Corporate Restructuring Law of Banking Legal Articles Nigerian Law Trade and Commerce

Corporate Restructuring and Formation of a Bridge Bank: THE ROLE OF CBN – Sandra Nkechi Eke

Mergers, acquisitions and takeovers have become commonplace in the Nigerian business environment, especially in the financial sector. In recent years, numerous deals, mostly involving financial institutions and insurance companies have been concluded. However, mergers and acquisitions are often deployed as a means of survival in a distressed economy and usually involve corporate and strategic management motives for the amalgamation of one company with another. Mergers and acquisitions have also been used in many cases to achieve company growth and expansion policies.

A merger occurs by the amalgamation of the undertakings or any part of the undertakings or interest of two or more companies and one or more corporate bodies. An Acquisition on its part is the acquisition of substantial control by one company over the assets or management of another company without necessarily fusing the two companies. Thus, in an acquisition, two or more companies may remain independent and separate legal entities but there may be a change in control of the companies.

A Takeover is very similar to an acquisition. In banking, it is a reorganization process involving the acquisition of all the shares of one or more banks (target bank(s) by another bank (acquiring bank), following which the acquiring bank takes over the rights and obligations of the target bank(s). For the consolidation exercise, after the takeover, the legal status of the acquiring bank remains unchanged and the acquired bank(s) shall cease to exist as a bank. However, for a Takeover to be sanctioned, a minimum of 30% of the shares of the targeted company must be bid for. An Acquisition may become a merger if more than one half of the issued share capital of a company is acquired, as a merger must not be less than 51%.


The primary laws that govern business combinations in Nigeria are the Investments and Securities Act 2007 (ISA), the Securities and Exchange Commission Rules and Regulations 2017 (SEC Rules) which are made by the SEC pursuant to the ISA, the Companies and Allied Matters Act 2004(CAMA), the Federal High Court Act and the Nigerian Stock Exchange Rules 2015.
However, asides from the above, there are other laws which are more industry-specific that regulate mergers, acquisitions and takeovers in their respective sectors. For instance, the Central Bank of Nigeria Act, the Banks and Other Financial Institutions Act 2004 and the Procedures Manual for Applications for Bank Mergers/ Take-overs 2004 issued by the Central Bank of Nigeria regulates these business combinations in the banking sector; the Insurance Act 2004 regulates the insurance sector; the Nigerian Communications Commission Act 2004 and the NCC Competition Practices Regulations 2007 regulates the telecommunications sector; the Electric Power Sector Reform Act 2005, which is applicable to the power sector; the National Broadcasting Commission Act, applicable to the broadcasting sector; and the Department of Petroleum Resources Guidelines for obtaining Ministerial Consent 2014 which applies to the oil and gas sector.


The most common motives for mergers and acquisitions include:

1. Growth and increased profitability: Accelerating a company’s growth, particularly when its internal growth is constrained due to paucity of resources is one of the main advantages of Mergers or Acquisitions. Internal growth requires that a company should develop its operating facilities- manufacturing, technical skills, research, marketing, etc. but lack of or inadequacy of resources and time needed for internal development may constrain a company’s pace of growth. Hence, a company can acquire an existing company or companies with requisite infrastructure, skills, production facilities as well as other resources from outside through mergers and acquisitions.

2. Increased market share: A merger can increase the market share of the merged firm. The severity of competition can be also reduced by increasing the company’s market power. This was the case with the merger between Benue Cement Company PLC and Dangote Cement PLC. This fusion improves the profitability of the company due to the economies of scale. The bargaining power of the firm vis-à-vis labour, suppliers and buyers, is also enhanced. The merged company can exploit technological breakthroughs against obsolescence and price wars.

3. Diversification: Diversifying the risks of the company, particularly when it acquires those businesses whose income streams are not correlated, leads to reduction of risk. Diversification implies growth through the combination of firms in unrelated businesses. It results in reduction of total risks through substantial reduction of cyclicality of operations. The combination of management and other systems strengthen the capacity of the combined firm to withstand the severity of the unforeseen economic factors which could otherwise endanger the survival of the individual companies.

4. Synergy: Synergy implies a situation where the combined firm is more valuable than the sum of the individual combining firms. A combined firm may avoid or reduce over-lapping functions and consolidate its management functions and thus enhancing its debt capacity. This is because a merger of two companies can bring stability of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt.

5. Adherence to Regulatory Requirement: the recapitalisation policy in 2005 by the CBN for banks to have N25 billion share capital forced banks who fell below to merge to remain in business in the face of stringent requirement. More recently, Skye bank was taken over by CBN through the creation of Polaris Bank, a bridge bank, largely because of its inability to be recapitalised and CBNs decision to withdraw its liquidity support.


The Securities and Exchange Commission (SEC) is charged with the responsibility of categorization of mergers which is based on the threshold of combined assets or annual turnover or a combination of both assets and turnover. However, SEC has now prescribed the thresholds and those in section 120(4) ISA no longer apply. The new thresholds are contained in Rule 427(1) SEC Rules which provides that the lower threshold for a small merger shall be below N1, 000, 000, 000 (One billion) of either combined assets or turnover of the merging companies; the intermediate threshold shall be between N1, 000, 000, 000 (One billion) to N5, 000, 000, 000 (Five billion); while the upper threshold shall be above N5, 000, 000, 000 (Five billion).


The Central Bank of Nigeria (CBN) gets involved in mergers, acquisitions and takeovers, where banking institutions are involved in the merger scheme. The Banks and other Financial Institutions Act (BOFIA) 2004 prescribes that prior consent of the CBN Governor must be sought and obtained before any such arrangement.

The Procedures Manual for Applications for Bank Mergers/ Take-overs 2004 issued by the Central Bank of Nigeria prescribes the three stages of approval for bank mergers: pre- merger consent, approval-in-principle and final approval and two stages of approval for takeovers: approval-in-principle and final approval.

PRE-MERGER CONSENT: Pre-merger consent represents CBNs preliminary consent to the banks wishing to merge to the effect that it has no objection to the proposed merger. This is to enable the merging banks forward their application for merger to the Securities and Exchange Commission (SEC) in accordance with the provisions of the ISA for processing and approval.

APPROVAL-IN-PRINCIPLE: This represents CBNs conditional approval of the merger or takeover.
FINAL APPROVAL: Application for this approval may be made simultaneously with the application to the Securities and Exchange Commission (SEC) for its statutory approval of the merger. However, the Final Approval shall only be granted after the merger has been approved by SEC or in the case of a takeover, on presentation of the registration of the takeover bid by SEC to CBN. The Banking Licence of the successor bank will thereafter be prepared by the CBN and delivered to the successor bank immediately upon the grant of the Court order sanctioning the merger.


It is pertinent to note that the Banks and other Financial Institutions Act, and The Prudential Guidelines of 2010 both empower CBN to carry out takeovers. The CBN can exercise these powers under certain conditions provided in the banks Prudential Guidelines. The CBN included these powers in its Prudential Guidelines in the wake of the Banking crisis of 2009 which paved the way for the creation of the Asset Management Company of Nigeria (AMCON). CBN was seen to have exercised these powers, when it took over former Afribank, Spring Bank, Platinum-Habib Bank (Bank PHB) and more recently Skye Bank.

The Central Bank according to provisions of its Prudential Guidelines can launch a Takeover of a bank if any of the following conditions occur:
1. If the bank is illiquid;
2. If the banks Capital Adequacy ratio is low.
The CBN as part of its regulatory oversight function can take the following actions over a bank considered illiquid: it could invite management for a discussion on its plan to improve liquidity; request the bank to realize assets that do not qualify for inclusion in liquidity ratio computation; conduct spot check to investigate the problem of the bank; advise the bank to divest from subsidiaries or related companies; change management and/or board; solicit for short term liquidity support for the bank from Nigeria Deposit Insurance Corporation (NDIC); suspend the bank from clearing until it makes good its clearing position; and provide financial support and other lender of last resort actions.


A bridge bank is an institution created by a national regulator, in this case the Central bank to operate a failed bank until a buyer can be found for its operations.

Typically, the tasks of a bridge bank are to ensure seamless continuity of banking operations by assuming the deposits of and honouring the commitments of the failed bank, so that service to retail clients is not disrupted; servicing adequately secured existing loans to avoid their premature interruption or termination and assuming other existing assets, liabilities or functions of the defunct bank at the discretion of the regulator. These tasks are carried out on a temporary basis (usually for no more than two or three years) to provide time to find a buyer for the bank as a going concern.

If the bank cannot be sold as a going concern, its portfolio of assets is liquidated in an orderly fashion. However, this mechanism has been seen over the years to be commonly adopted by CBN to protect the interest of depositors and to prevent liquidation which will have dire consequences for depositors and undermine public confidence in the banking system. The assets and liabilities of affected banks, whose licenses have been revoked by the CBN were duly transferred to newly incorporated Bridge Banks.

In July 2009, the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) carried out a special examination of all 24 deposit banks in Nigeria, with the aim of assessing their health, with focus on liquidity, capital adequacy, risk management and corporate governance practices. Ten (10) banks were adjudged to be in grave states with deficiencies in capital adequacy. Of these, eight (8) also had significant deficiencies in liquidity, risk management practices and corporate governance policies. The Managing and Executive Directors of these 8 banks were immediately replaced, and all the 10 banks were bailed out by the injection of fresh capital in the form of Tier 2 Capital. CBN however set a deadline for these banks to be recapitalised and banks that failed to do so had their licences revoked by CBN.

The assets and liabilities of affected banks, whose licenses were revoked by the CBN were duly transferred to newly incorporated Bridge Banks as follows; Mainstreet Bank Limited assumed the assets and liabilities of Afribank Nigeria Plc., Keystone Bank Limited assumed the assets and liabilities of Bank PHB Plc. and Enterprise Bank Limited assumed the assets and liabilities of Spring Bank Plc.

Sometimes in 2016, CBN took a regulatory action on Skye bank Nigeria PLC because of unacceptable corporate governance lapses as well as the persistent failure of Skye Bank PLC to meet minimum thresholds in critical prudential and adequacy ratios, which culminated in the banks permanent presence at the CBN Lending Window. This led to the resignation of the Chairman, all Non-Executive Directors on the Board as well as the Managing Director, Deputy Managing Director, and the two longest serving Executive Directors on the Management Team. Recently, CBN revoked the licence of Skye Bank Plc. since it had failed to be recapitalised despite several interventions of CBN. The action was followed by the creation of Polaris Bank to serve as a bridge bank to assume the assets and liabilities of Skye bank.

Sandra Nkechi Eke
Guest Columnist, LAW AXIS 360°.

Sandra is a legal practitioner at the prestigious firm of SPA AJIBADE & Company situate in Lagos, Nigeria. Her core interests are in Corporate Finance and Capital markets, Real Estate and Succession, Energy and Natural resources and dispute resolution.

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