also tended to have low
correlations to each other. While some regions may record poor or steady
performances, others can record robust performances.

For example, early this year some of the major stock markets in the world
experienced a fall in majority of its stock; the stock market in Nigeria was not
affected by this surge. This further reinforces the need for diversifying across
countries.

Where are the Opportunities?
Emerging markets constitute a small part of the current total global market
capitalization, but their rapid growth rates and steadily improving risk profiles
justify higher valuations over time. At the end of 2000, the total capitalization
of the world’s three major stock markets (the U.S., the U.K., and Japan) was
about $20.7 trillion. By comparison, emerging markets represented only a
small portion at $3.3 trillion, or 16%.

However, between 1991 and 2000, the market capitalization of Emerging
markets grew faster, at 716%, compared to developed markets, which grew
about 231%. Various Foreign companies have started to harness this potential
through equity funding in Nigeria as stated above.

Private equity is another type of FPI (Foreign Portfolio Investment) which
various companies are starting to harness in Nigeria. The advantage of
private equity is an injection of fresh funds into the business without the
burden of debt payment. Private equity mean funds from private investments4
collected in a pool of funds investments which is professionally managed by
an investment manager (private equity manager), in the unregistered
securities of private and public companies.

The major players in the private equity market are the investors (fund
providers), intermediaries (fund mangers) and the Issuers. We will briefly
examine the private equity market institutional structure in detail.

1. Investors ( Fund Providers)
These are typically the class of person(s) who provide funds for the
purpose of investing in private equity for strictly financial reasons,
specifically because they expect the risk-adjusted returns on private
equity to be higher than the risk-adjusted returns on other investments
and because of the potential benefits of diversification. This class
involves wealthy families and individuals, bank holding companies,
Insurance companies, investment banks, non-financial corporations, and
foreign investors.

2. Intermediaries (Fund Manager)
These are the mangers of the pool of funds. In Nigeria, these may be in
the form of a Company under CAMA or a Partnership under any of the
Partnership laws.

Under the partnership arrangement, institutional investors are the limited
partners and professional private equity managers, working as a team,
serve as the general partners. In most cases the general partners are
associated with a partnership Management firm, such as the venture
capital firms, or affiliates of a financial institution (an insurance company,
bank holding company, or investment bank); the affiliated firms
generally are structured and managed no differently than independent
partnership management firms.

Under the corporate structure, the fund manger would be incorporated
a s a company under CAMA, with the objective to conduct business as
a private equity investment company, venture capital, publicly traded
investment companies, and other companies.

The Fund Manager will be responsible for the Fund’s financial and
operating performance, as well as for the legal and other aspects of the
Fund’s formation. The Fund Manager will actively monitor and supervise
investment activities and review all documents related to investments.
The Fund Manager will enter into a Fund Management Agreement with
the Fund providing for a Fund Management Fee to the Fund Manager
for services performed. The Fund Manager will also oversee accounting
and financial reporting and ensure that the Fund and Sub-Funds are in
compliance with applicable laws as well as with the applicable statutes,
corporate documents, Fund Management Agreements, and other
related agreements. Investments will be structured generally in 5
anticipation of exits through management buybacks or sales of shares to
strategic investors within a short period of time of investment.

3. Issuers
Issuers generally are companies that cannot raise financing in the debt
market or the public equity market. Issuers of traditional venture capital
are young firms, most often that are developing innovative technologies
and idea and are projected to show very high growth rates in the future.

They may be early-stage companies, those still in the research and
development stage or the earliest stages of commercialization, or later stage companies,                                                                                       those that have several years of sales but are still trying to grow rapidly.

Some may be companies with stable, profitable businesses i.e. Low
technology Manufacturing, distribution, services, and retail industries
who want to finance expansion through new capital expenditures and
acquisitions and/or to finance changes in capital structure and in
ownership.

Public companies also issue private equity to help them through periods
of financial distress and to avoid the registration costs and public
disclosures associated with public offerings or in situation where they
want to go private, issue a combination of debt and private equity to
finance their management or leveraged buyout.
How do you get involved?

We shall briefly consider the regulatory frame work of starting Business as an
equity funding company in Nigeria. The prospective equity funding company
must first be incorporated pursuant to the Companies and Allied matters Act
(CAMA). The Company will be a Special Purpose Vehicle (SPV) through which
the investments will be made. It must be noted that the Memorandum and
Articles of the company must specifically state the kind of business it intends
to carry out.

After the company has become registered, if the company intends to deal in
securities of a public company akin to buying into a listed company, the
Investment Securities Act provides that the company must seek the approval
and register with the Securities and Exchange Commission the apex
investment regulatory body in Nigeria. It should also be noted that Section 17
of the Nigerian Investment and Promotion Commission Act (NIPC) allows a
non Nigerian to invest in any Nigerian enterprise; however such interests must
be registered with Commission.

The company must also register the securities it intends to invest in pursuant to
the Securities and Exchange Rules; this may either be a public offer or a
private placement. It should however be noted that only investments in
public companies require registration with SEC.

The company will also have to be aware of the various tax laws in Nigeria
including the Personal Income Tax, Companies Income Tax Act, Capital
Gains Tax Act and Stamp Duties Act to mention but a few. It should however
be noted that the Government in encouraging venture capitalist passed the
Venture Capital (Incentive) Act which provides Tax relief on personal
investments by venture capital company/projects where such investment is
not less than 25 % of capital required for venture project and the company
engages in:

I. Acceleration of industrialization by nurturing innovative ideas ,
projects and techniques to fruition:

II. Commercialization of research findings with high potential for far
reaching forward or backward linkages

III. Promotion of self reliance through the establishment of resource
based and strategic industries through the provision of risk
guarantee and insurance:

IV. Encouragement of indigenous processes and tech:

V. Promotion of the growth of small and medium scale enterprises
with emphasis on local raw material development and
utilization:

VI. Such objectives as specified by the FIRS(Federal Inland Revenue
Service)

Conclusion
Nigeria has become a significant option in the realm of global investment.
While investing in Nigeria involves significant risks, substantial progress has
been made on a number of fronts to reduce risk in those markets. Corporate
governance, accounting, and local securities regulations have all seen
steady improvements and the Government has shown a genuine desire to
nurture the growth of FPI through private equity investments.

For more details please contact:
Oluseun Sodunke on 234 1 738 8369, 234 1 791 07 02
Email: oluseun.sodunke@bloomfield-law.com
Kunle Obebe on 234 1 738 8369, 234 1 791 07 02
Email: kunleobebe@bloomfield-law.com

LEGAL CONSIDERATIONS FOR START-UP COMPANIES IN NIGERIA

One of the most paramount questions on the mind of every entrepreneur on the
verge of starting their own business or intending to expand their business is how
to raise capital. This article seeks to consider the various types of financing
options an the legal considerations that are available to start up businesses and
companies with the desire to expand in Nigeria.

Types of finance
Investing in a relatively new company is a risk which may deter some traditional
forms of finance. It involves investors taking a longer term view on their
investment, particularly where there is a large amount of research and
development to be funded, before any income will be received.

Finance falls into two main categories:
• Equity financing
• Debt financing

Whatever the type of finance given, investors will want to carry out appropriate
financial and legal due diligence to check the company and its affairs are in
good shape. This will include checking the appropriate paperwork is in place,
filings have been made at the Corporate Affairs Commission, intellectual
property rights are properly vested in the company, key contracts are properly
documented, there are suitable employment contracts for key individuals etc.

What is equity financing?
Equity finance is the most common source of funding for small companies. The
person starting the business will normally introduce equity capital, but equity
capital can also be raised from external investors like friends, family and venture capitalists. If the business is a company, the equity is invested in exchange for an
interest in the company (shares). Investors also expect a portion of the business’s
profit, which in the case of limited companies takes the form of dividends. Equity
finance is more risky than debt finance as shareholders are paid back only after
other creditors in any insolvency of the company. Investors will also be looking for
a good return when they sell their shares. Equity is best suited, therefore, to
businesses that expect to grow quickly.
The distinction between debt and equity is further blurred by the use of
instruments such as convertible loan stock which is a form of debt that is
convertible into equity on certain terms.  Some Important Considerations

1. Share Price – Valuation is key to determining the number of shares that would be allotted to the Investor.

2. Board representation – The Investor may also require a representation on
the Board of the company essentially to protect the Investor’s interest.
Ideally any board member should add value to the company by way of
knowledge, experience and contacts, and not merely act as an observer
for the investor.

3. Share structure – Investors commonly want a substantial minority (ie, less
than 50 per cent but greater than 25 per cent) which enables them to
block a special resolution (many key decisions require the consent of 75
per cent or more of the shareholders). Consider which shareholders, or
which combinations of shareholders voting together, can pass ordinary
resolutions which require greater than 50 per cent of voting shares.

4. Preferential return – Investors often want a priority return on their
investment either through the use of preference shares with a priority
dividend or more commonly through “A” ordinary shares which have a
priority return on exit events, usually a sale, float or liquidation of the
company termed a “liquidation preference”.5. Veto rights – investors often wish to enhance their position as minority shareholders through veto rights on key decisions for example:

a. changes to share rights;
b. changes to Memorandum and Articles of Association;
c. expenditure over certain thresholds;
d. issue of further shares or options;
e. disposal of assets;
f. employment of staff or staff over a certain salary;
g. changes to terms of directors’ employment(including salary);
h. changes to the nature of the business;
i. capital expenditure over a certain threshold.

6. Equity investors will also want to see a clear route for ‘exit’ – a realisation of their investment usually within Three to Five years. The usual means of achieving this are seeking a listing of the shares on a recognised exchange, seeking a trade sale or carrying out a refinancing. The investors’ desire for an exit may not always entirely coincide with the directors’ views of the direction the company will take.

What is debt financing?
Debt finance could usually be short term or long term. Debts are repaid over a
period of time, at fixed or variable rates of interest. The lender has no equity
stake in the company although a lender may require the ability to convert debt
into equity on the occurrence of certain events.

The lender will usually require that the debt be secured by a business or personal
asset. Terms can vary in length from one year to 25 years, and will usually be
determined by the asset that is being financed. The interest rate will reflect the
lender’s perception of the risk in providing the debt. Short term Debt financing
can be provided in the following ways:1. An overdraft is money that a business can borrow from a bank up to an agreed limit. It provides a business with short-term financing, effectively by
running a negative balance on the bank account. This is a particularly
good way of funding short-term requirements, such as providing working
capital during the course of each month.

2. Term loan is a fixed sum is lent for a fixed period, usually repayable in
installments, but once repaid cannot be redrawn.

3. Revolving credit is a fixed sum is lent for a fixed period, but is available in
tranches which can be repaid and drawn down again, giving greater
flexibility.

4. Loan note/bond is a fixed sum advanced for a fixed period, but the
holder of the note or bond can transfer the benefit to a third party.
Lending may be secured or unsecured. Secured lending involves the lender
taking a charge over certain assets of the borrower. This means that if a
company defaults in repayment of the loan the lender can have recourse to the
secured assets in order to satisfy the debt. The lender will rank ahead of
unsecured creditors, such as trade creditors, and there is therefore a
considerable advantage to it in taking security.

As a result, secured lending will typically be at a lower rate of interest to unsecured lending.

Secured lending is more difficult for early stage companies as there are often very few assets of value in existence at that point.

Some important considerations

The precise terms of the lending should be carefully checked to consider issues
such as:

1. The terms of repayment – can the company afford the repayments based on the income projections in the business plan?

2. Interest payable – what is the rate and is it in line with the market?

3. Right to repay early – are there any penalties for repaying early, for instance on a disposal or if you want to change banks?

4. Remedies for default – in what circumstances can the lender claim repayment?

5. Any ability to convert the debt into equity.

6. Covenants – are there restrictions on what the company can do without the bank’s consent?

Key steps to take
• Consider the appropriate level of investment you require.
• Make sure your business plan is up to date and complete.
• Consider what level of investment is required and from whom (i.e. family, friends, banks or venture capitalists).
• Appoint legal advisers at an early stage. As well as drafting any relevant
documents they can assist with contacts and advise on the contents and
circulation of business plans and help in negotiating the heads of terms.

For more details please contact:
Oluseun Sodunke on 234 1 738 8369, 234 1 791 07 02
Email: oluseun.sodunke@bloomfield-law.com

Kunle Obebe on 234 1 738 8369, 234 1 791 07 02
Email: kunleobebe@bloomfield-law.com

CORPORATE IMMIGRATION COMPLIANCE IN NIGERIA

INTRODUCTION

Nigeria is an emerging market with a number of companies with foreign interests
either entering in to joint ventures with Nigerian companies or as wholly owned
foreign companies. Often times, there is need for the engagement of specialized
expatriate personnel to undertake assignments in various fields especially in
technical services. Hence, companies source for expatriates who possess the
requisite expertise to carry out these services or carry out intra-company transfer of
employees from other countries.

This article seeks to highlight the various compliance issues that we encounter on a
regular basis and the steps to ensure compliance with regulatory provisions.

BUSINESS VISA HOLDERS SEEKING EMPLOYMENT IN NIGERIA
A business visa ordinarily enables investors, businessmen, to attend meetings,
workshops or seminar in Nigeria for short periods and further enables those who
have the intention of establishing a business to do so. It is instructive to note that a
business visa does not allow the holder to seek employment.
The Immigration Act provides that companies cannot employ a foreign national
without the permission of the Director of Immigration except the Minister of Interior
grants a waiver/exemption by notice.

We have recently discovered that some companies are not aware of the need to
apply for an expatriate quota for long term work authorization or to seek the
permission of the Immigration Service to apply for a Temporary Work permit (TWP)
for short term work authorization. The companies employ foreign nationals that
arrive in Nigeria with visitors or business visas. It is paramount that the H.R confirm the
immigration status of expatriate employees and take steps to regularize their
immigration status.

ILLEGAL EMPLOYMENT OF EXPAT EMPLOYEE

All over the world strict compliance to immigration regulations is taking centre stage
and Nigeria is not an exception. Companies desirous of employing foreign nationals
in Nigeria must first seek and obtain the consent in writing of the Director of
Immigration while persons entering Nigeria for business purposes must obtain the
consent of the Minister of Interior in writing.

The employer company is responsible for the application and would be held liable for failure to obtain consent.
It has also become prevalent that immigration officials carry out unscheduled site
visits to companies that employ foreign nationals, though the Immigration Act is
silent as to on-site inspection, in practice there are departments created within the
immigration service responsible for investigation if the need arises. It is therefore
advised that the H.R team must have copies of their expatriate employee’s work
permits and passport pages.

BACKGROUND CHECK OF EMPLOYEES QUALIFICATION
There is a need for background checks of documents (diplomas, degrees, and
professional qualification) of prospective expatriate employees by Employer
Company. It is not unusual that employees’ present fake documents, it is the responsibility of
the company to conduct a preliminary verification of credentials and documents
before the documents are submitted to the Immigration service, this will save the
companies from any undue embarrassment.

JOB DESIGNATIONS FOR TEMPORARY WORK PERMIT HOLDERS
Companies that intend to engage the services of expatriates for short term
assignments are required to apply to the Comptroller General of Immigration for a
Temporary Work Permit (TWP). It is pertinent to note that TWP holders are not entitled
to job designations. The job designations connote an intention to keep the expat
employee on a long term basis and would definitely raise a red flag with the
Immigration Service.

EXPIRATION OF EXPATRIATE QUOTA
An expatriate quota is a permit issued by the Federal Ministry of Interior which allows
a company registered in Nigeria to employ foreign nationals. The Expatriate quota is
granted for a period ranging between 2/3 years at the discretion of the Minister of
the Interior and subject to renewal upon expiry.

We have discovered that a number of companies do not keep track of the
expatriate quota’s expiry date. On the expiration of the expat quota, the foreign nationals do not have a basis of employment in Nigeria and this may jeopardize the company’s operations. It is advisable that the company has a proper monitoring system that ensures that the expatriate quota renewal commences before the
substantive expatriate quota expires.

NIGERIAN UNDERSTUDIES
To further protect local content/workers, it is advisable that companies advertise
employment vacancies and also interview for positions in their organizations before
seeking expat workers. It is also pertinent to state that companies must ensure that foreign national
employees have Nigerians understudies. The details of the Nigerian understudy must
reflect in the monthly expatriate quota returns filed with the immigration authorities.
All relevant information must be disclosed by the company to the immigration
authorities and where an expat is desirous of working in Nigeria there must be
evidence of work experience to fill any vacant position on the expatriate quota.
The expertise of the expat must not be in question.

It is instructive to note that where foreign national has been convicted for
deportation, the employer company shall pay the expenses incidental to the
voyage from Nigeria of the Person to be deported and his dependants (if any) and
maintenance of such person and his dependents.

The Immigration Act further states that it shall be an offence for any employer of
persons liable to repatriation to discharge any such persons without giving notice to the Director of Immigration, where this happens the business of the employer may be wound up subject to the provisions of the immigration Act.

CONCLUSION
It is quite unfortunate that the immigration lawyer is always called upon after the
fact (the arrest, detention for deportation of the foreign national employee) It is
advisable that companies seek the counsel of an immigration lawyer every step of
the way especially on issues of compliance with the relevant Immigration laws and
regulations in place, Human resource experts rarely ever do this, when a company
intends to employ an expat, The Immigration Lawyer can always guide the Human
resource department of companies to avoid the pitfalls of our Immigration laws and
regulations. It should be noted that this article is for general information only. It is not offered as
advice, on any particular matter, whether legal procedural or otherwise. If you have
any questions about this article, please contact the author.

Author
Kunle Obebe
Bloomfield- Advocates & Solicitors
200 Muritala Mohammed Road,
Yaba, Lagos,
Nigeria
Tel: +234 1 738 8369, +234 1 7910702
Fax: +234 1 4960 466
Email: kunleobebe@bloomfield-law.com