Q1 2020

INSIGHTS TO THE DEMUTUALISATION OF THE NIGERIAN

INSIDE TOKUNBO ORIMOBI LP The Nigerian Stock Exchange (the “Exchange” or “NSE”) mutual, non-profit company LTD/GTE into a Company was established in 1960 as the Stock Exchange and Limited by Shares. 6 When a demutualisation occurs, the since the introduction of the concept of demutualisation, it former members of the exchange may continue to utilize the has always been a matter of “when” not “if ”. The NSE is products and services as they did before, however, prices and currently set up as a not-for-profit Company Limited by other terms of the transactions may change. Upon Guarantee (“LTD/GTE”).1 This means that no part of its demutualisation, the NSE will become the 57th Exchange to income or revenue can be distributed to any of its members2. be demutualised. Also, as a company LTD/GTE, it cannot have a share capital,3 thus, in the event of a winding up, all its members would be Following global trends and the recognition of the potentials of required to contribute to the debts and liabilities of the 4 demutualisation, the members of the Exchange approved its Exchange, including the costs for winding up, provided that demutualisation at an Extra-Ordinary General Meeting held on the the total amount to be contributed by all its members is not th 5 30 of March, 2017. Pursuant to the demutualisation, the less than N10,000 (Ten Thousand Naira). Upon winding up, Exchange will operate as a non-operating holding company with the assets of the Exchange can only be distributed to some ownership of the Nigerian Exchange Limited and other other company LTD/GTE having similar objectives or subsidiaries of the Exchange. Consequently, the corporate applied to some charitable object, in either case to be identity of the Exchange will become the Nigerian Exchang7 e determined by its members to its dissolution. Group Plc.

The principal decision-making body of the NSE is the THE IMPLICATIONS OF DEMUTUALISATION ON Council of the Exchange (the “Council”). The Council THE NIGERIAN STOCK EXCHANGE works through six substantive committees and the Chief Executive Officer (the “CEO”) of the NSE is in charge of The demutualisation of the NSE will have several the day-to-day management and operations of the NSE. The implications, some of which are highlighted below: CEO is assisted in the exercise of his functions by officers who carry out designated respective executive and non- ·Change of Name: The NSE will now be known as executive functions and altogether constitute the the Plc (the“Exchange management of the NSE. Group” or the“Group”). The Exchange Group will exist as a non-operating holding company with Demutualisation of Exchanges (“DOE”) is a process ownership of Nigerian Exchange Limited, NGX whereby an Exchange transforms its legal structure from a Regulation Limited, and NGX Real Estate Limited as

1. Section 26 (1) of the Company and Allied Matters Act Cap 20 Laws of the Federation 2004 (“CAMA”) 6. https://leadership.ng/2020/01/04/demutualisation-of-nse-light-at-end-of-the-tunnel/ accessed April 3, 2020 2. Supra 7 https://punchng.com/why-does-it-matter-to-demutualise-the-stock-exchange/accessed April 3, 2020 3. Section 26(2) of CAMA 4 Section 26(6) of CAMA 5. Section 27(7) of CAMA AURORA Q1 02 by the Exchange will be transferred to the Nigerian Exchange adequate capacity to deal with the challenges of a rapidly Limited, which will operate as the trading platform and carry evolving capital market. Demutualisation was thus proposed on activities as a securities exchange, while the NGX as a means of dealing with these challenges to set the NSE on Regulation Limited will be charged with the regulatory course for rapid expansion and development. functions of the Exchange. Thus, demutualisation, if successfully implemented is poised ·Transfer of Ownership: All the assets, liabilities and to provide the following benefits: undertakings of the Exchange will now subsist in the Exchange Group except the securities exchange 1. Access to Capital: The conversion of the NSE from license and all assets and appurtenances in relation to a mutually owned organization to a profit-oriented the securities trading business of the NSE. The organization opens it up to injection of more capital securities exchange license of the NSE, and all assets from the public to finance its projects, achieve its and existing contracts required to carry on the objectives and kick start a drive for expansion. As a securities exchange function shall be transferred to result of the conversion, an opportunity for a the Nigerian Exchange Limited. potential Initial Public Offer (“IPO”)or a strategic investment is created, thereby opening the Exchange ·Ownership of Subsidiaries: The previously Group to domestic, foreign, and institutional existing subsidiaries of the NSE, namely, NSE investors, creating more capital for the Exchange Consult Limited, NSE Nominees Limited and Coral Group, and creating liquidity for its members. Properties Limited will be wound up voluntarily and the assets will be transferred to Nigerian Exchange 2. Improved Corporate Governance: Another Group Plc in accordance with the provisions of profound effect of the demutualisation of the NSE is section 457 of the Companies and Allied Matters that the corporate entity will now be subject to Act, 2004. globally accepted best practices of corporate 8 governance standards expected of public companies. Taxation: Upon demutualisation and in accordance The attendant effect of this will be the efficiency and with the Finance Act 2020, the Exchange Group will transparency of the entity since the operations of its not accrue any liability to pay tax arising as a result of Board of Directors will now be subject to Nigerian its conversion and re-registration as a public and global corporate governance rules. This allows company limited by shares. However, upon the NSE management to be more efficient and completion of the conversion and re-registration, the leaner. Exchange Group will only be liable to pay all extant applicable taxes on subsequent profits for each 3. Global Competitiveness and Technological relevant year of assessment earned by the Exchange Advancement: As a result of globalization and Group after the conversion and re-registration technology, local markets are forced into more direct process. Additionally, the shareholders of the competition regionally and more particularly, Exchange Group will also be liable to pay taxes on internationally. The new Exchange will be forced to their dividends. take on necessary improvements to facilitate more competitive strategies. Technology has not spared the THE BENEFITS OF DEMUTUALISATION TO exchange markets in its disruptions. It offers THE NIGERIAN STOCK EXCHANGE transparency, trader anonymity and extended trading hours. Hence, with efficient technology innovation, The demutualisation initiative was first mooted by the NSE in an Exchange market will be properly positioned to 2007 in recognition of the need to foster much needed attract good quality listings and facilitate capital transparency, accountability and efficiency in the operations formation. The demutualisation therefore rightly of the NSE in order to restore confidence in the capital positions the Exchange Group to access market. technological solutions for global competition and better customer experience. At the time, it was perceived that the governance of the NSE was not in line with internationally accepted best practices 4. Tax Revenue: Following the demutualisation, the and that its function as a Self-Regulatory Organisation Exchange Group would be liable to pay to the Federal (“SRO”) was opaque in execution and that it did not have Government of , companies' income tax9 and

8. Section 6 of the Rules on Demutualisation of Securities Exchanges in Nigeria 2018 9. Companies and Income Tax Act Cap 21 Laws of the Federation 2004

AURORA Q1 03 other relevant taxes payable by profit-oriented company, the NSE will lose its tax-exempt status and will now organizations, thereby providing additional source of be liable to pay company income tax and other applicable tax tax revenue for the Nigerian government. liabilities.

5. Diversification of Interest: The Exchange Group Also, there is an issue of a potential conflict of interest as a profit seeking entity will be able to diversify its especially in regard to its status as a SRO. As a result of the products and services in the market. demutualisation, the NSE will convert to a Public Limited Liability Company which may be listed on the Exchange. The 6. Increase in Foreign Investment: Its status as a NSE as a SRO saddled with the responsibility of carrying out public company will enable it to tap into foreign oversight functions and duties of trading and listing on the markets to enhance the strategic interests of the Exchange. A potential conflict of interest will arise in the Exchange, thereby creating opportunities for event that the NSE decides to list on the Exchange i.e. Self- expansion and alliances with strategic shareholders listing. This challenge has been addressed by the and international exchanges. The shares of the Demutualised Exchanges (“DME”) globally and according Exchange can be listed on other Exchange markets, to Open spaces Compliance Consultants10, this issue may be thus unlocking opportunities for greater inflow of addressed through the following means: foreign direct investment. 1. Establishment of a Subsidiary to Perform 7. Investor's confidence is enhanced: Its Regulatory Functions: Here, there would be a demutualised status will elevate the corporate profile procurement for the establishment of a subsidiary to of the exchange and thereby boost both its domestic perform its regulatory functions. There will be a and international investor confidence as separation of the Exchanges' regulatory demutualised exchanges are often regarded as open responsibilities from its listing and trading business and transparent companies. Hence, investor activities. This can be done by procuring the participation is increased as investors prefer to invest incorporation of a separate regulatory body which in markets where the exchange demonstrates strong will neither be subject nor accountable to the corporate governance, in the belief that such markets Exchange. This method is popularly known as the are less likely to experience manipulation or be Separation Model. This method was adopted by the threatened by systemic failure. (“NYSE”) and the (“LSE”) during their 8. Identification of market value: Demutualisation respective demutualisation processes. gives the exchange members the chance to realize the market value of their equity in the exchange. The 2. Demutualised NSE continues to perform all of members, upon allotment of shares, will be able to its Existing Regulatory Functions: Here, there trade their shares over the counter. will be a retention of the Exchanges' regulatory power alongside its listing and trading business 9. Easier access to new broker/dealers. activities however, with the installation of additional safeguards to ensure that the Exchange exercises its regulatory powers fairly. These additional safeguards THE REGULATORY CHALLENGES OF may include procuring an independent body to carry DEMUTUALISATION AND POSSIBLE SOLUTIONS out oversight functions or appointing a department of a ministry to carry out supervisory roles over the Whilst it has been established that the NSE is long overdue Exchange and placing a restriction on the percentage for demutualisation and the advantages are discussed herein, shareholding by any one single entity in the 11 there are a few potential draw backs to the NSE's demutualised exchange. In other words, the demutualisation which may impact the Exchange and its regulatory structure of the exchange will be various stakeholders. Some of these are examined below. unaffected by the demutualisation. This method is also popularly known as the Integrated Model. This First, the NSE, when demutualised, will lose certain benefits method was adopted by the Johannesburg Stock currently available to it as a not-for-profit entity. It is expected Exchange (“JSE”), the Singapore Stock Exchange that, where the company is converted from a company (“SSE”) and the Hong Kong Stock Exchange limited by guarantee into a profit-orientated limited liability (“HKSE”).12

10. OpenSpaces Compliance Consultants Limited is a London-based financial services regulation and compliance consultancy firm (www.openspacesltd.com) 11. Section 5(2) of the Rules on Demutualisation of Securities Exchange in Nigeria (made pursuant to Section 313 of the Investment and Securities Act No. 29 of 2007) provides to the effect that no single entity or related entities shall be permitted to own, directly or indirectly more than 5% of the equity and/or voting rights in a demutualised Securities Exchange. AURORA Q1 04 3. Outsourcing the Regulatory Functions of the THE EFFECT OF DEMUTUALISATION OF THE NSE to an Independent Third Party: This NSE ON THE NIGERIAN ECONOMY substantially obviates likely conflicts of interest that would arise where a for-profit exchange retains (most The NSE plays a major role in the Nigerian financial market of) its regulatory functions. The NSE would be able and its conversion and re-registration from a Company to focus on being a profitable corporate entity and LTD/GTE to a Limited Liability Company is expected to making the markets more efficient. It also allows the drive development in the Nigerian capital market. NSE to focus on functions directly connected to its Demutualisation was considered to ensure that the Nigerian business activities, and thus concentrate on building capital market attains modern, efficient and intentionally its business and maximizing value for its competitive brand on a global scale. The key strategy is to shareholders. improve liquidity, competitiveness and attractiveness in the domestic capital market as well as promote corporate 14 4. Outsourcing listing functions (only) of the NSE governance to boost investors' confidence. Empirical studies to an Independent Third Party: An independent reveal that demutualised exchanges have a stronger post listing value and operational value performance than mutual listing authority would be responsible for admitting 15 to, and suspending and removing companies from organization. the official list. It would set the minimum standards for initial listing and would be responsible for According to the data of the World Federation of enforcing of such standards. It could also be Exchanges, the weight of mutual entities dropped drastically responsible for monitoring the dissemination of from 40% in 1999 to only 15% in 2013. In the same period the number of demutualised stock exchanges increased from price sensitive information; and ensuring that the 16 listing rules keep pace with market developments. A 10% in 1999 to 62% in 2013. prominent example of this model is the LSE whose listings are regulated and supervised by the UKLA, an The NSE upon its demutualisation will be able to globally independent listings authority. compete with other Stock Exchanges and will be forced to examine its role as a trading venue and take on necessary 17 5. Removing the SRO function from the NSE and improvement to facilitate more competitive strategies. It is assigning same to the Securities and Exchange expected to foster continuous growth, transparency and Commission (the “SEC”): The SEC is readily efficiency in the Nigerian capital market and significantly equipped through the powers vested in it by law and contribute to the Nigerian economic development. regulations to address conflict of interest issues arising from the demutualisation process and can be Consequently, the listing will encourage better governance, viewed as well suited, as the primary capital markets effective management and flexibility in raising capital. It will regulator, to take on the additional responsibility of also drive technological improvement, enhance product direct regulation of the demutualised exchange. offerings and facilitate faster trading operations. Therefore, the Exchange is expected to attract highly experienced staff Experts have also recommended13 that, to effectively and as well as foreign investors, foreign stockbroking firms and transparently manage any potential conflict of interest, there foreign direct investment. must be a procurement of a new regulatory organisation within but independent of the demutualised exchange whose Demutualisation will aid the introduction of improved global responsibilities would include inter alia: regulating the trading facilities which will maximize the economies of scale conduct and stipulating prudential guidelines for the NSE and increase shareholders accessibility to the market. Dealing Members and the enforcement of the listing rules. According to Otunba Abimbola Ogunbanjo, President of This new regulator's independence must be assured by the National Council of the Nigerian Stock Exchange in one ensuring that there is a separate governance structure and a of his correspondence, he enunciated that: funding arrangement that will not interfere with its independence and neutrality “Our focus to increase retail participation and protect investors in our market will be unchanged. Retail investors will continue to have access to diversified asset classes for growing wealth and through the Investor's Protection Fund, we will continue the restitute of proven cases of infractions but more importantly on artificial intelligence driven market monitoring system will be

13. Supra 14. Lead Debate on Demutualisation of the Nigerian Stock Exchange Bill 2017 by Sen Foster Ogola. 15. Article 3, Rules on Demutualisation of Securities Exchanges in Nigeria 2015. 16. Lead Debate on Demutualisation of the Nigerian Stock Exchange Bill 2017 by Sen. Foster Ogola. 17 Scheme of Arrangement between Nigerian Stock Exchange and Dealing & Ordinary Members of the Nigerian Stock Exchange of the Demutualisation of the Nigerian Stock Exchange. January 20, 2020 AURORA Q1 05 sustained. Ultimately, when the Exchange is ready to float new shares for Upon demutualisation, the NSE should cease to be a SRO. the investing public, retail investors would be a key consideration for the We propose that a new entity established by an Act of the allocation of share” 18 National Assembly should be saddled with the responsibility of enacting and enforcing Listing Regulations, in which case, With a more agile and efficient Exchange, there will be a the Exchange will be monitored and subject to the better capital market that can complement the banking regulations of this entity. An entity as above-mentioned such sector, which presently dominates the funding of entities. as the SEC would be a good fit for this task but assigning the The liquidity challenge currently savaging the African stock role to the SEC will further burden an already over-burdened market will be addressed with the demutualisation. It will regulator. Although, creating a new entity would require serve as a wealth creation mechanism to the general populace significant financial resources and funding of such an whereby, shareholders can buy shares, make money from institution may constitute a challenge, but this approach their investment and are directly involved in the growth of would ensure an increased perception of transparency and the Exchange. With shareholders' investment in the independence by the market and would mitigate conflicts of Exchange, money is retained in the Nigerian economy and interest, otherwise created by self-listing of the NSE. the Exchange is able to carry out its high-level plans. Furthermore, we recommend that the Group must adopt the The NSE will be better positioned to seek strategic highest standard of Corporate Governance operated by international alliance and consolidation, introducing a greater other successfully demutualised exchanges in developed geographical collaboration, cross border listing as well as countries. Most importantly, the Board of Directors of the 19 mergers and acquisitions possibilities. A demutualised Group must be properly constituted by seasoned exchange affords Nigerian and foreign investors the professionals with high level educational and professional opportunity to become shareholders thereby improving experience, who have the capacity to drive the vision of the investors' confidence. It will enhance access to skills, NSE to becoming Africa's preferred Exchange Hub. knowledge and technical efficiencies from strategic Additionally, the appointment of the members of the Board shareholders20. must be approved by the proposed entity established to enact and enforce Listing Regulations. CONCLUSION No doubt, the demutualisation of the NSE is a laudable It is commendable that the NSE has identified its vision of approach in the right direction and upon its successful becoming Africa's preferred Exchange Hub and a key step to completion, we expect that it will positively restructure the achieving this goal is to successfully demutualise the face of the Nigerian capital markets thereby constituting one organization. of the major factors to drive growth of the Nigerian economy in this decade. Being the largest economy in West Whilst we mentioned demutualisation as a great concept that Africa, there is so much advantage that the demutualisation is long overdue for adoption by the NSE, we have also will cause to the growth of the economy, considering the highlighted the possible challenges which may pose a threat positive impact of its other counterparts such as, the JSE and to the process and the major challenge is the conflict of Nairobi Stock Exchange on their respective economies. interest.

Being a SRO, the NSE is the umpire for listings in Nigeria. Upon demutualisation, the implication is that the Group will be listed on the Exchange thereby presenting it as a listed entity as well as the regulator, concurrently.

We understand that the demutualisation will afford the NSE the opportunity to list on other exchanges thereby strengthening its capacity, further establishing it as a globally competitive entity and bring tremendous growth to the Nigerian economy. It is important that there are mechanisms which enhances sustainability in place and this sustainability mechanism is referred to as “Checks and Balances”.

18. https://bizwatchnigeria.ng/demutualisation-nses-journey-to-elite-league/March 8, 2020. 19. https://bizwatchnigeria.ng/demutualisation-nses-journey-to-elite-league/March 8, 2020. 20. Article 5(4 (a), Rules on Demutualisation of Securities and Exchanges in Nigeria 2015.

AURORA Q1 06 INSIDE TOKUNBO ORIMOBI LP

1. DOING BUSINESS IN NIGERIA SERIES - The panel session had very exhaustive discussions on the LAGOS 2020 economic outlook for Nigeria in 2020, challenges encountered by investors in doing business in Nigeria, On February 26, 2020, the Tokunbo Orimobi Foundation amongst other things. hosted another edition of one of its CSR initiatives –The Doing Business in Nigeria (DBN) Series – at Radisson Blu Anchorage Hotel, Victoria Island, Lagos. Having held previous editions in New York, London and Johannesburg, this edition was the 2ndevent in Nigeria.

The event, which was themed, Nigeria in 2020 – The Investors' Manual, had Miss Kerry Anakwenze (Associate, Tokunbo Orimobi LP) as MC/Host; Mr. Tayo Amusan (Chairman, Persianas Group), Mr. Victor Ndukauba (Deputy Managing Director, Afrinvest (West Africa) Limited), Mr. Paul Onwuanibe (MD/CEO, Landmark Group) and Mr. David Uzosike (Technical Lead, Enabling Business Environment Secretariat) as Panelists. Miss Michelle Okoyomo of Greenwich Trust Limited, moderated the panel session. The Opening Remarks were given by our President, Mr. Michael Orimobi and Mr. Sonnie Ayere (Chairman & After an insightful time of deliberations and networking, CEO, Dunn Loren Merrifield), gave the Keynote Address. the DBN Series ended with closing remarks by Mr. Michael Orimobi - President, Tokunbo Orimobi Foundation. The discussion centered around the economic trajectory of the country in comparison with previous years, employing the World Bank Ease of Doing Business Indices as the key 2. GLOBAL CITIZEN FORUM, WORLD performance indicators for the country. Mr. Sonnie Ayere ECONOMIC FORUM, DAVOS 2020 commenced his Keynote Address by giving an overview of the Nigerian economy. He emphasized that lack of adequate On January 23, 2020, our Global Chairman was a speaker and accurate data is one of the major reasons why Nigeria is alongside other business leaders at the session on “African not able to attract investors when compared to other Outlook: Economics, Innovation & Governance”. emerging/frontier markets. Tokunbo Orimobi Legal Group was the sponsor of this highly educative and informative panel session. During the session, the Panelists highlighted amongst other things, the opportunities, challenges in Africa as well as key drivers that will set the trend in the new decade.

AURORA Q1 07 Specifically, our Global Chairman noted the need for all with our international outlook - 10 offices in 7 countries. We Africans to carve a positive narrative for Africa. He reiterated must commend the organizers of the Business of Law that challenges are part and parcel of every nation in the Conference for a fantastic job. world, however, the ability and verve to surmount those challenges will make us standout as Africans and set the trend for the next generation. 4. LAW MEETS MUSIC

3. THE BUSINESS OF LAW CONFERENCE 2.0

Our Global Chairman was a speaker on the Panel that discussed 'Visibility as a Tool for Law Firm Viability' at The Business of Law Conference 2.0 which took place on Tuesday, January 28, 2020.

On Friday, December 20, 2019, the Tokunbo Orimobi Foundation held the second edition of its “Law Meets Series” with the Law Meets Music – The Christmas Experience.

The Law Meets Music was an avenue for young and upcoming artists to showcase their talent and introduce their voice to the corporate world.

The Christmas themed party had artists like Made it, Tinu Cole, Dream Baba, and Tosin with Olu Jazz as the Band of the event. The after party which took place after the main event featured DJ Xclusive who brought out a different side of everyone present with his mix of music.

During the session, he noted that Capital is the most essential tool for Law Firm visibility. The reason for his conclusion lies in the fact that “it takes money to make money”. He stated that we cannot overlook the fact that Law Firms in Nigeria do not have enough capital to maintain human capital and fund their OPEX. We cannot compete with other sectors for human capital retention, visibility etc. due to lack of access to capital.

We need to fix this problem as a profession. Law Firms need to be able to raise cheaper liabilities to fund CAPEX and OPEX.

He reiterated that the legal business in Nigeria is quite It was an evening of fine cocktail, exotic drinks, wining, saturated and to be distinguished from others, Law Firms dinning, dancing and networking. It was indeed a remarkable need to think outside the box. This we have been able to do experience!

AURORA Q1 08 5. LAPO MICROFINANCE BANK LIMITED 7. 2LP MANAGEMENT LIMITED SEREIS 1 N6.2BN SERIES 2 BONDS ISSUANCE TRANCHE A NOTE ISSUANCE EXERCISE We are pleased to officially announce the closing of the 2LP Management Company Limited Series 1 Tranche A Note Issuance. This deal closed on December 19, 2019. Tokunbo Orimobi acted as Solicitors to the Trustees on this deal and we are proud to be one of the few law firms in Nigeria to have advised on deals of this nature. We congratulate our Securities, Mergers and Acquisitions Team (a sub-set of our Transactions Practice) for a job well done. We are pleased to officially announce the closing of the N6.2bn Series 2 Bonds Issuance Exercise under the N20bn Bond Issuance Programme by LAPO Microfinance Bank Limited. Tokunbo Orimobi LP acted as Solicitors to the Company on this deal and we are proud to be one of the few Law Firms in Nigeria to have advised on deals of this nature. This Bonds Issuance Programme is the only consummated public debt capital deal by a Microfinance Bank in Nigeria.

We congratulate our Securities, Mergers & Acquisitions Team (a sub-set of our Transactions Practice) for a job well done

6. RED STAR EXPRESS PLC RIGHTS ISSUE EXERCISE

We are pleased to officially announce the closing of the Red Star Express Plc Rights Issue of 336,855,291 ordinary shares of 50 kobo each at N4 per share. This deal closed on the 18th of December 2019.

Tokunbo Orimobi acted as Solicitors to the Issue on this deal and we are proud to be one of the few law firms in Nigeria to have advised on deals of this nature.

We congratulate our Securities, Mergers and Acquisitions Team (a sub-set of our Transactions Practice) for a job well done.

Phone Email & Website Global Head Office +234 (0) 8055190066 [email protected] Plot 1963B Buraimoh Kenku Street www.tolegalgroup.com Off Oyin Jolayemi Street Victoria Island Lagos, Nigeria