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August, 2003

Economic & Financial Crimes

Nigeria is through legislation and some enforcement, trying to stem and follow the current global behaviour of combating economic and financial crimes, which are more sophisticated and difficult to detect, than other forms of crimes.

One of such legislation is the Economic and Financial Crimes Commission (Establishment) Act, 2002. This legislation created the Economic & Financial Crimes Commission (“the Economic Crimes Commission”).

One of the principal functions of the Economic Crimes Commission is “the investigation of all financial crimes including advance fee fraud, money laundering, counterfeiting, illegal charge transfer, futures market fraud, fraudulent encashment of negotiable instruments, computer credit fraud, contract scam, etc.” See Section 5 (1) (b).

Another function of the Economic Crimes Commission is the adoption of measures to identify, trace, freeze, confiscate or seize proceeds derived from terrorist activities. In consonance with present international behaviour, a conviction under this leg attracts life imprisonment and confiscation of the concerned properties to the Federal Government of Nigeria.

The legislation establishing the Economic Crimes Commission requires the latter to establish and maintain “… a system of monitoring international economic and financial crimes in order to identify suspicious transactions and persons involved”. This it does in cooperation with other similar agencies in other countries of the world.

Finally, for harmony and proper coordination, the Economic Crimes Commission is charged with the responsibility of enforcing the provisions of the following existing Laws in Nigeria :

  1. The Money Laundering Act, 1995;
  2. The Advance Fee Fraud and other fraud related offences Act, 1995;
  3. The Failed Banks (Recovery of Debts) and financial malpractices in Banks Act, 1994, as amended;
  4. The Banks & other Financial Institutions Act 1991, as amended;
  5. The Miscellaneous Offences Act, Cap 410, LFN, 1990;
  6. Any other Law or regulation relating to economic and financial crimes.

Various offences relating to financial crimes/malpractices attract their corresponding penalties on conviction and these are stated in Part IV of the Economic & Financial Crimes Act (“the Act”). They include:

  1. Failure of an Officer of a Bank or other financial Institution to secure compliance with the provisions of the Act attracts on conviction, imprisonment for a term not exceeding 5 years or to a fine of N50,000, or to both such imprisonment and fine. See Section 13.
  2. “Any person who commits or attempts to commits a terrorist act or participate in or facilitates a terrorist act, commits an offence, and is liable on conviction to life imprisonment. See Section 14.

As a further deterrent, any individual convicted of an offence under this Act forfeits all his/her assets relating to the offence, to the Federal Government of Nigeria. This also applies to illegally acquired assets in a foreign country subject to any treaty or arrangement between Nigeria and such other foreign country.

The Act gives the Economic Crimes Commission wide powers to apply to a Federal High Court for an order freezing the accounts, in any Bank or other financial institution, of any arrested person, without notice to such a person.

In conclusion, this Act has not attracted much enthusiastic commendation either locally or from the international community. This is because the deficiency in tackling economic and financial crimes in developing economies is more a matter of lack of political will and discipline in its enforcement than in the legislations.

As a result of the above, Nigeria is among 17 countries blacklisted for financial crimes by the United Nations and the International Monetary Fund (“IMF”) Financial Action Task Forces. These organisations with others have warned direct foreign investors to be cautious of transacting business in Nigeria .

In response to the above, the Nigerian government has, in addition to increased enforcement of the existing Laws on financial crimes, sent an Amended Bill on Financial Crimes to its National Assembly. Only time will tell whether this will bring the required all round “comfort” to the investing public.

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October, 2003

Commercial Disputes & Arbitration

The first week of October 2003, I was again at ExxonMobil (Eket & Bonny) as a Legal Facilitator on financial and estate planning. One of the important returns from this project is the need to be proactive, to take responsibility and ACTION in the management of our finances, to invest and stop procrastinating on the main ground that we do not earn enough money.

Also new in October was the opening of the Abuja Multi-Door Court House, which is another attempt to seek alternative methods to dispute resolution, as litigation remains very expensive, technical and cumbersome in procedure, and prolonged in conclusion. Like the one in Lagos , it is a “Court-connected ADR centre”. According to the Director of the Lagos Multi-Door Court House (“LMDC”), cases get to the latter through:

  1. Referrals from High Court Judges by virtue of the Court's practice directions in Lagos State .
  2. Direct contact by the disputing party or parties.
  3. By the terms of a contract that a dispute should be referred to LMDC.
  4. By direct invitation by LMDC.

Lagos State Ministry of Justice and the Lagos Branch of the Nigerian Bar Association (“Lagos NBA”) also held some workshops on the new High Court (Civil Procedure) Rules 2003, which would soon come into operation. A lot of optimism awaits the commencement of these new Rules as they are expected to speed-up the court processes.

Arbitration as An Alternative Dispute Resolution Method

That disputes are an integral part of human existence cannot be contested. The only contest is the mode of resolving disputes as most of the time, individuals find it difficult to separate a dispute, which may be minor, from a larger activity, which can continue pending the resolution of the dispute. In stead, the disputing parties engage in prolonged litigations that eventually destroy all cordiality and the main stratum of the larger activity.

Professor Gaius Ezejiofor SAN described Arbitration in his book, “The Law of Arbitration in Nigeria ” (“the Book”), as the reference of a dispute to an independent person for hearing and determination in a judicial manner in contrast to a determination by a Court of Law.

An Arbitrator(s) can hear only civil disputes; criminal cases are as a matter of public policy, handled by the government. Also, disputes arising from an illegal contract cannot be referred to Arbitration.

In order for you to further appreciate the difference between Arbitration and litigation, let us briefly review the advantages of Arbitration over litigation, some of which are highlighted in the above mentioned Book:

  1. Arbitration has less frustrating delays than litigation.
  2. Because of the above, Arbitration can be less expensive to the parties, in the long run.
  3. Arbitration is less formal as the parties can rely solely on documents and written briefs of arguments, thus also saving time and money.
  4. Litigation is held in public and trade secrets can be disclosed during this process to the peril of either party or both parties. But Arbitration proceedings are held in private; the parties' trade secrets can be heard in private and protected from public disclosure.
  5. Parties in Arbitration can represent themselves or chose their own Arbitrator(s) who may be persons familiar and versed with the party's industry, culture and country.
  6. Arbitration takes care of the conveniences of the parties and their witnesses in fixing dates, time and place for its hearings in marked contrast to litigation where the priority is the convenience of the Court and not necessarily that of the parties.
  7. Arbitration is conciliatory and not combative like litigation. It allows for neutralisation of the venue and the procedure in the proceedings to preserve trust in a conciliatory manner in the entire process.

Though Arbitration has many advantages, it also has some disadvantages:

  1. An Arbitration panel has no coercive powers of its own; the panel has to rely on the assistance of the regular Courts to achieve compliance.
  2. An Arbitration panel cannot adjudicate or consolidate multi party suits or disputes; this can lead to multiplicity of suits and wastage of resources.
  3. An Arbitration panel's decision can be set aside by a Court of Law.

An Arbitration decision, usually called an Award, is final as the substantive issues cannot be re-contested before a Court of Law. However, a party can, under Sections 29 and 30 of the Nigerian Arbitration and Conciliation Act (“the Act”), seek to, within a period of three (3) months of the award, set aside the award on either of the following grounds:

  1. That the award contains decisions on matters/issues, which were beyond the scope of the issues submitted to the arbitration, for resolution and decision.
  2. That the Arbitrator(s) misconducted himself/themselves or that the award was improperly procured.

Conclusion

In practice and as a delay mechanism, it is found that an unsuccessful party to an award usually commences an action in Court as soon as he loses, challenging the award either under Sections 29 or 30 or both, of the Act.

Also, the lack of having its own coercive powers under the Law, like a regular Court of Law, is a big disadvantage to the arbitration process as one or both of the parties may decide to be unreasonable or disobedient to the orders or directions.

In addition, in order to arm an Arbitration award, legal proceedings are required to be commenced under Section 31 of the Act. This process can become the subject of delays and cumbersome procedural manoeuvring that traditionally accompany litigation leading to long periods of time between the grant of the award and its enforcement.

While I will continue to recommend this method of dispute resolution, parties, Legal Counsel and all stakeholders in the administration of justice will do well to learn to obey agreements, orders and directions that are, on the average, just and equitable. This is because, a part of human nature, does not allow us to be satisfied all the time.

There is finally the need to also review the Arbitration and Conciliation Act to meet the challenges of the twenty first century by for example, requiring the decisions/awards of the Arbitration panel to be final in fact and a challenge to the decisions in a Court of Law to be under more rigorous terms and conditions, which secures the award no matter how long the Court challenge takes.

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Myths About Copyrights

Elementaries of Copyright

Copyright ownership and protection only covers and protects works that are in a fixed form ; it does not cover ideas that have not been reduced to a fixed form.

Unfortunately, the Copyright Act in Nigeria does not sufficiently define what is a copyright as it states, “'copyright' means copyright under this Act”. It however defines ‘copy' as “ … a reproduction in written form, in the form of recording or cinematograph film, or in any other material form, so however that an object shall not be taken to be a copy of an architectural work unless the object is a building or model”.

Brad Templeton in his beautiful article on copyrights defined a copyright as “basically the legal exclusive right of the Author of a creative work to control the copying of that work”. Underlinings are mine. His full article, which I recommend, can be found at http://www.templetons.com/brad/copymyths.html .

Copyright has as its principal purposes the right of the Author to derive maximum commercial benefit from his work and to also exercise control over its reproduction in any form or medium.

In Nigeria , unlike in some other countries, there is no formal requirement that a copyright must be registered before ownership right is conferred on its Owner. Also, copyright does not vest in perpetuity as in some cases, ownership rights ceases after 50 years from the year in which for example, the sound recording was first made.

Some of the rights of the copyright Owner include (I) control over the reproduction of the work; (II) publication of the work; (III) performance of the work in all places; (IV) reproduction and distribution of the work; (V) adaptation, translation or communication of the work in any form, etc.

Exceptions To Copyright Owner's Rights

  1. Fair dealing for purposes of research, private use, criticism or review, reporting of current events, etc. An acknowledgement of the Author of the work is however recommended for this and other exceptions.
  2. Imitation by way of parody (satirical imitation), pastiche (a jumble of other works) or a caricature.
  3. Reproduction and distribution of conspicuous works of arts in public places.
  4. Educational use including educational broadcast, etc. It is expected that the Broadcasting Commission would have accredited the program as an educational one before broadcast.
  5. Public recitation.
  6. Use for public interest or under government control or direction.
  7. Judicial reporting; this does not confer copyright of the judicial decision on the Reporter.
  8. Use for blind or disabled persons.

Like other rights, the rights of a copyright Owner can be transferred by assignment, testamentary disposition or other operation of the Law.

Other Copyright Myths

Brad Templeton in his above article mentioned some copyright myths, which are false and can lead to civil and criminal liability in the event of any infringement. They include:

  • “If it does not have a copyright notice, it is not copyrighted”. Notice is no longer required; registration on the other hand is only required in some jurisdiction for purposes of commencing a litigation.
  • “If I do not charge for it, it is not a violation”. This is also false as a charge only affects the amount of damages that will be paid in the case of an infringement.
  • “My posting was just fair use”. Fair use is meant only for the enhancement of certain social values and not for profit/infringement.
  • “If I make my own stories, but base them on another work, my new work belongs to me”. Derivative works, which is what this is, require the permission of the original Owner before use.
  • “Oh, so copyright isn't a crime or anything?”. Section 18 of the Nigerian Copyright Act makes it a criminal offence to infringe an Owner's copyright.

Constraints To Copyright Compliance & Enforcement

Nigeria is a signatory to many Copyright and intellectual property rights, conventions and organisations amongst which are: (1) Universal copyright Convention; (2) the Berne Convention for the protection of literary and artistic works; (3) Rome convention for the protection of performers, producers of photographs and broadcasting organisations; (4) World intellectual Property Organisation, etc.

The enforcement of copyright however remains largely unsuccessful for many reasons amongst which are:

  1. Sophistication in piracy technology so that recognising the difference between the original and the pirated copies is becoming more difficult if not in some cases, impossible.
  2. Low per capita income vis-à-vis the high costs of the original works against the low cost of the pirated works has not assisted compliance and enforcement.
  3. Under funding of the regulatory bodies charged with copyright enforcement and outdated untested Laws are also inhibiting factors. Where support has come from large multinational copyright Owners, the regulatory body has been held to act as agent provocateurs in trying to effect compliance with the Copyright Laws.
  4. Insufficient regulatory offices in areas outside the federal and economic capitals of the country, which in most cases is where most of the pirated works are copied.

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Mergers & Acquisitions

It is a New Year. I say Happy New Year 2004 you and your family!

Greater challenges and business opportunities will come in 2004. I have just concluded reading the popular book, “Straight from the Gut” by Jack Welch. I recommend this book to everyone who aspires to own a global corporation as it teaches, amongst others, the following, for financial success:

  • Boundarylessness. This also entails partnering or merging and or acquiring businesses in which the Owners are guaranteed the Number 1 or Number 2 position in profitability and competitiveness.
  • Engaging the best people with ideas and backing them with the required finance and working environment to achieve results.
  • The world is now a global village and economic intelligence with intellectual capital are key to competitiveness and survival.

In Nigeria , the general belief is that for there to be greater economic growth, there must be an increase in direct foreign investment (“DFI”). The Nigerian government, through legislation, has tried to make this possible as a foreign company/corporation can now acquire a 100% (One Hundred Percent) interest in a Nigerian company, among other benefits.

Unfortunately, in global terms, there are no large corporations in Nigeria, with the required long, tested business cultures and values because most corporations are owned by one man, on whose demise, the corporation also comes to an end. There continues to be a resistance to mergers and acquisitions as most business people do not understand and appreciate its benefits but in its stead, prefer a one-man owned corporation.

What Is A Merger?

Section 590 of the Nigerian Companies & Allied Matters Act 1990 defines a merger of companies as “an amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate”.

The Investment & Securities Act, 1999 (“the Investment Act”) gives a very similar definition to mergers. Further, the Securities & Exchange Commission Rules & Regulations (“the SEC Rules”), made pursuant to the Investment Act defines an acquisition under Rules 227 (i) as “ the take-over by one company, of sufficient shares in another company, to give the acquiring company control over that other company”.

Advantages of A Mergers/Acquisitions

  1. Some of the benefits/advantages of a merger or acquisition for a combined company include:
  2. Increased financial resources for the combined company;
  3. Enhanced product capacity;
  4. Expanded and enhanced product lines and brand portfolio;
  5. Elimination and optimisation of overlap in operational activities;
  6. Increased market share;
  7. Increase in technology acquisition;
  8. Enhanced work force as the best people from the combined company will remain;
  9. Flexibility in its timing and implementation to avoid any uncertainty and hostility especially from the tax and other regulatory authorities. On this, see the article by Jay A. Lefton, Esq. in the IBA Lawyer Magazine for December 2003.

Legal Requirements for Mergers & Acquisitions

There are various stages, under Nigerian Law, that a merger or acquisition has to pass through. They include:

  1. The intending companies are required, either alone or together, to apply to a Federal High Court, who in turn orders separate meetings of the intending companies, to approve the proposed merger or acquisition (the scheme);
  2. The members of each company, compromising three quarters in value of the shares of each company, are required to consent by resolution to the scheme;
  3. The above consent is then required to be referred to the Securities and Exchange Commission (SEC) for approval;
  4. On SEC giving its approval, the parties or one of them is required to apply to the Federal High Court who must sanction the scheme;
  5. The sanction of the Federal High Court must then be forwarded to the Corporate Affairs Commission (CAC) within seven (7) days of the Order of the Federal High Court.
  6. Also, a notice of the Order of the Federal High Court must be published in two government gazettes and in at least one National Newspaper.

The above stages are as provided for in Section 591 of the Companies & Allied Matters Act, 1990 (“CAMA”). This section is also very similar to Section 100 of the Investment Act. The main difference though is the penalty for default in obtaining the approvals; under the Investment Act, the fine is not less than N 20,000 (Twenty Thousand Naira) whereas under CAMA, it is only N 1,000 (One Thousand Naira). Under the SEC Rules, the penalty can be as high as N 1,000,000 (One Million Naira) with additional sums for each day of default.

The Role Of Securities & Exchange Commission

Section 99 (2) of the Investment Act and Rule 228 (i) of the SEC Rules requires every company in Nigeria, whether private or public, to submit an application for every merger and acquisition to the Securities and Exchange Commission (“SEC”).

The area of concern amongst private practitioners is whether private companies, who are not members of the capital market and who cannot make share subscription offers to members of the public, should submit their merger or acquisition applications to SEC? This is in spite of Rules 228 to 234 of the SEC Rules. This is because most private corporations in Nigeria have not developed to the stage where they have or would assume monopolistic or dominating stature in the market.

Whilst we await further clarification on this regulatory requirement, I encourage compliance as SEC in Nigeria has just published the name of a large multi national pharmaceutical company for failing to complying with the above provisions. This will surely affect and can undermine the credibility of this corporation.

Mergers & Acquisitions Exceptions To The Sec Approval Rule

Rule 230 of the SEC Rules, in its almost exact words, provides that the following merger or acquisitions transactions do not require SEC approval:

  1. Holding companies acquiring shares solely for the purposes of investment and not for the purpose of voting or to cause substantial restraint of competition or tend to create a monopoly.
  2. Transactions undertaken by an authority given by the Federal Government Agency vested with statutory power to enter into investments.

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Innocuous Letters of Offer

 

Legal News:

I obtained some favourable decisions at the Courts in the month of February 2004. The lesson to be shared from this is that a closer interaction and conferencing with the Clients assist Legal Counsel to appreciate the facts in dispute the more and accordingly, apply the right portions of the Law to the resolution of the dispute. The Nigerian Supreme Court re-affirmed this practical behaviour in the case of NEKA B.B.B Manufacturing Co. v. ACB International Bank Plc in its judgement delivered on January 16 th 2004 where it held that “evidence, whether oral or documentary, consist of facts, and facts are the fountain head of the Law”.

Also in February 2004, a new Chief Judge was sworn into office in Lagos State on the retirement of the old one. Unfortunately, some Court rooms at the Lagos High Court, Tafawa Balewa Square were gutted by fire.

The proposed amendment to the Economic and Financial Crimes Act passed through the National House of Representatives. Some of the proposed amendments include a restriction on the volume of cash that individuals and corporations can carry at a time and the reporting procedures.

In the United States , the former Chief Executive Officer of ENRON was arraigned for numerous charges of fraud, etc. This again brings for discussion, the issue of corporate governance and the personal liability of Executive Directors of a company for unacceptable executive decisions. I intend to send to you a newsletter on the latter in the coming month.

Tax Aspects to Mergers & Acquisitions in Nigeria

My senior tax colleagues at PriceWaterHouseCoopers, particularly Mr. Azeez Alatoye, drew my attention to my non mention, in my January 2004 Newsletter, of the tax aspects in a Merger and or Acquisition deal particularly to Section 32 of the Capital Gains Tax Act and Section 25 (9) of the Companies Income Tax Act.

Section 32 of the Capital Gains Tax Act provides that “A person shall not be chargeable to tax under this Act, in respect of any gains arising from the acquisition of the share of a company either merged with, or taken over or absorbed by another company as a result of which the acquired company losses its identity as a limited liability company, provided that no cash payment is made in respect of the shares acquired ”. The underlining is mine.

ection 25 (9) of the Companies Income Tax Act on the other hand gives the Federal Board of Inland Revenue (“the Board”) the additional discretion of requiring either company involved in a merger or acquisition to guarantee or give security to the satisfaction of the Board, for the payment in full of all tax due or which may become due by the company selling or transforming such assets or business.

Innocuous Letters of Offer

Businesses continue to receive letters of offer from third parties offering introductory assistance in various areas, from recruitment of staff to products and services. The legal risk arises when the recipient acts on the letter and receives an “offending large invoice”.

The position of most legal Counsel, who represent the party who transmits the innocuous correspondence, is usually that an offer was made to the recipient company, which was accepted by conduct. The latter party is therefore estopped from denying a binding contract.

The Supreme Court in the case of Vulcan Gas Limited v. G.I.V Limited [2001] 5SC (Part 1) 1 @ 12 paras. 15-20 held that an agency relationship could arise in any one or more of the following ways:

  1. By express appointment of the agent by the principal, whether orally or formally;
  2. By ratification of the agent's acts by the principal;
  3. By virtue of the doctrine of estoppel;
  4. By implication of Law in the case of agency of necessity, and
  5. By presumption of Law in the case of cohabitation.

Opinion

It is recommended that to avoid unwanted liability, each formal or informal offer should be followed by a polite inquiry as to the terms, conditions and consideration of the offer, in the same manner in which it was made or received. Should the response be contrary to the principle of your company or firm, nicely inform the person making the offer and thank him for the attempt.

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