CORPORATE LAW PRACTICE: COMPANY SECURITIES IN NIGERIA (1)

When we talking about company securities, we looking at the contributions to the capital of companies which is made with a view to obtaining some profitable returns by the investors, Securities as defined by SECTION 315 of INVESTMENT AND SECURITIES ACT include;

a)      Shares

b)      Debentures

c)      options

d)      bonds

e)      commodities

f)       futures and other derivatives

                                              

                                                                       SHARES

MEANING: IN BORLAND’S TRUSTEE V STEEL BROTHERS & CO LTD defined shares as;

            ‘’is the interest of shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of  series of mutual covenants entered into by all shareholders……’’

According to COMPANIES AND ALLIED MATTERS ACT (herein will be referred to as CAMA) the combination of section 114 and 115 you can see the nature of Share, SECTION 115 describes shares as a chose in action and is a property transferrable in the manner provided in articles of association of the company. SECTION 114 now states that the rights and liabilities attached to a share is;

a)      dependent on the terms of issue and company’s article

b)      notwithstanding anything contrary in the terms of article, it includes the right to attend any general meeting of the company and vote at such meeting.

From this foundation we can see the prevailing power of the Article of a company in relation to shares of the company, I believe it the reason why in most sections related to shares, you will see CAMA stating that ‘’subject to the article’’. Still on the Article of company, in a private company it Article have a restriction on transfer of share clause which is drafted as;

            ‘’The Directors may, in their absolute discretion and without giving any reason, refuse to register any transfer of any share, whether or not it is fully paid’’

AND, both Public and Private company have a Preemptive Right clause which is drafted as;

             ‘’The company shall not allot any new or unissued shares unless the same are offered in the first instance to all the shareholders or to all the shareholders of the class or classes being issued in proportion as nearly as may be to their existing holdings’’

Flowing from the above I believe we have a background knowledge of what a share is all about and some surrounding issues around shares in a company. Reading through the provisions of CAMA, the rights attached to having a share are;

1.      Right to attend any general meeting

2.      Right to vote at meetings

3.      Right to notice of meeting

4.      Right to be appointed as a director

5.      Right to dividends

6.      Rights to petition for winding up

7.      Right to inspect the Minutes Book

8.      Right to have his name in the register of members……etc

The next question will be HOW TO ACQUIRE SHARES IN A COMPANY

1.      By Subscription

2.      By allotment

3.      By transfer

4.      By transmission

By virtue of SECTION 79 of CAMA, if you read it through you will see that having a share in a company already put you on the way of becoming a member of the company, except for subscription if after having a share and your name is entered in the company register of members then you become a member of the company.

N.B: These four ways of acquiring shares in a company can also be said to be ways of becoming a member in a company.

SUBSCRIPTION

This is very easy because at incorporation, the issue of shares is made to the initial subscribers. These are persons who sign the memorandum of association and articles of association of a company.  The provision of CAMA under SECTION 27(2)(b), the subscribers are required to take among themselves a total number of shares of a value not less than 25% of the authorized share capital. The subscribers upon incorporation are deemed to have agreed to be members of the company and their names are entered as members in the company register of members. See SECTION 79 (1)

TRANSFER OF SHARES

The general rule is that a share is a property transferable (section 115 CAMA) but this is subject to any form of restriction in the Article of the company and also the manner at which it can be transferred can be provided for by the Article of the company.

In the foundation we try to build when discussing shares, you remember we talked about the relationship between the Company’s Article and its Shares, the Article of a Private Company places a restriction on transfer but note that it is not a prohibition from the wordings of the restriction clause the power to restrict lies on the directors (N.B: not a single director but the Board of directors), this is actually affirmed by the provision of SECTION 22(2) of CAMA.  So, the extent of the transfer will be defined by the Article of the company.

N.B: It is a settled law that the court cannot interfere where the article gives the directors powers to restrict transfer of shares without giving any reason unless a mala fides of the directors can be proved. See RE SMITH AND FAWCETT LTD the court held that;

                        ‘’ having regard to the terms of the Article, the only limitation on the director’s discretion was that it should be exercised bona fide in the interest of the company’’

Furthermore, this restriction is absent in a public company.

PROCEDURE FOR TRANSFER

This will actually depend on the way the shareholder wants to transfer, whether he wants to transfer all his shares comprised in the Share Certificate or partly or wholly to different people..

The method of transfer provided for under SECTION 151(1(2)(4) of CAMA is that it shall be by delivery of a proper INSTRUMENT OF TRANSFER (Agreement in deed form) to the company and the subsequent Registration of the Transferee in the Register of Member.

PROCEDURE 1: WHERE HE TRANSFERS ALL THE SHARES

1.      The transferor and Transferee duly execute an Instrument of transfer

2.      Stamp the Instrument of transfer

3.      The transferor delivers to the transferee the duly executed Instrument of Transfer with the original share certificate

4.      The transferee sends the instrument of transfer together with the share certificate to the company for registration

5.      Upon registration a new share certificate will be issued to the transferee within 3 months

6.      Then his name will also be entered in register of members within 28 days of the conclusion of the agreement. [see SECTION 83(2) CAMA]

PROCEDURE 2: WHERE HE TRANSFERS PART OF THE SHARE

1.      The transferor executes the Instrument of Transfer with the transferee(s) subject to payment of agreed price upon verification of share certificate

2.      They stamp the instrument of transfer

3.      The transferor takes the stamped Instrument of transfer and his original share certificate to the company, for the purpose of recognition and registration of the instrument

4.      The company acknowledges it by endorsing at the back of the instrument of transfer ‘’CERTIFICATE LODGED’’

5.      The company registers the transferee(s) as new owners of the quantity of shares bought

6.      Upon registration, the company shall issue a new share certificate to the Transferor to reflect his remaining shares and another certificate to the transferee(s) within 3 months

7.      The names of the transferee(s) will be entered in the register of members within 28 days of the conclusion of the agreement.

EFFECT OF ‘’CERTIFICATE LODGED’’ ENDORSED ON THE INSTRUMENT OF TRANSFER

The endorsement means that the company has recognized the transfer. See SECTION 157(2) CAMA. The recognition of the Instrument of Transfer is merely a representation by the company to any person acting on the faith of the recognition that there have been produced to the company such documents as on the face of it show a prima facie title to the transferor. See SECTION 157(3) CAMA

REASON;

a)      It is merely a precautionary measure for the transferor who should not give to the transferee a certificate to more shares he has purchased

b)      It also appeases the transferee who may be unwilling to part with his money without the exchange of the certificate, the instrument of title.

FURTHERMORE, SECTION 157 (4) provides that where any person acts on a the faith of a false recognition by a company made negligently, the company shall be under the same liability to that person as if the recognition has been made fraudulently.     

TAKE NOTE SECTION 157(5)(b) provides that the recognition of an instrument of transfer shall be deemed to be made by a company if;

a)      The person issuing the instrument is a person authorized to issue certificated instruments of transfer on the company behalf and

b)      The recognition is signed by a person authorized to recognize transfers of shares on the company’s behalf or by any officer or servant either of the company or of a body corporate so authorized.

REASONS WHY A COMPANY MAY REFUSE TO REGISTER THE TRANSFER OF SHARES

1.      If the shares are not fully paid up

2.      The company has a lien on the shares

3.      Non-payment of requisite fees in respect of the instrument of transfer

4.      Instrument of transfer is not accompanied with the share certificate

5.      The instrument of share is not in respect of only one class of shares

EFFECT OF NON-REGISTRATION OF TRANSFERRED SHARES

By virtue of SECTION 152(2) CAMA provides that until the name of the transferee is entered in the register of members in respect of the transferred shares, the transferor shall so far as concerns the company, be deemed to remain the holder of the shares.

IMPLICATION: Generally the entry of the Transferee name, effectively vest the title to the share to him and he qualifies as a member of the company.  But failure to register his name makes the interest in the share an equitable interest. And all the rights and liabilities of a shareholder would continue to be addressed to the transferor as if the shares are still his own….see STARCOLA V ADENIJI

REMEDIES FOR A PERSON ENTITLED TO SHARES BUT NOT REGISTERED

We can see from above the effect of non-registration of transferred shares, now the question is does this person have remedies. YES. The remedies are;

a)      He can serve on the company a notice and affidavit of interest in the company shares. See SECTION 156 CAMA

b)      Apply to the Federal High Court to rectify the company Register of members in his favor. See SECTION 90 CAMA

c)      The transferee may bring action against the transferor to account for the benefits derived within the period his interest was subsisting, particularly dividend paid out within the period.

TAKE NOTICE OF COMPANIES REGULATION 32

Requirements For Filling Of Notice Of Transfer Of Shares

a)      Duly Stamped Instrument of Transfer

b)      Evidence of payment of FRC annual dues and

c)      Payment of fees

AND, the notice of transfer of shares shall be filled with the commission within 14 days of the transfer.

ALLOTMENT OF SHARES

RULES ON ALLOTMENT; (N.B: this is generally subject to the provisions of Securities and Exchange Commission Act)

a)      The power to allot shares vests in the company, BUT it may delegate it to the BOARD OF DIRECTORS (N.B: this is subject to the provisions of the Article or from the resolutions in general meeting)….SEE SECTION 124 CAMA

b)      The shares allotted by a company must not exceed its authorized share capital

c)      If the Company does not have sufficient unissued authorized share capital to accommodate the allotment, then it must increase its share capital first before it can make the allotment.

d)      The principles of contract guides allotment of shares

e)      The procedure will depend if the company is either a private company, an unquoted public company or a quoted public company

f)       Allotted share can be paid for in cash or in kind ….see SECTION 127 CAMA

HOWEVER, before we go to procedure for allotment of shares, you know BAR PART 2 may be funny, what if the company falls under NO C of the above rules, so how will the company increase it share capital, then we go to SECTION 102 AND REGULATION 29 OF COMPANIES REGULATION, this is was affirmed in  OKOYA V SANTILI

THE PROCEDURE FOR INCREASE OF SHARE CAPITAL

1.       The board of directors, meet to pass a resolution to the effect that the capital of the company be increased

2.      The board authorizes the secretary to summon general meeting.

3.      The secretary will convene a general meeting of the company giving notice of meeting to members and specifying in the notice the intention to pass an ordinary resolution to increase the share capital of the company

4.      The company at general meeting passes an ordinary resolution setting out the terms of the increase - s. 102(2)

5.      The company delivers to the CAC 15 days after passing the resolution notice of the increase – s. 102(2)

6.      The following documents must be delivered to the commission

a)      A copy of the resolution signed by a director and secretary

b)      Duly stamped form for Notice of Increase in Authorized Share Capital

c)      Updated Annual Return

d)      Evidence of payment of FRC annual due

e)      Payment of fees

7.      Within 6 months of giving notice of increase to the commission, the company must have issued not less than 25% of the share capital including the increased share capital

8.      The company will deliver to CAC a statutory declaration verifying the issuance. See SECTION 103 CAMA

N.B: The increase shall not take effect until the condition in 7 & 8 are fulfilled.

So now let assume the company have increased its share capital and it wants to allot its shares

PROCEDURE FOR ALLOTMENT OF SHARES

1)      Board resolution will be passed stipulating the numbers of shares to be allotted

2)      For public offer of a public company, Prospectus and Subscription List are issued. If private company or public company where the offer is not public, no prospectus is issued out

3)      Application forms from interested applicants are received by the company and recorded in application and allotment sheets.

4)      General meeting is convened or if delegated to the board, then a Board meeting is convened and a resolution passed authorizing the allotment. (NOTE that if it is a public company, then the meeting and resolution would be that of the ALLOTMENT COMMITTEE)

5)      Inform successful applicants of the allotment WITHIN 42 DAYS of approval after the allotment

6)      Unsuccessful applicants will be issued Letter of Regret with a Cheque enclosed for the payment made on the unallotment  shares

7)      Deal with Letters of Renunciation for those allotted shares

8)      Prepare and deliver share certificate to the allottee within two (2) months of  the allotment

9)      Enter allottee’s name in the Register of Members within 3 months of allotment. See EZEONWU v. ONYECHI

10)  File Return of Allotment, post incorporation (form CAC 2A) with CAC within one (1) month of allotment. Section 129(1) CAMA; Regulation 31(2) Companies regulations, 2012.

TO THE PROVISION OF THE REGULATION 31(2)

The following documents are to be filed with CAC for the registration of the allotment:

                                i.            Special resolution signed by two directors of the company

                              ii.            Duly completed form for return of allotment (Form CAC 2A)

                            iii.            Resolution of the company for forfeiture of shares, where applicable

                            iv.            Updated annual returns

                              v.            Updated section 553 of CAMA filing

                            vi.            Evidence of payment of FRC annual dues

                          vii.            Evidence of payment of filing fees

POSER: IF THE APPLICANT WANTS TO PAY FOR THE SHARES BY CONSIDERATION OTHER THAN CASH?

By virtue of Section 127 CAMA it provides that subject to the provision of SECTION 135 -138 of the ACT, a company may in its Article, make provision with respect to payment on allotment of its shares.

So when the applicant wants to make payment other than cash, we should aver our mind to SECTION 137 and never forget SECTION 129 also;

THE PROCEDURE

1.      The company appoints an independent valuer who will determine the true value of the consideration and submit a valuation report to the company.

2.      The valuer so appointed is entitled to any relevant information required from the officers of the company

3.      WITHIN 3 DAYS of receiving his valuation, the company must forward the valuation report to the proposed purchaser informing him of its acceptance or non-acceptance

4.      Such consideration must be of the same value as the nominal value of shares given to the proposed shareholder. That is, the true value of the consideration shall not be less than the value of the shares being exchanged.

5.      If the consideration involves capital investment of N20,000 or more, apply under the Industrial Inspectorate Act

6.      If accepted, the entity is transferred to the company and within 1 month of the transfer, the company shall file FORM CAC 2A duly stamped and file with the CAC the documents stated in SECTION 129 CAMA;

a)      Duly stamped contract transferring the title

b)      Valuation report

c)      Evidence of title if applicable

d)      Resolution of the company agreeing to accept the entity

TRANSMISSION OF SHARES

RULE: This occurs upon the death of a shareholder or when bankruptcy of a member of the company, his shares vests in his legal representative of the deceased, where the deceased is a joint holder then it will vest on the survivor (s). Upon Bankruptcy, it vests on his trustee in bankruptcy…see SECTION 155(1)(2) CAMA.

POSER: HOW CAN YOU PROVE ENTITLEMENT?

By virtue of SECTION 148 CAMA, it provides that regardless of the provision of the Article of the company, the following are sufficient proof of entitlement of a legal personal representative;

a)      Grant or Probate where there is a will

b)      Letter of Administration where there is no will

c)      Evidence of being an executor

d)      Share certificate

e)      In case of trustee of bankruptcy, evidence of court order, and the fact that he has not been discharged

SOME KEY POINTS ON TRANSMISSION OF SHARES

1.      Do you know that the personal representative may himself validly transfer the shares or other interest of the deceased, although the personal representative himself is not a member of the company. See SECTION 154 CAMA

2.     

 HOWEVER, he may elect either to be registered himself as holder of the share, or to have some person, nominated by him, to be registered as the transferee of the share.

3.      SO, if the personal representative so entitled elects to be registered, he shall deliver or send to the company a Notice in writing signed by him stating that he so elects and if he elects to have another person registered, he shall testify his election by executing a transfer of the shares in favor of that person

N.B: Under no 3 & 4 circumstances, the company still has the right to decline or suspend the registration, just as it would have had in the case of a transfer of the shares by that member before his death or bankruptcy.

A VERY VITAL POINT …… By virtue of section 155(5) CAMA, the personal representatives can receive dividend and other benefits without being registered.

HOWEVER, by the proviso to that section 155(5) CAMA, the directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the shares, and if the notice is not complied with within ninety (90) days the directors may thereafter withhold payment of all dividends, bonuses or other moneys payable in respect of the share until the requirements of the notice have been complied with.

PROTECTION OF BENEFICIARIES

SCENARIO: Now let imagine, I married 2 wives with 6 Children, upon my death I have bequeathed my interest or share of Company A to Derin, the 1^st daughter of my first wife, if problem arise over the share bequeathed to Derin, how can derin protect her interest in the share? Since the interest of a beneficiary under a will is equitable only until the shares are transferred to him and he had been registered as a member.

The protection is enshrined in SECTION 156 OF CAMA, the section provides that any person claiming to be interested in any shares may protect his interest by serving on the company concerned a notice and affidavit

Thereafter, the company shall enter on the register of members, the fact that such notice has been served and shall not register any transfer or make any payment or return in respect of the shares contrary to terms of the notice until the expiration of 42 days’ notice to the claimant of the proposed transfer or payment.

AND,  in the event that the company default in complying with the above, the company shall compensate any person, injured by the default.

NOW TO THE PROVISION OF REGULATION  33(1)

 The requirements for filing notice of transmission of share;

i)                    Photocopy of death certificate

ii)                  Letter of administration/probate

iii)                Notice of election or instrument of transfer, whichever one is applicable

iv)                Evidence of payment of FRC annual dues

v)                  Payment of fee

TO BE CONTINUED!!!!!!!!

SO, stay tuned we will be discussing, share certificate and issues related with same, classes of shares under CAMA and finally Debenture……………….

READ HARD

EAT HARD

REST HARD

PRAY HARD………ONLY THE LIVING CAN BE CALL TO BAR!!!!!!