Project Finance 2024 Comparisons

The current project finance landscape influences the nature of sponsors and lenders participating in infrastructure projects. Project finance transactions typically see a cross-section of sponsors from across different levels of government and the private sector. Depending on the government level with authority over such infrastructure project, private financiers work with either state or federal governments to sponsor projects based on their respective obligations as structured in the transaction. Development financial institutions and multilateral financial institutions typically play the role of arrangers, while commercial banks operate as lenders. The large scale, long-term nature, and complexity of project finance transactions underscore the critical need for transaction structuring to protect respective interests and assign appropriate obligations towards ensuring the comfort of sponsors, lenders, and all parties to an infrastructure transaction.

There has also been legislative encouragement in the project finance market, further spurring private sector investments and infrastructure funds toward critical development projects, particularly in the oil and gas market.

Public-private partnership (PPP) transactions present a creative and viable solution to Nigeria’s infrastructure deficit. The increasing reliance on such arrangements has contributed to the growth of project finance transactions in the country, including landmark projects that have significantly bridged critical development gaps. Several notable projects have emerged in recent years, highlighting the transformative potential of PPPs.

These PPP projects operate within the legal and regulatory landscape principally guided by the Infrastructure Concession Regulatory Commission (Establishment etc.) (ICRC) Act of 2005. The Act regulates PPP infrastructure contracts with the Federal Government of Nigeria’s (FGN) jurisdiction. Accordingly, it provides the framework for private sector participation in PPP financing, contractual and concession arrangements, and project development. Closely related to this Act is the Public Procurement Act (PPA) 2007, establishing the Bureau of Public Procurement (BPP) and providing the framework and standards for public procurement activities in the country. Other relevant framework components include the Fiscal Responsibility Act 2007, the Debt Management Office Act 2003, and the National Policy on PPPs.

Despite the growth in the PPP landscape, the attendant processes can be cumbersome, especially with respect to the public tender process framework established at both state and federal levels. The process demands time and resources, which may adversely impact investors’ appetite, hence the hesitation to invest in PPP deals.

The complex and robust nature of project finance deals demands detailed structuring considerations, particularly with respect to risk identification and allocations. Accordingly, numerous issues spring up when structuring such deals to achieve the transaction objective without compromising on the rights and interests of the parties. This underscores the need for local counsel to anticipate and mitigate potential and typical risks within the project finance environment.

A foremost risk consideration for project finance investors in Nigeria is the political risk. Government continuity and policy certainty are points of concern in the country, as governments may take varying policy and regulatory directions, both of which impact investor confidence. To mitigate this, investors typically seek sovereign guarantees in respect of political risks. While domestic investors may pursue and indeed achieve a degree of reassurance with respect to their project finance deals involving the government, obtaining sovereign guarantees can be challenging.

The risk of market distortion is another consideration when structuring deals. Frequent changes in regulations, misalignment in government approaches, and incoherent fiscal objectives can be a source of genuine challenges, potentially distorting the market and damaging investor relations.

Given these risks, investors looking to enter project finance deals must ensure their contracts identify the prominent risks and clearly provide for mitigation provisions, including comprehensive force majeure clauses, stability provisions, and dispute resolution mechanisms. Stabilisation clauses, for instance, help to reassure investors by preventing parties to a contract from taking unilateral actions that could adversely affect it. Given the long-term nature of project finance transactions, such clauses are crucial for preserving the integrity of the contract. Investors may also explore risk guarantees and political risk insurance where available. These guarantees take various forms, from performance guarantees to payment guarantees. By securing these financial commitments upfront, investors are further incentivised to commit and complete their projects.

Funding techniques in the project finance landscape are mostly a function of debt and equity financing. Development financial institutions, multilateral financial institutions, and commercial banks typically provide the debt financing for these projects, with their financing structured as senior debt. Subordinated to this senior debt is the equity financing, primarily provided by project promoters. These two financing streams drive the project to completion, while the syndicate of lenders takes security over the project company’s assets.

Many industries are poised to experience significant project activity in the coming years, particularly the energy, oil and gas, and infrastructure sectors. The energy and infrastructure sectors are bound to benefit greatly from the Electricity Act 2023 and the Constitutional Amendment signed by the former President Muhammadu Buhari, with respect to empowering state governments to legislate on the generation, transmission, and distribution of electricity within their states. Following the amendment, the Electricity Act was signed into law and revamped the legal, regulatory, and institutional framework of the electricity regime in the country. Prior to these new power regimes, the Petroleum Industry Act, 2021 (PIA) had also been signed into law to transform the oil and gas sector.

Together, these new frameworks, when effectively implemented, promise to reshape the investment landscape, fostering a surge in project finance transactions in infrastructure, energy, and oil and gas projects. These new frameworks will complement the various government commitments such as the Highway Development and Management Initiative (HDMI) and Infrastructure Corporation of Nigeria (InfraCorp), established to accelerate infrastructure development across multiple levels.

By fulfilling their respective mandates focused on road systems and wider transportation, these initiatives will stimulate investment in sectors such as agriculture, which currently faces challenges including inadequate power supply, road networks, storage, and processing facilities. Addressing these infrastructure deficits will increase the likelihood of investment in related sectors and generate further project finance opportunities.

Collateral offered to lenders can take various forms, depending on the lenders’ preferences and the type of security they deem most appropriate. Asset types are primarily categorised into movable and immovable, with the former including land and landed property, land fixtures, easement rights, among others. Movable property, on the other hand, broadly includes equity rights, shares, receivables, licences, bank accounts, cash flows, corporate guarantees, etc. From a practical standpoint, lenders can take security over both movable and immovable property. The amount of security required is typically influenced by the transaction size, the lender’s financial strength, and the borrower’s creditworthiness.

Lenders can take security through mortgages (fixed or floating charge or both), assignments by way of security, or by placing a lien on property.

• Mortgages can be legal or equitable under Nigerian law. Where lenders opt for a legal mortgage, the title moves from the mortgagor to the mortgagee to create security in favour of the lenders. Such title is subject to reconveyance once the mortgagor fulfils its obligations under the mortgage. Formality requirements of a legal mortgage typically include obtaining governor’s consent per the Land Use Act Laws of Federation of Nigeria (LFN) 2004 (LUA), where such mortgage involves real property; payment of required stamp duties; and registration of the stamped deed of mortgage.
• With respect to equitable mortgage, a transfer of legal title in the asset does not take place. Instead, the mortgage creates an equitable interest over the asset, thus encumbering the property in favour of the mortgagee. This is typically created by depositing with the mortgagee the title deeds accompanied by an agreement or intention to create a legal mortgage, depending on the jurisdiction where the equitable mortgage is sought to be created.
• Lenders can also take security by creating a fixed charge over identified property or a floating charge to cover an entire business undertaking or specific assets. Unlike a legal mortgage, a charge does not transfer title in property but creates a security interest in favour of the lenders, establishing the lender’s priority over any subsequent charges.
• A lien grants the lender a proprietary interest in the asset until the debt is repaid. The lenders will typically have the right to hold on to such assets as security to demand the repayment of the borrower’s obligations.
• Where parties are looking to assign contractual rights, receivables, or claims, an assignment by way of security is appropriate. This option of taking security transfers rights from the assignor to the assignee subject to reassignment once the assignor has discharged its obligations under the agreement. In assignment by way of security, notice of such assignment will be sent to the borrower’s counterparty with a requirement for the acknowledgment of the same.
• With respect to a lien created by a security agent, this is recognisable under Nigerian law. Provided a security agent is validly appointed to hold security on behalf of its lenders, and such security is perfected, the security agent’s right to enforce the security, including by way of a lien, is recognisable.

Under Nigerian law, lenders have the option to create either fixed or floating charges over a company’s present and future assets. A fixed charge is tied to specific, identifiable property, meaning that the property must be ascertainable at the time the charge is created or when it comes into existence. In contrast, a floating charge does not require the assets to be immediately identifiable. Instead, it can be created over a company’s general business undertaking or a category of assets.

The security interest sought to be registered determines the potential registration cost. The costs associated with a registered form of security involving land will vary from those associated with an unsecured transaction. Broadly, the costs below are applicable with respect to registering collateral security in Nigeria:

• Where security is created over land, the governor’s consent in Lagos State, for instance, is 0.25%, while the cost for registration at the land registry is 0.5%.
• Stamping costs are provided for by the Stamp Duties Act (as amended), Cap S8 LFN 2004 (SDA), regulating the stamping regime in Nigeria. Documents are generally stamped in fulfilment of stamp obligations, to evidence the existence of the instruments, and also make such documents admissible in civil proceedings. The stamping cost is 0.375% for a mortgage while fixed and floating charges are calculated at a 0.125% rate.
• There is a registration requirement for secured transactions at the Corporate Affairs Commission (CAC) within 90 days of the creation of such security. This attracts a NGN25,000 fee or 0.35% of the secured amount, whichever is higher.
• In the case of oil and gas assets, as regulated by the PIA, taking security over certain property will trigger a consent requirement from the Nigerian Upstream Regulatory Commission (the Commission) or the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the Authority).

The identification requirements of each security option are determined by the security type. Essentially, whether the specifics of the security subject must be identifiable is a function of how such security is to be created. A floating charge, for instance, attaches to a class of assets or the general business undertaking. In this regard, there is no requirement to specifically identify such assets, since the charge literally continues to flow over the assets until it crystallises.

Contrarily, taking security by way of fixed charge, an assignment, or a mortgage will require the security subject to be ascertainable. This requirement exists as such security options demand that specific interest be assigned or transferred, necessitating the need for the security subject to be identified. The same logic underpins the need for a fixed charge created over future assets to be specifically described ahead of its existence.

A company generally has the right to create security over its assets. However, for such right to become exercisable, the company may be required to obtain some consents or approvals based on the dictates of its constitutional documents or sector-specific regulatory directives applicable to such companies. For instance, a bank cannot grant security over its assets without first obtaining an approval from the Central Bank of Nigeria (CBN). Grants of guarantees are also not restricted in Nigeria, as long as the guarantee is in writing and stamped accordingly. Where the guarantor is a corporate party, the accepting party needs to exercise due diligence in ensuring that such corporate guarantor has the power to offer the guarantee in accordance with its constitutional documents.

There are central registries in Nigeria with respect to records of property. Secured transactions are typically required to register any such interest to establish a claim over the secured property. Accordingly, where obligations have been discharged and the property is no longer charged or encumbered, this release is also registered. This makes it possible for parties to search at the various registries, including the State Lands Registry, CAC, and the Nigerian Collateral Registry.

Once the secured obligations have been discharged, a deed of release would be executed indicating that the borrower has been released from its obligations under the secured transaction. Following the execution of the deed of release, this will be stamped at the applicable stamp rate and accompanied by a memorandum of satisfaction for the purpose of registration at the CAC. If the secured asset is real property, the release procedure includes the additional step of registering the deed of release at the land registry.

Collateral enforcement becomes relevant when a borrower defaults on their obligations. Ideally, the transaction document between the parties would provide for a period during which the defaulting party can remedy its default. Accordingly, in an event of default, the lender will send a notice of default to the borrower, prescribing the number of days during which the borrower can remedy such default and pay any applicable default charges. Where such default persists beyond those days, the lender can enforce the collateral against the borrower through the following methods:

• Power of Sale: Where the borrower has defaulted and the mortgage is by deed, the power of sale arises. However, the power of sale does not become exercisable until:
1. Notice requiring payment of obligations has been served and default continues to persist for three months after such service.
2. The borrower is in default of interest payment for two months.
3. The borrower has breached a fundamental term.

Once these requirements are met, the lender can put the assets up for sale to realise the obligations due.

• Right to Step In: Where the Parties have structured their agreement to include a step-in right, this can be exercisable in an event of default. A step-in right would see the lender step into the position of the borrower, entitling the lender to receive the receivables ideally accruing to the borrower.
• Receivership: A lender under a legal mortgage can appoint a receiver to act in its stead for realising the obligations due from a borrower. Following the appointment of a receiver, a notification of this must be sent to the CAC. The appointing party would typically need to approach the court to sanction the receiver’s appointment.
• Taking Possession: The Nigerian property regime does not impose statutory restrictions on a lender taking possession of collateral to realise outstanding obligations. An enforcing party may only encounter difficulties if they have contractually agreed to waive their right to take possession in the event of a default.
• Foreclosure: To foreclose the borrower’s right to the asset, the enforcing party must approach the court to get an order of foreclosure. This is necessary in Nigeria because foreclosure represents a total enforcement action, completely divesting the borrower of all rights to the assets.

Parties ordinarily have the reserve to enter into and agree on contractual terms, and the courts typically respect the sanctity of such terms. Accordingly, the courts would respect a choice of a foreign law and give effect to it, ensuring that the interpretation of the contract reflects the parties’ true intent.

Notably, the court will refuse to enforce the parties’ choice of law where the chosen law conflicts with the state’s laws, fundamental public policy or accepted moral standards. In such cases, the choice of foreign law may be disregarded in the interest of justice.

Foreign judgments and arbitral awards are recognisable and enforceable in Nigeria. Following the Foreign Judgments (Reciprocal Enforcement) Act, Chapter F35, LFN 2004 (Reciprocal Enforcement Act), a foreign judgment is registrable in Nigeria provided that:

• the judgments of the superior courts of Nigeria enjoy substantial reciprocity treatment in the originating foreign country of such judgment; and
• the Minister of Justice and Attorney General of the Federation has made an order (“Minister’s Order”) extending the applicability of the Reciprocal Enforcement Act to judgments obtained in the superior courts of such foreign judgement.

However, pursuant to Section 10 (a) of the Reciprocal Enforcement Act, since the Minister’s Order is yet to be made, judgments obtained prior to that order will be registrable in Nigeria without further litigation, provided that such judgments:

• derive from civil proceedings;
• are final and conclusive between the parties thereto and capable of execution in the originating country;
• have not been wholly satisfied; and
• are judgments where there is a sum payable thereunder (not being in respect of taxes or other similar charges, or in respect of a fine or other penalty).

Similarly, foreign arbitral awards are recognisable and enforceable in Nigeria without re-examination, as Nigeria has given effect to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards.

Provided the security created is properly registered, a foreign lender has the right to enforce it and recover the outstanding debt. However, if the foreign lender needs to convert the proceeds into a foreign currency for repatriation, consent from the Central Bank of Nigeria is required. This process is typically streamlined if the foreign lender obtained a certificate of capital importation when initially bringing the capital into Nigeria.

There is generally no express provision in Nigerian law that governs cross-border financing in Nigeria. Therefore, foreign institutions are permitted to provide foreign loans to Nigerian entities. It is, however, important to note that this does not make foreign lending void of regulations. Nigerians involved in cross-border financing are required to comply with the CBN regulations and directives in relation to foreign currency borrowings, such as:

• the CBN revised foreign exchange manual 2018 (as amended) and circular dated 21 April 2017 issued by the CBN to establish the Investor’s & Exporters’ FX window;
• the Foreign Exchange (monitoring & miscellaneous provisions) Act which established the foreign exchange market;
• the certificate of capital of importation (CCI) regime for foreign loans; and
• the National Economic Intelligence Committee (Establishment, etc) Act 2004.

There is no restriction on the granting of security to foreign lenders for loans granted in Nigeria. A Nigerian company may source funding through various means, including borrowing, subject to the provision of its memorandum and articles of association.

A lender may accept various forms of security, including rights over the company’s property, such as real estate. However, any security interest must be registered at the relevant land registry for real property and at the CAC for security created over the company’s assets. The enforcement of security over real property by a foreign lender is subject to the provisions of the Constitution of the Federal Republic of Nigeria, the LUA, and certain restrictions imposed by the Acquisition of Lands by Aliens Laws of various states.

Nigeria’s national policy on foreign investment permits foreign investment in all sectors of the economy except specified industries or enterprises designated as being on the “negative list” in the Nigeria Investment Promotion Commission (NIPC) Act (the “NIPC Act”), in which both local and foreign investments are prohibited. Section 17 of the NIPC Act provides that a non-Nigerian may invest and participate in the operation of any enterprise in Nigeria subject to the provisions of Section 18, which provides that the provisions of Section 17 shall not apply to the negative list.

The list is not exhaustive due to the discretionary power granted to the Federal Executive Council (FEC) to determine other enterprises that may be added to the investment prohibition list. Nevertheless, it is useful to note that the nature of business activities in the sectors that are listed under the investment prohibition list are enterprises involved in products or services that touch on national security.

Cyberspace, and particularly the use of national cyberinfrastructure, are subjects of regulation on account of national security, and foreign investment in this sector may be reviewed on grounds of national security. The provisions of the Cybercrimes (Prohibition, Prevention, etc.) Act (“Cybercrimes Act”), the National Cybersecurity Policy, and the National Cloud Computing Policy (NCCP) provide the basis for the review of foreign investments in the cyberspace industry in Nigeria on grounds of national security and public order. Whilst the Cybercrimes Act and the National Cybersecurity Policy, which governs the designation of critical national information infrastructure, generally encourage public–private partnerships to continue to develop Nigeria’s capacity in cyberspace, there is, however, the caveat that critical national infrastructure must be within Nigerian territory. This means that foreign investment in any enterprise that will be involved in controlling or processing classified national security information must maintain its cyber infrastructure within Nigeria. Additionally, under the NCCP, the National Information Technology Development Agency (NITDA) and the security services are tasked with ensuring that classified or national security information is securely hosted. Such information must either be stored on the premises of the relevant ministries, departments and agencies (MDAs) or in facilities that are collocated or hosted in a cloud within Nigeria’s territorial boundaries.

Section 78 of the Companies and Allied Matters Act 2020 (CAMA) provides a general pre-condition for foreign direct investment to the effect that a foreign company intending to carry on business in Nigeria is obligated to incorporate a separate entity in the form of a company in Nigeria, except foreign companies that have been exempted from incorporation by the Minister of Trade. This requirement does not, however, extend to foreign investment in an existing Nigerian company.

Where the nature of the foreign investment involves a merger, the approval of the Federal Competition and Consumer Protection Commission (FCCPC), depending on whether it is a small or a large merger as defined under the Federal Competition and Consumer Protection Act (FCCPA), will be required to complete the transaction.

Nigeria has always had a liberal “free entry, free exit” approach to the movement of foreign investment in and out of its economy. Subject to payment of all relevant taxes, foreign investors are guaranteed unrestricted repatriation of their investment capital and proceeds, in any convertible currency, if that capital was brought into Nigeria under a CCI.

A CCI is a certificate issued to a foreign investor as evidence of an inflow of foreign direct capital investment, whether as equity or debt, and whether in cash or in kind. A CCI is issued by an authorised dealer on behalf of the CBN. A predominant advantage is that the holder of a CCI is guaranteed repatriation of its capital as well as profits upon the maturity of its investment, at the official market rate. The CCI is issued free of charge to the investor. Upon application and submission of the required documents, the CBN, through the authorised dealer, issues the certificate. Although obtaining a CCI is not mandatory, it is strongly recommended to mitigate the risk of exchange rate fluctuations in the foreign exchange (FX) market. The CCI enables investors to recover their funds through the more stable and favourable official market.

While it could be argued that in a stable market with relatively converged official and unofficial exchange rates, not having a CCI might not pose a significant risk (as investors could still source and repatriate FX from the unofficial market), the potential for future divergence between these rates makes the official market – accessible with a CCI – a more attractive option. Therefore, obtaining a CCI is always advantageous.

Typically, repatriation is completed within 24 hours of submitting requests to the authorised dealers or the next auction window, as the case may be. In normal market conditions, the process is straightforward. However, it could become a complicated process if the repatriation involves large sums of money. In such a situation, since the investor does not have a CCI with which to access the official foreign exchange market, it would have to opt for alternative FX options such as businesses that have FX to trade and other independent sources. If the volume of trade involved is significant, the investor may be unable to easily access the required FX from a single source, potentially requiring the pooling of resources or more time to obtain the full amount. Furthermore, purchasing FX without a CCI usually involves higher exchange rates.

It is permissible for a project company to maintain offshore foreign currency accounts.

The instrument that creates a charge is required to be registered at the CAC within 90 days of creation. Stamp duties are also to be paid on all other funding and project documents, to be acceptable as evidence in any legal action for the enforcement of rights. Therefore, the relevant financing agreements are filed at the CAC and the Federal Inland Revenue Services (FIRS) – the authority responsible for collecting stamp duties.

A licence known as a certificate of occupancy is required for the ownership of land in Nigeria. A foreign entity will be required to incorporate a Nigerian entity through which it can hold the certificate of occupancy, pursuant to the LUA.

Natural Resources or Pipeline

The ownership of petroleum is solely vested in the federal government. A licence/lease is required for the exploration or exploitation of petroleum resources. Mineral resources are also vested in the federal government and require a licence/lease for their exploration. Companies incorporated in Nigeria with foreign ownership are eligible to hold these licences/leases. However, a foreign company cannot hold such licences/leases in its own name.

The role of trustees or agent is recognised under Nigerian law.

A secured party is able to enforce its security interest in accordance with the enforcement provisions and other terms of the finance and security documents, and as provided by applicable law. Ordinarily, contractual subordination is recognised and enforceable under Nigerian law. Creditors may agree among themselves to contractually vary the order of priority or waive or subordinate their security interests to those of other creditors. Creditors may enter into a contractual subordination arrangement whereby junior creditors agree to subordinate their payment rights to the payment of debts due to senior creditors or agree to turn over monies collected from the debtor to the senior creditors.

In the absence of such contractual arrangements regarding priority, a legal interest will typically take precedence over an equitable interest. Similarly, security interests that are created first in time will generally rank ahead of those created subsequently.

In the context of insolvency, CAMA provides that where the company’s assets available for payment to general creditors are insufficient, certain claims – such as those for employees’ wages and salaries – have priority over the claims of debenture holders under any floating charge. Secured creditors, however, take precedence over all other claims, including preferential payments, while equity holders rank last in the order of payment priorities.

According to CAMA, the legal forms of a potential project company in Nigeria include the following:

• Sole Proprietorship: Sole proprietorship is usually referred to as “one-man business”, “business name”, “firm”, “corporation” or “enterprise”. A sole proprietorship may be made up of partners, referred to as “proprietors”. It is the simplest form of doing business because it is easier and cheaper to incorporate and set up. In most cases, the founder is the sole owner of the business and shares the burden and profits of the business alone. This is the most common structure for small and medium-sized enterprises in Nigeria. An owner or partner of a sole proprietor does not have separate legal personality from the business. Although the name of the business may be different from that of its owner or partners, the owner or partners are liable and bear personal responsibility for claims against the business. Indeed, the liability of the owner or partners is unlimited, extending even to their personal assets.
• Private Company Limited by Shares: As a result of the separate legal personality between the company and its owners and the limited liability of its members, this is the most common entity for conducting business in Nigeria. The name of a private company must end with “Limited” or “Ltd”. Although two or more persons may incorporate a company in Nigeria, the law allows one person to incorporate a private company. No partnership consisting of more than 20 persons shall conduct business in Nigeria for profit without being registered as a company. A foreign company must be registered and have a place of business in Nigeria before conducting business in Nigeria. Individuals forming a private company must be at least 18 years old, of sound mind, and not undischarged bankrupts. The total number of members must not exceed 50 persons, excluding bona fide employees. While the minimum share capital of a private company limited by shares is NGN100,000, companies with foreign participation must have a share capital of NGN100,000,000.
• Public Company Limited by Shares: Public companies limited by shares face more complex legal procedures and corporate governance requirements due to the larger pool of investor funds and public investment. There is no restriction on the maximum number of shareholders. A public company name must end with “Public Limited Company” or “PLC”. A public company must have at least three independent directors who were not employees of the company, did not receive payments exceeding NGN20,000,000 from the company, or did not own 30% or more of the company’s shares in the preceding two years. A public company may raise capital from the public by offering its shares and debentures and inviting them to subscribe. There is no restriction on the transfer of shares. The company may be listed and quoted in the stock exchange subject to the provisions of the Investment and Securities Act. Every public company shall hold a statutory meeting within six months from the date of its incorporation. A public company must publish the notice of its Annual General Meeting (AGM) in a newspaper and send it to all those entitled to receive it.
• Unlimited Liability Company: In a private unlimited company, the members' legal liability is unlimited. These entities must meet the minimum share capital requirements stipulated for private or public companies. Apart from the liability differences, other features of an unlimited company are generally similar to its limited counterpart.
• Limited Liability Partnership: The Companies and Allied Matters Act, 2020, provides for the formation and registration of limited partnerships, which must have at least two partners. A limited liability partnership must have perpetual succession, and a change in partners does not affect the existence, rights, or liabilities of the limited liability association. A person of unsound mind or an undischarged bankrupt is not allowed to be a partner in a limited liability partnership.
• Limited Partnership: The Companies and Allied Matters Act, 2020, provides for the formation and registration of limited partnerships of not more than 20 persons. Each partner must, at the time of entering into the partnership, contribute an agreed sum as capital or provide a property valued at the agreed sum and will not be liable for debts or liability of the partnership beyond the agreed sum. During the continuance of the partnership, any partner must not directly or indirectly draw out any part of its contribution, and if he/she draws out any such part, he/she will be liable for the debts and obligations of the partnership to the amount drawn out. A person of unsound mind or an undischarged bankrupt is not allowed to be a partner in a limited partnership.

While there is no legally mandated form for a project company, in practice, the private company limited by shares is the most common.

Nigerian companies have experienced phases of rapid industrialisation, economic liberalisation, and financial instability, each necessitating varied restructuring strategies to boost competitiveness and operational efficiency. These restructuring efforts have been profoundly shaped by government policies, market conditions, and regulatory reforms. These factors compel companies to continually adapt their structures, operations, and strategies to effectively manage internal challenges and respond to external pressures. Corporate restructuring options in Nigeria can be classified into internal, external, or a combination of both, depending on the business needs and legal considerations.

• Internal Restructuring: Internal restructuring occurs within a single company, typically when it faces significant debt but wishes to retain its corporate identity without involving third parties. Among these internal restructuring options are arrangement and compromise, which involve altering the rights or liabilities of a company’s members, debenture holders, or creditors. Another option is the arrangement on sale, which occurs when a company’s members resolve in a general meeting, via a special resolution, to undergo voluntary winding-up or formal liquidation. A liquidator is then appointed to sell the company’s assets or business to another corporate entity in exchange for cash, shares, or debentures, with the proceeds distributed among the members according to their liquidation rights. The transferee company does not need to be incorporated under CAMA 2020.
• Management Buy-Out. This is another option which involves the company’s management team, including directors and officers, acquiring controlling shares of the company or its subsidiaries, which can be done with or without third-party financing, as per Rule 449(a) of the SEC rules. Additionally, recapitalisation involves increasing the amount of long-term finances used in financing the organisation and equally increasing the debt stock of the company or issuing additional shares through existing shareholders or new shareholders or a combination of the two. Each of these internal strategies plays a crucial role in helping a company navigate financial difficulties and improve its performance.
• External Restructuring: External restructuring, on the other hand, involves transactions between companies not previously under common ownership or control, aimed at increasing capital and asset stock through asset-based, capital, or financial changes. This type of restructuring involves mergers, where two or more companies merge into a single entity; acquisitions, where one company acquires another; and the sale or purchase of assets to streamline operations or address financial challenges. External restructuring is fundamentally about reshuffling operations and resources through changes in ownership and control. Some of these restructuring options are outlined below.

Mergers

A merger occurs when one or more entities acquire or establish control over a significant portion of another entity’s business operations, assets, or shares, typically involving the consolidation of two or more companies into a single entity through absorption or combination of resources, management, and operations. Mergers are driven by various strategic objectives, such as expanding market share, achieving economies of scale, diversifying product offerings, accessing new markets, and increasing competitive advantage. The merger process involves several key steps, starting with negotiation, followed by due diligence, valuation, regulatory approvals, and ultimately, the execution of formal agreements to finalise the merger. The types of mergers include:

• Horizontal Mergers: According to Rule 421(1) of the Securities and Exchange Commission Rules, a horizontal merger involves direct competitors – companies operating in the same line of business. This type of merger combines or fuses companies that are competitors in the same market. A horizontal merger can potentially create a monopoly by reducing or eliminating competition. For example, a merger between two or more banks, or a merger between telecommunications companies like MTN, GLO, and AIRTEL, would be considered a horizontal merger.
• Vertical Mergers: Rule 421(1) of the SEC Rules defines a vertical merger as a merger between companies in a noncompetitive relationship. It involves the combination or fusion of two or more companies engaged in complementary business activities. An example of a vertical merger would be a merger between a company that supplies raw materials and a company that manufactures finished goods.

Conglomerate Mergers

Conglomerate merger is the combination or fusion of two or more companies that operate in completely unrelated business sectors. For instance, a merger between a food processing company and an insurance brokerage firm would be considered a conglomerate merger. The primary objective of this type of merger is to diversify risk and maximise returns.

Small Mergers

A small merger is defined as a merger or proposed merger with a value at or below the lower thresholds. Rule 427(1) of the SEC Rules specifies that the lower threshold for a small merger is below NGN1,000,000,000 in combined assets or turnover of the merging companies. Therefore, a small merger occurs when the combined assets or annual turnover of the merging companies in Nigeria is below NGN1,000,000,000 or any amount prescribed by the SEC from time to time. A party to a small merger may implement the merger without notifying or obtaining approval from the Federal Competition and Consumer Protection Commission, unless specifically required to do so. If notification is required, the merger cannot be initiated until it has been approved by the FCCPC, with or without conditions.

Large Mergers

A large merger is defined as a merger or proposed merger where the combined assets or annual turnover of the merging companies in Nigeria is valued at over NGN5,000,000,000 or any amount prescribed by the SEC from time to time. In the case of a large merger, the parties involved are required to notify the FCCPC in the prescribed manner and form.

Acquisition

The SEC Rules treat acquisitions as distinct transactions separate from mergers or takeovers, providing a unique definition and procedure for them. An acquisition involves one company taking over a sufficient number of shares in another company to gain control over it. According to Rule 433 of the SEC Rules, an acquisition is a business arrangement where a person or group of individuals purchases most, if not all, of a company’s ownership stake to take control of the target company. Rule 434(a) of the SEC Rules authorises the SEC to regulate acquisitions involving both private companies and unquoted public companies by requiring the filing and approval of acquisition requirements by any corporate entity or individual. The requirements for an acquisition are outlined in Rule 434(b) of the SEC Rules, which stipulates that the acquiring company must file a “Letter of Intent”. This filing must be submitted by a registered Capital Market Operator (CMO) authorised to act as an issuing house, and the letter of intent must be accompanied by several other documents.

Following the acquisition, Rule 438 of the SEC Rules mandates that dissenting shareholders be treated in accordance with the procedures outlined in Sections 146 and 147 of the Investments and Securities Act, 2007. Additionally, Rule 439 of the SEC Rules requires the SEC to conduct a post-acquisition inspection three months after the approval of the acquisition application. Section 146(1)(c) of the ISA defines a dissenting shareholder as a person who is registered or entitled to be registered as the holder of outstanding shares. Under Section 146(1)(b), outstanding shares are defined as shares subject to acquisition for which a takeover bid has been made but not accepted. The definition of dissenting shareholders includes those who reject the offer, those who neither accept nor reject the offer, and those who, after accepting the offer, still fail or refuse to tender their shares to the offeror.

While “takeover” and “acquisition” are sometimes used interchangeably, they differ in that a takeover often implies a hostile or unwilling acquisition, whereas an acquisition may be friendly or consensual. A takeover is characterised by the acquisition of shares not merely for investment purposes, but specifically to gain control of the company’s management. When the acquiring entity purchases a substantial number of shares in the target company, it is considered to have made a takeover bid. While most takeovers are friendly, some are hostile, meaning an unsolicited offer is made by a potential acquirer that is resisted by the management of the target company. The process involves acquiring at least 30% to 50% of the shares or voting rights or any lower or higher threshold as prescribed by the SEC of the target company. This acquisition can be made by an individual, referred to as a core investor, or by a company, known as the acquiring company, with the intention of taking over the target company.

If the acquiring company gains sufficient shares, it gains control over the target company. In this scenario, the acquirer and the target company form a single group, where the acquirer becomes the holding company and the target company becomes its subsidiary, with both companies continuing to exist as separate legal entities. It is not necessary for all the shares to be acquired at once by the core investor or acquiring company; shares can be acquired gradually through a series of transactions over time. Furthermore, the core investor or acquiring company does not need to act alone, as shares may be acquired by persons acting in concert with them.

According to Section 134(1) of the ISA, before a takeover can proceed, the acquiring company or core investor must obtain authorisation for the takeover bid from the SEC. Additionally, a takeover bid cannot be made for shares in a private company. Rule 445(1)(a) of the SEC Rules stipulates that if an individual or group of individuals acquires, or intends to acquire, a minimum of 30% of the shares in a publicly quoted company (the target company) with the goal of taking control of that company, a takeover bid must be made to the shareholders of the target company. This bid can be made directly by the person or group or through their agent. It is important to note that, according to Rule 445(1) (b), the agent must be a registered Capital Market Operator. Before proceeding with a takeover, the acquiring company or core investor must obtain authorisation from the SEC to make the takeover bid. The procedure for applying for this authority is detailed under Rule 447(1)(b) and (c) of the SEC Rules.

The terms of the insolvency would largely determine whether there would be any effect on the security or guarantee. Upon the commencement of insolvency proceedings, a moratorium is placed on the enforcement of security against the debtor. Consequently, a secured creditor may not realise the security itself but must deliver it to the liquidator for realisation. However, such stay or moratorium does not have extraterritorial effect.

Generally, creditors are ranked according to the type of security that they possess over the debtor’s assets and whether such security is registered as stipulated under Section 197 of CAMA. Under Section 494 of CAMA, the order of priority is as follows:

• all outstanding payments to employees of the debtor;
• deductions for pensions;
• accrued holiday remuneration;
• claims of creditors with fixed charges;
• claims of secured creditors with floating charges; and
• claims of unsecured creditors.

If the lender’s security interest was completely perfected prior to the insolvency of the borrower, the lender can legally enforce its security against the borrower. Under Nigerian law, any court attachment, sequestration, execution of judgment against the estate or effects of the borrower or any disposition of property of the company in the course of a winding-up proceeding shall be void. However, where such security was not duly perfected, the lender will be deemed an unsecured creditor, which affects the priority of the lender’s claims.

Unlike natural persons who are subject to bankruptcy proceedings, statutory corporations are generally not subject to bankruptcy as they are governed by specific statutes establishing them.

Under Section 65 (7) of the Insurance Act, a person who intends to insure any property located in Nigeria, whether movable or immovable, or any insurable interest or liability in relation thereto, shall place such insurance with insurers registered in accordance with the Insurance Act, by the National Insurance Commission (NAICOM). Thus, where a foreign insurance organisation, not registered with NAICOM, wants to provide insurance services in Nigeria, it may seek and obtain the permission of NAICOM to provide insurance and reinsurance services. Also, while insurance policies may not be taxable, a relevant premium must be paid.

Insurance policies over project assets are payable to foreign creditors.

While payments of principal are generally not subject to withholding tax, payments of interest and some other payments (eg, dividends) made to lenders are subject to withholding tax at the rate of 10%.

The withholding tax may, however, be subject to relevant double taxation treaties entered into by Nigeria with the lender’s country of residence, and the rate could be reduced to 7.5%. Nigeria has double taxation treaties with the United Kingdom, China, the Netherlands, Sweden, the Czech Republic, Canada, France, Pakistan, the Philippines, Singapore, Slovakia, Romania, South Africa, and Spain.

In Nigeria, stamp duties must be paid on instruments executed within the country or on instruments executed elsewhere that relate to property situated in Nigeria or any matter or transaction undertaken in Nigeria. Consequently, lenders extending loans to entities in Nigeria are required to pay stamp duties under the Stamp Duties Act (SDA) within 30 days of receiving or executing a copy or original of the agreement. The applicable rate of stamp duty is determined by the relevant tax authority and, depending on the specifics of the transaction, documents, and parties involved, it may be charged on an ad valorem basis (a percentage of the transaction value) or as a nominal fee.

Failure to pay stamp duties renders the instrument inadmissible as evidence in civil proceedings in Nigeria and may constitute an offence under Nigerian law.

Additionally, the security interest over assets provided as collateral under a loan agreement may also attract stamp duties. Other associated costs include registration fees payable to the relevant government agency, which could include Nigeria’s corporate registry, land registry, maritime registry, aircraft registry, or the National Collateral Registry, as applicable, along with consent fees and other related charges.

To address these costs, parties to a project agreement may adopt tax gross-up provisions to allocate responsibility for the payment of stamp duties and taxes to one of the parties. This approach helps ensure proper determination of the consideration under the agreement. Furthermore, loan agreements may be structured in a manner that allows parties to benefit from available tax exemptions and privileges.

There are generally no federal usury laws or other rules limiting the amount of interest that can be charged on a loan. However, some states in Nigeria, under their respective Money Lending Laws, impose limits on interest that may be charged by money lenders under various forms of borrowing arrangements.

Based on the rules of privity of contract, parties are free to select any governing law of their choosing. However, it is typical for contracting parties of project agreements to choose English law as their governing law, specifically where both parties are from different jurisdictions.

Based on the rules of privity of contract, parties are free to select any governing law of their choosing. However, owing to the fact that lenders are often of foreign jurisdiction, the typical governing law for financing agreements is English law.

Domestic laws govern matters such as taxation, security over fixed and floating assets, currency controls, environmental, health, and safety matters, among others.