Post by lairezippert on Nov 12, 2020 21:36:16 GMT 4
Nigeria: Suitable Group Investment Structure In Nigeria; The Trust Structure
11 November 2020
by Seun Timi-Koleolu and Eustace Aroh
Pavestones Legal
There is a growing connection amongst people around the world, largely due to the use of technology by startups and other tech companies to solve problems across borders. Technology is also making it possible for investors who see value in such startups to invest in them from any country in the world. Apart from the growing crop of startups arising from Nigeria, there is also a growing crop of investors who are identifying and investing in business opportunities within and out of Nigeria.
Investors in Nigeria range from institutional to individual investors. It is quite common for a group of individuals to pool funds together to invest in businesses (Group Investments).
In establishing an investment group, it is pertinent for the members to utilize a suitable business structure to maximise returns. The business structure an investment group applies will, invariably, affect its returns, tax liabilities, asset protection and operational cost.
What are the available structures for Group Investments in Nigeria?
Group investments in Nigeria may be structured in various ways such as: a Partnership, a Company, a Cooperative Society and a Trust; with each one having its merits and demerits. For Instance, one of the merits of a company structure is its distinct legal personality from its owners. It can own properties as well as enter contracts. There are, however, administrative requirements and tax implications which may make it unsuitable for group investors. A Cooperative Society (CS) structure is another structure that can be considered. The merit of a CS structure is that upon registration, it acquires corporate status and is exempted from Companies Income Tax. The process of establishing a CS is, however, tedious. Another structure an investment group may adopt is a Limited Liability Partnership which enables the partners enjoy limited liability status with minimum tax exposure. Although this structure has been introduced by the Nigerian Companies and Allied Matters Act 20201, it is yet to be given effect to at the Corporate Affairs Commission. A useful and typically preferred structure for Group Investment in Nigeria is the Trust structure.
What is a Trust?
A Trust is a legal relationship between a Settlor, a Trustee and a Beneficiary. A Trust is set up by a person called the Settlor through a Trust Agreement or Trust Deed. With this structure, the Settlor transfers property or funds ("Trust Asset") to a person he appoints as the Trustee who then holds and manages the Trust Assets on behalf of the Beneficiaries.
In the case of a group investment, the Trust should be structured to make the investors both the Settlors and the Beneficiaries, with one or more of the investors appointed as the Trustees. The investors (as Settlors) will then pool funds together to invest in equity or other target assets and the Trustee will enter into the investment deal on behalf of the Trust. The Trustee is to be responsible for managing and distributing proceeds of the investments to all the investors (in their capacity as Beneficiaries). This structure is also referred to as an 'Unincorporated Syndicate'.
What are the useful clauses to include in a Group Investment Trust Agreement?
The Trust Agreement must specifically create the Trust and a name should be given to the Trust. The Agreement should clearly appoint one or more of the investors as a Trustee and grant him/her rights to manage the investment on behalf of the Trust. The investors should be identified as Settlors and Beneficiaries unless the proceeds of the investment are to go to a third party (in that case, the third party will be identified as the Beneficiary). The contribution ratio and the profit/asset sharing ratio should be clearly stated in the Agreement. Liability of each of the parties to the Agreement should be clearly detailed.
Conclusion
Where a trust structure is adopted for a Group Investment in a startup, the stock purchase agreement should be reviewed to ensure it allows for the free transfer of shares amongst members of the Group (for instance, transfer of shares should not be limited by a 'right of first refusal' which is typically granted to companies.
Footnote
1. Please see our article on Companies and Allied Matters Act 2020 pavestoneslegal.com/the-nigerian-companies-and-allied-matters-act-2020/