Introduction to Due diligence for foreign corporation doing business in Nigeria
It is often very exciting for corporations to expand their operations to new markets, but it can be daunting as well, in this case for foreign companies seeking to expand their operations to Nigeria. Nigeria is one of Africa’s largest economies and has an explosive population growth which offers opportunities for expansion across various sectors of the Nigerian economy. However, for foreign companies that are unsure of and unfamiliar with the country’s terrain, venturing into Nigeria on business can be tricky, and navigating Nigeria’s legal and regulatory landscape requires a very careful approach to due diligence across multiple frontiers.
Foreign companies that conduct thorough due diligence more often than not have successful investments, as their bases are covered. In this article, we will explore critical elements of due diligence that foreign companies seeking to venture into Nigeria for foreign direct investments should undertake before and during their operations in Nigeria. This guide aims to equip foreign investors to Nigeria with the knowledge and actionable market insights they need to know in order to understand Nigeria’s regulatory environment, local business practices, among others.
Understanding the Nigerian Regulatory Environment
Foreign investors [and their representative counsel from outside Nigeria] should endeavour to understand the numerous regulatory bodies that govern different sectors and the general business sector in Nigeria’s economy. Furthermore, while it is possible that they may find a lot of valuable information on the Internet, we suggest that they look beyond the Internet to knowledgeable local counsel working in Nigeria to properly advise them on Nigeria’s regulatory environment, as, more often than not, a lot of information available online from regulatory authorities themselves are either outdated, irrelevant or, disappointingly, misleading.
Overview of regulatory bodies in Nigeria and their legal frameworks
The Corporate Affairs Commission
The Corporate Affairs Commission [“CAC” or “the Commission”] is the Body primarily responsible for regulating business activities in Nigeria. The CAC is in charge of business registrations and company incorporations, and supervising and regulating their activities as they operate in Nigeria, up to their dissolution, de-registration or winding up where needed if they have served out their purposes. The Corporate Affairs Commission derives its powers from the Companies and Allied Matters Act. Where a foreign corporation is seeking to venture into business with or deal with a Nigerian corporate counterpart, its first port of call should be the CAC to conduct its due diligence search on the existence of that company, its compliance records, its directors, shareholders and its history of business. It is also important they understand the relevant provisions of Nigeria’s CAMA as it will serve as the primary guidelines for their operations. Other laws do apply, but the CAMA is the major corporate law they should be aware of.
Nigerian Investment Promotion Commission
The Nigerian Investment Promotion Commission [“NIPC”] is an agency of the federal Government of the Federal Republic of Nigeria which was established by the NIPC Act to encourage, promote, and coordinate foreign investments in Nigeria. The NIPC is tasked to initiate and support measures which shall enhance the investment climate in Nigeria for Nigerian and [especially] non-Nigerian investors; provide up-to-date information on incentives which are available to investors in Nigeria, among others. For foreigners doing business in Nigeria or investing in Nigeria, they may be required to register with the NIPC and seek investment incentives from the NIPC if same applies to them and the Sector they are investing their money in Nigeria.
The Securities and Exchange Commission
The Securities and Exchange Commission [“SEC] is an agency of the federal Government of the Federal Republic of Nigeria established by the Investment and Securities Act to develop and regulate the Nigerian Capital Market. The SEC is responsible for the registration of securities and market intermediaries, conduct inspections of capital market operators and investigate alleged breaches of the laws and regulations which govern capital market operations.
Are there sector-specific regulations that govern specific industries?
There are many multi-faceted sectors that investors investing in the Nigerian economy can beam their sights on. It should be duly noted that there are numerous sector-specific regulators and regulations that apply for the oil & gas sector, telecoms sector, financial services sector, power sector, mining sector, aviation sector, health sector, among others. For operators in the oil & gas sector, it is important to be aware of the Petroleum Industry Act which is the primary regulation that governs oil and gas operations in Nigeria and regulates upstream operations, midstream and downstream operations and host communities development.
Key legal considerations for foreign investors in Nigeria
Ownership structures and control
When foreign-owned corporations are seeking to establish their operations in Nigeria, they should carefully consider the most appropriate ownership structure that will benefit them the most. In this regard, upon a careful scrutiny of their ownership, business operations and business needs [in Nigeria], they can arrive at a decision on whether to establish a full Nigerian subsidiary in Nigeria or to open a branch office in Nigeria.
Branch office, or subsidiary?
It is very important to note that the Companies and Allied Matters Act require foreigners seeking to do business in Nigeria to register their foreign-owned company with the Corporate Affairs Commission. However, does that mean that the company cannot establish a branch office in Nigeria without incorporating in Nigeria? The answer lies in the provisions of CAMA.
Branch Office: This will act as an extension of a [foreign] parent company, with ownership and control fully vested in the parent company. Such a branch office will limit its operations to what’s applicable to it by law and nothing more; for it to do anything else, it will have to incorporate in Nigeria. Please note that you cannot establish a branch office for a foreign-owned corporation in Nigeria without following due process, to wit: applying for exemption under section 80 of CAMA. Such exemptions are not granted as a matter of course; any foreign company applying for exemption from incorporation in Nigeria under section 80 of CAMA has to be providing certain specialized services, like foreign companies engaged in export promotion activities, engineering consultants and technical experts engaged in individual specialist projects under contract with any of the government cadres in Nigeria.
Nigerian Subsidiary: For most foreign companies seeking to operate in Nigeria, incorporating a full Nigerian subsidiary for their operations is the major way they can operate and participate in Nigeria’s economy. This subsidiary will be a fully foreign-owned company established under Nigerian law, or incorporated as a joint venture (JV) with Nigerian partners. If wholly foreign-owned, the control and ownership vests totally in the foreign corporation that owns it, but if incorporated as a JV, the ownership and control will be shared with the local partners in the percentage of their individual shareholding, and as agreed in their Founders’ Agreement and Articles of Association of the Nigerian company.
Companies and corporations in different companies have suffices affixed to their company/corporation names like “LLC”, “Inc.”, among other appellations. These appellations do not apply to Nigerian companies. In Nigeria, companies whether limited by shares or unlimited, are required to affix “Ltd” or “Limited” to the end of a company limited by shares and “unltd” or “Unlimited” to a company with unlimited liability. Thus, foreign companies setting up their Nigerian subsidiaries should be aware of this.
Requirements for foreign-owned companies in Nigeria
Foreign companies that choose to set up Nigerian subsidiaries or engage in joint ventures with local partners are statutorily required to comply with certain requirements, among which include:
Minimum share capital: Every company incorporated in Nigeria with foreign participation [ownership] must have a minimum issued share capital of ₦100,000,000 [One Hundred Million Naira]. Even if the company being incorporated as a Joint Venture in partnership with local partners, so long as the company has foreign participation [whether as directors and shareholders or directors or shareholder], that company’s minimum issued share capital must be no less than ₦100,000,000 [One Hundred Million Naira]. Failure to meet this requirement will lead to the CAC querying the application for incorporation and withholding registration approval until the issued share capital is increased to meet statutory minimum.
Business Permit and Expatriate Quota: Upon incorporation, and before any foreign-owned Nigerian company can commence business, such company is required to apply for and obtain a business permit from the Federal Ministry of Interior. Companies applying for business permits usually apply for same together with expatriate quotas for the percentage of expatriate employees the company will be employing to work in the company in Nigeria. The company can apply for expatriate quota alone, though.
Registration with the NIPC: Foreign-owned companies are required to register with the NIPC for business incentives. As aforementioned, the NIPC regulates foreign investments in Nigeria and offers incentives to foreign-owned companies in Nigeria. Upon registration, the NIPC will issue a certificate of registration to the company which is necessary for their investment activities and protects them from expropriation and naturalization.
Local Content Requirements: This is sector-specific. Foreign-owned companies operating in certain sectors of the Nigerian economy like the oil & gas sector, are required to meet certain local content requirements. These foreign-owned companies note these requirements and comply with them if and where needed in order to prevent regulatory sanctions.
Compliance and Reporting obligations
Foreigners and foreign-owned companies in Nigeria must ensure that they continuously comply with regulatory reporting requirements over their activities. Depending on sector and scope of their activities, they may also be required to register with certain regulators if they meet certain thresholds, or if they access, process, store and use the data of data subjects in Nigeria. Some of these requirements include:
Annual Returns
Every company incorporated in Nigeria is mandated to file annual returns with the Corporate Affairs Commission at the end of its financial year. Annual returns filing must be done within fourteen days after the annual general meeting of each [financial] year. If a company’s end of financial year falls within January to June, they are required to file their annual returns on or before the end of December 31st of each year. Filing afterward attracts penalty. If a company’s financial year end falls within July to December, then the company is expected to file their annual returns before the end of June, the following year. Filing afterward attracts penalty for late filing. Where a company fails to file its annual returns consistently with the CAC for a consecutive period of ten years, the CAC will delist and strike out the name of that company from the Corporate Register.
Tax Reporting
Every company incorporated under the laws of Nigeria is expected to register with the Federal Inland Revenue Service and apply for tax identification number [TIN]. With this TIN companies can pay company income tax according to their tax threshold. For companies with gross annual turnover of ₦25 million or below, the company income tax is 0. For companies with gross annual turnover of over ₦25 million and under ₦100 million the CIT is 20% while for larger companies with gross annual turnover of over ₦100 million, the CIT is 30%.
Anti-Money Laundering
In Nigeria, it is the duty of the Economic and Financial Crimes Commission [“EFCC”] to combat incidences of economic and financial crimes, including money laundering. To combat money laundering, certain classes of companies incorporated in Nigeria are required to register with the Special Control Unit against Money Laundering [“SCUML”]. The SCUML was established in 2005 as part of the measures by the federal Government of Nigeria to combat money laundering. Designated non-financial businesses and professionals [“DNFBP”] are required to register their companies with the EFCC and obtain a SCUML Certificate. DNFBPS include dealers in jewelry, car dealers, audit firms, tax consultants, clearing and settlement companies, supermarkets; casinos, pool betting and lottery businesses; accountants and accounting firms, construction companies, consultants and consulting companies; real estate agents, estate developers and brokers; mortgage brokers, practitioners of mechanized farming, among others.
Contractual obligations and local partnerships
Foreign companies in Nigeria often enter into joint ventures or partnerships with local partners in Nigeria to either meet regulatory requirements [for example, where local content regulations require mandatory local participation], gain access to local markets, or even key into local domain expertise. However, it is pertinent that these foreign businesses are careful to understand the local nuances that is applicable to Nigeria due to socio-cultural and regulatory differences from their own home jurisdictions, and act accordingly. To this effect, very well-drafted commercial contracts that clearly outlines terms and factors in dispute resolution mechanisms that will be reasonably favourable to them. When it comes to dispute resolution, foreign companies should beware of outright courtroom litigation, given how protracted they can get in Nigeria, sometimes lasting for several years. To mitigate against this, including mandatory arbitration clauses for mandatory arbitration may be the best way to go, to ensure that any arising disputes are swiftly handled through arbitration or other alternative dispute resolution mechanisms other than outright litigation immediately a dispute arises.
Hiring local and expatriate workers.
Hiring local workers after a foreign corporation incorporates in Nigeria is not much of a hassle as there are basically little to no legal barriers to same. However, to hire expatriate workers in Nigeria, even for a wholly foreign-owned Nigerian company, numerous legal and regulatory compliance due diligence issues will surely crop up. Such foreign-owned company will have to meet up with these requirements in order to be able to hire foreign employees in Nigeria. First, the company has to be apply for, and obtain a Business Permit from the Federal Ministry of Interior. The company can, while applying for a Business Permit, apply for expatriate quota for the number of foreigners it intends to employ in Nigeria as well. Suppose the company does not intend to hire expatriate employees immediately in Nigeria upon commencement of business operations in Nigeria. In that case, the company can wait until such time as it needs to before applying for expatriate quota for the number of foreigners it needs to hire to work in the Nigerian company. This is a regulatory requirement for companies hiring expatriates—be they locally or foreign-owned companies—and it is important to adhere to these requirements or else the expatriates coming to work in Nigeria may be denied visas into Nigeria.
IP Due Diligence Considerations
Protecting your Trademarks, Patents, Copyrights, Industrial Designs
Nigeria has numerous laws that aim to protect intellectual property rights by both locals and aliens in Nigeria. Nigeria is also a signatory to major international treaties that protect IP rights internationally.
The Nigerian Copyright Act: The Copyright Act protects literary, artistic and musical works. The Copyright Act also protects computer programs and films (cinematography). Under the Act, all protectable works that meet protection criteria are automatically protected and creators are given the exclusive rights to reproduce, perform and distribute their works for specified periods. International corporations that own copyright works can register them with the Nigerian Copyright Commission to keep a record of their copyrighted works in Nigeria.
Patent and Designs Act: Nigeria’s Patent and Designs Act protects innovation patents and industrial designs. Inventors can protect their inventions which are new, inventive and capable of industrial application locally in Nigeria through the registration of their patents with the Nigerian Trademark Registry. Industrial designs are registered and protected for their visual appearance/aesthetics aspects of their products. Foreign companies doing business in Nigeria who have either of these relevant IP should endeavour to register them locally in Nigeria and obtain protection in Nigeria even if their designs and patents were registered internationally. To seek protection in Nigeria and protect against infringers in Nigeria, they should endeavour to register their IP in Nigeria to gain local protection cover.
Nigeria is a member state to the Patent Cooperation Treaty (PCT) and foreign corporations that have filed an international application under the PCT can enter the national phase and file their PCT patent application in Nigeria with the PCT details of their patents within thirty months from the international filing date.
We have written extensive guides on filing PCT patent applications in Nigeria, filing patent applications in Nigeria and filing for the protection of industrial designs in Nigeria. These guides can serve a useful value to foreign corporations seeking IP protection in Nigeria.
Challenges IP owners can potentially face in Nigeria
- Weak enforcement mechanisms
- Piracy and infringement
- Counterfeiting
- IP illiteracy among the local population
Due diligence in land transactions, acquisitions and property rights in Nigeria
Land Use and Ownership laws in Nigeria
The primary legislation that governs land holdings and land ownership in Nigeria is the Land Use Act which vests all land in any State in the federal Republic of Nigeria on the Governor of that State to hold same as trustee for the benefit of the citizens of the State.
Foreign companies either establishing branch offices (if they are not registering as exempt under section 80 of the Companies and Allied Matters Act) or incorporating Nigerian subsidiaries may need land to either develop for industrial purposes or for commercial purposes in line with their objects of incorporation at time of registration. Thus, it becomes pertinent to ask at this point whether a foreigner can own land in Nigeria? Subject to the alien land ownership procedure of each State (which will differ depending on the State), foreigners can acquire land in Nigeria. But given that the focus of this Guide is on foreign companies and foreign-owned Nigerian companies operating in Nigeria, we shall focus on that. Once a foreign company or individual registers a company in Nigeria, the company becomes a Nigerian entity and as such will be accorded all rights due to Nigerian entities under Nigerian law.
Conducting property searches and title verifications: the extreme importance of verifying land titles
Land holdings and ownership in Nigeria is opaque, plagued by land grabbing, lack of centralized records, and protracted property disputes in both criminal investigations and civil proceedings in numerous Courts across Nigeria and even at Nigeria’s apex Court. Individuals can sell land to multiple purchasers; individuals call sell portions of family land without the knowledge and consent of principal members of the family; land development companies sell phantom lands to purchasers; there are even incidences of double allocation of Plots of Government-owned land to different applicants. These lead to endless protracted disputes Because of this, foreign-owned companies need to conduct thorough due diligence into any land transactions they are entering into to forestall future disputes that could prevent them from using the land they sourced for.
They must conduct thorough land searches using experienced professionals when getting into land acquisition transactions. Any and all title documents given to them by vendors must be thoroughly scrutinized, assessed and searched upon for title verification. Land searches at the Ministry of Land in whatever location they are seeking land holding is also very important. Suppose the foreign corporations are seeking for large hectares of land for industrial purposes. In that case, it might be more advisable to apply directly to the Government of the State they were seeking to invest for a land allocation. Hence, they get a direct allotment from Government-owned land, et cetera.
Suppose you are a foreigner or foreign corporation doing business in Nigeria, or seeking to partner with local partners in Nigeria. In that case, we invite you to reach out to us via corporateservices@kabbizlegal.com for additional information.
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