By Abimbola Izu

With the expiration of the December 31, 2022 deadline, a new share capital rule for companies in Nigeria takes effect. A corporate governance expert, Abimbola Izu, examines the implications of the new rule.

The Companies and Allied Matters Act (CAMA) 2020 was a radical departure from CAMA 2004 in many respects. One of such departure was the requirement for all shares in the capital of all limited liability companies to be fully issued, thus effectively outlawing the concept of “authorised share capital”.

Section 124 (1) of CAMA provides that the amount of share capital stated in the memorandum of newly registered companies shall not be less than the minimum issued share capital. Sec 124 (2) re-emphasised the point by prohibiting the registration of any company with a share capital less than the minimum issued share capital.

Sec 124 (3) further provides that existing companies must issue any unissued shares in their capital within 6 months of the commencement of the Act. This deadline was subsequently extended till December 31, 2022 via an amendment to Regulation 13 of the Companies Regulations, 2021, by the Minister for Trade and Industry, being the supervisory minister, in exercise of the powers conferred in that behalf by CAMA.

Some practitioners have opined that perhaps the requirement to issue all un-issued capital applies only to newly formed companies. However, this position is inconsistent with the very clear provisions of Sec 124 (3) and (4) that very specifically prescribe a period within which companies must issue previously unissued shares in their capital.

Others have suggested that the provision contemplates the minimum share capital, which, in their view, is N100,000 for private companies, and N2m for publicly quoted companies as set out in Sec 27 (2) of CAMA. Again, in one’s opinion, this position is not supported by CAMA. Sec 27 (2) of CAMA provides as follows:

Sec 27 (2)

“If the company has a share capital

(a) The memorandum of association shall also state the amount of the minimum issued share capital which shall not be less than N100,000, in the case of a private company and N2 million, in the case of a public company, with which the company proposes to be registered, and the division thereof into shares of a fixed amount;”

The clear meaning of this provision is that each company must have a minimum share capital, and companies are free to determine what that minimum capital would be, provided it is not lower than the threshold set. The section did not by any means prescribe the above amounts as the minimum capital for companies.

Rather, it allows each company to set its own minimum share capital, but only gave the floor below which that discretion cannot be exercised. However, whatever the company eventually sets in its memorandum of association becomes its minimum share capital, and all provisions in the Act relating to minimum share capital, of necessity refers to that amount.

By the combined provisions of Sec 27 (2)(a), and Sec 124 (1-4), no company is allowed to hold any share capital, other than fully issued ones, and the fully issued capital must be equal to whatever the minimum share capital the company sets for itself in its memorandum of association.

Regulation 13 of April 16, 2021 as amended (Regulation 13) has, in the past couple of months, acquired notoriety, as many companies struggled with the implications of this, and how to ensure compliance. As far as one knows, there were several high – level individual and group engagements with the Corporate Affairs Commission (CAC) to understand the full import of this regulation, possibility of a further extension of time for compliance, and indeed what options are available. In the end, companies were advised to pass resolutions on cancellation of the shares at their AGMs or simply issue and allot the unissued shares.

The reasoning probably was that the obvious loss would be the statutory fees by way of stamp duties and CAC filing fees paid on those shares (which may be significant, depending on the quantum of shares involved), which, by their cancellation, would be forfeited. This advise was heeded by many companies.

While appreciating the constraints faced by companies and the rationale for taking what looks like an easy way out, one feels the need to examine the bigger implications posed by this statutory provision, and its implementation. One is hoping that this may trigger some discourse that may facilitate a review of the positions.

Issue or allotment?

Sec 124 of CAMA requires companies to issue all their share capital. It is however unclear what exactly is meant by “issued”. Section 868 of CAMA defined “issued” within two contexts as follows:

“issued generally” means in relation to a prospectus, issued to persons who are not existing members or debenture holders of the company.

“issued share capital” in relation to any reduction has the meaning assigned by Sec 124 (2) of this Act”

It is clear that “issued” or “issued share capital” within the context of an increase in share capital is not contemplated in either definitions provided. We thus must look to general commercial usage for meaning and context.

Commercially, “issued” within the context of share capital of a company is generally understood to mean that portion of the share capital of the company that was appropriated for subscription by shareholders in pursuance of a capital raise. Were this understanding to be the contemplation of CAMA, the mere appropriation of shares for issuance under a proposed capital raise would have sufficiently met the requirement of Sec 124 (1-4).

However, it appears that CAMA’s actual intended meaning or application of this word is “allotment”. This is more so when we consider Sec 127(1) which provides as follows:

“A company having a share capital, may, in general meeting, and not otherwise, increase its issued share capital by the allotment of new shares of such amount as it considers expedient”. (emphasis supplied).

By this provision, it is clear that the only way the issued capital of a company can now be increased is by allotment. This means therefore, CAMA does not contemplate the mere appropriation of shares for subscription as “issued”. Rather, it is the allotment of such shares that is considered the issuance thereof. Thus, CAMA seems to have treated both issuance and allotment as one and the same. The significance of this treatment will become obvious in subsequent paragraphs.

By Sec 127 already referred to, a company can only increase its share capital at the general meeting and at the time of the increase, it must be allotted for the increase to be valid. In fact, Regulation 14 (1) of 2021 amplified this provision very clearly by stating that “Allotment of shares shall be done at the same time the shares are issued”.

In effect, companies willing to increase their share capital must already be clear of the following at the time of approaching the general meeting (a) how many new shares the company wishes to create, (b) who the shares will be allotted to, (c) the price at which the shares will be allotted and (d) the shares must then be allotted to the proposed allottees at the same general meeting at which the shares were issued.

Before considering the practical implications of these issues, it is important to consider the provisions of CAMA 2020 with respect to allotment of shares.

Power of allotment under CAMA 2020

Sec 127 (1) of CAMA 2020 reproduced above, seems to have exclusively reserved the power to allot shares for the shareholders at the general meeting. This compares with Sec 124 of CAMA 2004 which vested the powers to allot in the general meeting, but which may be delegated to the directors whether for private or public companies.

Pursuant to that provision, the general practice with most private and public companies alike was that they found it more convenient and commercially expedient to empower directors to deal with such matters. However, this position, and the possibility of doing so, seem to have been significantly impaired by CAMA 2020.

The prohibition of allotment of shares other than at general meeting contained in Sec 127 (1) seemed to have been amplified by Sec 149 (1) and (2) of CAMA 2020 which provide that the power to allot shares is vested in the company and with respect to a private company, may be delegated to the directors, while with respect to a public company, it is subject to the provisions of the Investment and Securities Act (ISA), 2007. Many practitioners have taken solace in this provision and Regulation 14 (2) of 2021 which restated the powers of the shareholders to delegate the powers to allot shares to the directors of private companies as provided in Sec 149 (1). It therefore seems notionally, that the challenges highlighted above would be of no worry to private companies.

The above provisions notwithstanding, with respect to private companies, in one’s humble view, there appears a conflict between the very forceful and prohibiting provision of Sec 127 (1) which provides that the exercise of allotment may only be done at a general meeting “and not otherwise”…, and Sec 149 (1) and Regulation 14 (2) which suggest that the exercise may be done by directors under a delegated authority from the general meeting. We wait to see how this potential conflict will be resolved by the regulators and operators, in the coming periods. Importantly, it will also be useful to see what the leaning of the courts would be in the event that a shareholder decides to vent his grievance against the exercise of such powers by directors.

The position with public companies is a lot more concerning. One is mindful of Regulation 14 (3) which provides that directors of a public company may allot shares if they have been so authorised by their articles, or specifically by the general meeting for a specific offer. This appears an attempt by the regulators to place a bridge over what patently is troubled waters. The challenge however is the integrity of the bridge and whether it can, and will stand any legal scrutiny at the suit of an aggrieved person in time to come.

It may be useful to consider again the provision of Sec 149 (1) which states:

“The power to allot shares is vested in the company, and in relation to a private company, this power may be delegated to the directors…” (emphasis supplied).

By the well settled principle of interpretation captured in the Latin maxim “expression unius est exclusion alterius” meaning “the expression of one thing is to exclude another”, the express mention of private companies with respect to the possibility of delegating the powers of allotment to their directors, very clearly excludes that possibility for public companies. Moreover, recognising that this is a departure from what obtained in the repealed CAMA 2004, it is clear that it is the intention of the lawmakers of CAMA 2020 to limit the exercise of that prerogative to only private companies, else it would have reproduced what obtained previously in CAMA 2004, as it did in many other provisions.

Accordingly, one opines that CAMA 2020 has withdrawn the possibility of delegation of the powers to allot to the directors of public companies, and such power must of necessity be exercised by the shareholders at the general meeting.

Furthermore, Regulation 14 (3) of 2021 made by the Minister of Trade and Industry is a mere regulation made pursuant to Sec 867 of CAMA. By the well settled principles of law, it is a subsidiary and inferior instrument and as such cannot amend, contravene or seek to vary the express provisions of an Act of the National Assembly.

Wherever there is a conflict between the Act, and any regulation or subsidiary instrument made under it, the provisions of the Act must of necessity prevail. To the extent that Regulation 14 (3) therefore seeks to give to public companies prerogatives that have been expressly excluded by CAMA, an Act of the National Assembly, one is of the view that the provision cannot stand.

As such with respect to public companies, it appears that the combined provisions of Sec 149 (2) of CAMA and 88 of ISA, have done nothing to shift the arduous responsibility and need to return to the general meeting for allotment of shares in any event, and neither can Regulation 14 (3) come to their aid. Sec 88 of ISA clearly states that the responsibility for allotment shall be by the issuer, together with the issuing house, the issuer being the issuing company. In the reality of Sec 127 (1) and 149 (1) that withdrew from the shareholders, the hitherto existing power to delegate such powers to directors as it existed under Sec 124 of CAMA 2004, it does appear that public companies must of necessity return to shareholders at a general meeting for any form of allotment.

Implications and practical challenges

There are a number of complications that will arise with the above outcomes. For a private company, it may be possible for the proposed allottees of new shares to have been identified and commitments obtained from them before formally approaching the general meeting to seek enablement to create, issue and allot the shares. It may also be possible for the process of allotment to be done by directors under a delegated authority, if that position is upheld by stakeholders and by the courts, when tested. Not so for a public company. Given the typically diverse and large nature of shareholding of publicly quoted companies, this appears a potential challenge. From a practical standpoint, how would a publicly quoted company with more than 300,000 shareholders for instance, ever be able to increase its share capital by “issuing” and allotting shares at the time of creation at the general meeting?

The challenge seems even more complicated by the pre-emptive rights of existing shareholders over all newly created shares hitherto applicable to only private companies under CAMA 2004, which has now been extended as a mandatory provision to all companies, public companies inclusive, by virtue of Sec 142 (1) of CAMA 2020. By this provision, a public company seeking to raise capital, and increase its issued share capital must first offer the proposed new shares to existing shareholders by way of rights issue in the proportion of their shareholding. Notionally, it appears that by commencing capital increases by way of rights issues, companies may be able to circumvent the immediate challenge posed by the requirement to allot the shares at the time of increase and issuance, since the existing shareholders who are the potential allottees of the rights issues are already known. However, this is a mere deferment of the real challenge. In the event of undersubscription of the rights issue, it does appear that companies would be confronted with one of at least two realities, either (a) return to the general meeting for further empowerment to offer the shares by way of public offer, or (b) cancel the unsubscribed shares, since there must not be any “unissued” (i.e “unallotted”) shares. To be fair, it is possible to propose and obtain anticipatory approvals that will enable the company undertake a public offer in the event of undersubscription of a rights issue, at the same time the resolution for rights issues is being proposed. However, one is of the view that by CAMA 2020, directors must still return to the general meeting before shares can be allotted pursuant to any such pubic offer. The nightmare of the multiple general meetings, layers of approvals and multiple costs involved to consummate a simple increase of capital and allotment of shares, as a consequence of this, can only best be imagined for now.

Aside the challenge with the necessary implication of knowing who the subscribers would be before a capital increase can be initiated, and the attendant costs and troubles of many layers of general meetings, there is also the challenge of pricing. By Sections 141 and 142 of CAMA, shares of companies are expected to be issued at a price, not being charitable institutions. The requirement for shares to be increased only by allotment, which must be done at the same time with issuance, means necessarily that at the time of approaching the general meeting for an increase, the price of the shares must have been determined, else it cannot be allotted. This removes the discretion and flexibility that directors hitherto had in determining prices in response to market realities. Importantly, it will also make offers by price discovery methods practically challenging and difficult to realise.

Furthermore, the requirement for increase of capital only by allotment of shares which must be done at the general meeting means companies will be forced to allot shares on deferred payment basis. At the time of approaching the general meeting for authorization to increase and allot, it is unlikely that the shares would have been paid for, not having in fact been created. Yet, companies have to allot the shares at the time they are being newly created. From the practical perspective therefore, at the time of allotment, not only must companies already be armed with the list of the proposed allottees of the shares, the approval of the shareholders at the general meeting will effectively allot the shares to them. Thus, the allotment at this point can only be done on credit, or at best conditionally, as payment may not have been received at that point. In a sellers’ market, where there is so much funds chasing few companies’ stock, it may be feasible to mandate a deposit for shares by would – be subscribers before approaching the general meeting for allotment to them. Not so in our clime where the market is not deep and funded enough. Although by the combined provisions of Sec 152 and 158 of CAMA, a company has discretion in the manner of payment for its shares, and it can allot shares on deferred payment terms, this is intended, and ought to be at the discretion of each company, rather than the law creating a situation that foists allotment of shares on credit by default on companies.

Furthermore, where shares have been increased by the issuance and allotment of the shares, it begs to be seen what then happens where allottees fail to take up the shares or pay for them. This portends either cancellation of such shares and a waste of time and moneys spent creating them, or a new challenge of undercapitalization of companies by reason of non – payment for allotted shares, and a new class of unfunded and bad assets in the books of companies.

As companies seek to increase and issue new shares in the coming months and years under the new regime of Sec 124 and 127 of CAMA, the reality of the challenges posed by the practical implementation of these provisions may well become apparent. Importantly, care needs to be taken in trying to find a quick fix, to ensure that whatever fix is adopted is one that will stand legal scrutiny. Given the significant tussles that have been seen in companies, especially public companies, in recent times, it will be dangerous to allow loose strands, as they may well become weapons in the hands of gladiators in tussles for the soul and control of companies. Both regulators and operators would necessarily have to find creative ways to avoid and or minimize the potentially disruptive and obstructive impact on the corporate world, given an already challenging operating environment with daily rising cost of doing business. Potential walk – around solutions would require empathy, flexibility, understanding, out of the box thinking and collaboration amongst all stakeholders.

•Abimbola Izu is a partner with Portalls Advisory Services, a firm of Commercial Solicitors and corporate governance Consultants. She wrote from Lagos and can be reached at [email protected]