Legislation review - Banking Sector 2024 Recapitalisation in the Horizon: The Role of the Nigerian Transaction Legal Advisor
A. Introduction
On March 28, 2024, the Central Bank of Nigeria (“CBN”) pursuant to its regulatory powers as stated in Section 9 of the Banks and Other Financial Institutions Act (BOFIA) 2020, issued a circular to all Commercial, Merchant, and Non-interest Banks and promoters of proposed banks. The subject of the subsidiary legislation is the “Review of Minimum Capital Requirements for Commercial, Merchant and Non-interest Banks in Nigeria.” The reason for its issuance is to ensure that the financial services sector, particularly the banks are resilient, solvent, and capable to continue the growth of the Nigerian economy.
A previous recapitalization exercise in 2005 by the CBN saw the increase of the bank’s minimum capital base to N25 Billion. This resulted in several corporate restructuring transactions that propelled the merger between or acquisition of several banks.
This Subsidiary Legislative Review seeks to identify salient provisions of the CBN Circular and importantly the role of the Nigerian licensed Transaction Legal Advisor in not just the actual recapitalization process, but in the preliminary, peripheral, and concluding stages.
B. Salient Provisions of the 2024 CBN Circular on Recapitalisation
i. Minimum Capital Requirement
The new minimum capital requirements for commercial banks were divided into three cadres: International - N500 Billion; National - N200 Billion and Regional – N50 Billion. In the case of a Merchant Bank (National) – N50 Billion; while that of Non-interest Banks (National) – N20 Billion and (Regional) – N10 Billion.
Excluded Capital for Purposes of Determining Capital Requirement are – (a) Shareholders’ Fund (But paid-up capital and share premium are inclusive) (b) Additional Tier 1 Capital.
ii. CBN Approved Transaction Structure
a. Injection of fresh equity capital through private placements, rights issue and/or offer for subscription.
b. Mergers and Acquisition; and/or
c. Upgrade or downgrade of license authorisation.
In general, the CBN directed all banks to submit an implementation plan that clearly indicates the chosen option(s) for meeting the new requirement and various activities involved with their timelines. This Implementation Plan is to be submitted not later than April 30, 2024, to the Director, Banking Supervision Department, Central Bank of Nigeria.
iii. Recapitalisation Timeline
a. In the case of existing banks, they are required to meet the minimum capital requirement within a period of 24 months commencing from April 1, 2024, and ending on March 31, 2026.
b. In the case of proposed banks, the new capital requirement shall be applicable to all new applications for banking license submitted after April 1, 2024.
c. Already submitted and pending applications for banking license shall be processed irrespective of the increase in capital requirements. However, the promoters of such proposed banks shall make up the difference between the capital deposited with the CBN and the new capital requirement not later than March 31, 2026.
There are concerns about the downsides of the recapitalisation exercise such as market uncertainty, loss of jobs, dilution of existing shareholders’ holdings etc. However, it is believed that the merits outweigh the demerits. Specifically, the CBN accentuates that the broad objective of this Recapitalisation Exercise is to engender the emergence of stronger, healthier, and more resilient banks to support the achievement of a US$1 Trillion economy by the year 2030. It is intended that these resilient banks with larger capital base and capacity can underwrite larger level of credit which is critical to lubricate and catalyse the growth of the economy. In addition to financial stability, a valid case has been made that the recapitalisation exercise will improve competitiveness and risk management; and importantly enhance confidence of the investing public and bank customers.
C. The Role of the Legal Advisor
The role of the Legal Advisor in the 2024 Banks Recapitalisation Programme cannot be overemphasised especially from regulatory, compliance, transactional and dispute resolution standpoints. Pivotally, the Professional Advisors (Finance, Tax, Audit and Legal) would work closely with the Bank’s Board of Directors, Management Team, and Shareholders to fashion out an Implementation Plan for the actualisation of the Recapitalisation Directives that is to be submitted to the CBN on or before April 30, 2024. In addition, the following aspects amongst others will require the expertise of Transaction Counsel and when accessing the Capital Markets, will require a SEC licensed Capital Market Expert (legal practitioners) –
i) Review of the statutory corporate documents
ii) Conduct of due diligence exercise to ensure that all information material to the process are updated and in order.
iii) Offer of legal advice on the best transaction structure, considering the scope approved by the CBN.
iv) Negotiation, drafting and review of all legal documentation required for the recapitalisation process.
v) Offer of legal advice on legal disclosure obligations and general observance of sound corporate governance principles.
vi) Offer of legal advice on compliance with the statutory requirements as imposed by the Companies and Allied Matter Act, 2020, and other applicable laws.
vii) Statutory filings with CBN, CAC, SEC, FIRS, NGX etc. and providing confirmations on enforceability and effectiveness of the transaction documents.
viii) File necessary court action and court processes to give effect to the selected transaction or resolution of any dispute during the course of the Recapitalisation Exercise.
ix) Take any other step(s) or role ancillary to any of the above.
D. Conclusion
It is anticipated that various aspects of the 2024 Recapitalisation Exercise will throw up opportunities for the legal advisor (law firm) acting alone or in collaboration with another law firm. There will no doubt exists the need for banks and in some cases its officers to seek expert business advisory legal service and even dispute resolution service on potential corporate governance and transaction dispute(s) that may arise during the Recapitalisation Exercise that just commenced.
Qualifications and Disclaimers: This Publication is prepared strictly for informational purposes. It should not be relied upon or serve as a substitute for proper legal advice. Counsel will not be held liable for any action or inaction that is premised strictly on this paper.
For Further Information, Please Contact –
1. Mr. Ikemefuna Stephen Nwoye – Lead Partner
2. Mr. Onyeachonam Bernard Omeji – Associate Partner
3. Mr. Akintomide Olumide Ajijo – Legal Associate