21 Apr Protection of Minority Shareholders Under Nigerian Company Law
One of the direct consequences of incorporation of a company is that a registered company is conferred with the privileges of corporate personality. A fundamental attribute of corporate personality is that the company is a legal entity distinct from its members. However since the company is an “artificial person”, it can only be run and managed by “natural persons”. Such natural persons are typically the members or directors of the company who are tasked with the day to day management of the company and are required to act in the best interests of the company. Consequently, decision making in a company is meant to be reached in a democratic manner i.e. discussions in shareholder or board meetings and resolutions passed either unanimously or by a majority vote. Although, majority shareholders will habitually get what they want due to “majority rule”, it is essential that minority shareholders are given an audience prior to any major decision relating to the company. It is not uncommon to find majority shareholders running a company in an illegal or oppressive mode irrespective of provisions of the Companies and Allied Matters Act 2004 (“CAMA”), the foremost legislation regulating the operation of companies in Nigeria or managing a company in an unfavourable manner detrimental to the minority shareholders.
In this article, we will examine the CAMA provisions providing protection to minority shareholders and the safeguards put in place to ensure that majority shareholders do not act in an illegal or irregular manner.
Foss v Harbottle
The rule in the case of Foss v Harbottle and under Section 299 of CAMA states that where an irregularity has been committed in the course of a company’s affairs or any wrong has been done to the company, only the company can sue to remedy that wrong and only the company can ratify the irregular conduct. This rule has been consolidated by various statutes and an abundance of case law over the years. The ramifications of this rule are twofold (i) the company will ultimately be the plaintiff to sue in respect of wrong done to the company and (ii) the Court will not intervene in the management of company, where the irregularity being complained about is within the scope of powers of the majority shareholders to remedy or ratify by means of an ordinary resolution.
There are however exceptions to the aforementioned rule under Section 300 of CAMA in instances where it is essential that the company is prohibited from committing certain acts namely:
- Entering into a transaction which is illegal or ultra vires;
- Purporting to do by ordinary resolution any act which by its constitution or by CAMA is required to be done by special resolution;
- Any act or omission affecting a shareholder’s personal rights as a member;
- Committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong done;
- Impracticable to call a company meeting in time to redress the wrong done to the company or to the minority shareholders; and
- Where the directors are likely to derive a profit or benefit, or have profited or benefited from their negligence or from their breach of a fiduciary duty.
The CAMA stipulates certain actions that can be brought by minority shareholders against the company in the event that any of the above scenarios occur namely:
- Personal Action;
- Representative Action;
- Derivative Action
The remedies available to personal and representative actions are either injunction or declaration however the remedies for bringing a derivative action are more thorough. In a derivative action, an applicant can apply to the court for leave to bring an action in the name or on behalf of a company, or to intervene in an action to which the company is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the company.
The remedies available in the event that the court is satisfied with the application include:
- Court orders directing that the applicant or a third party control the conduct of the action;
- Giving directions for the conduct of the action;
- Directing any amount adjudged to be paid by the individual or company; or
- Requiring the company to pay reasonable legal fees incurred by the applicant in connection with the proceedings.
Sections 310 and 311 of CAMA also provide another option for a minority shareholder to bring a petition to the court on the grounds that:
- the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against a member or members, or in a manner that is in disregard of the interests of a member or members as a whole; or
- that an act or omission was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory to a member or members.
Accordingly, if the court is satisfied that the petition is well founded, the court may make one of the following orders amongst others:
- That the company be wound up;
- Regulating the conduct of the affairs of the company;
- Directing an investigation be made by the Corporate Affairs Commission;
- Appointing a receiver or a receiver and manager of property of the company;
- Restraining a person from engaging in specific conduct or from doing a specific act or thing.
Conclusively, although it is customary that the majority will always make the bulk of the decision making of a company, there exist certain statutory safeguards to protect the minority shareholders/members of companies.
In addition the foregoing, it is germane that key provisions of the Shareholders Agreement of the company are negotiated by counsel in a manner that would grant minority shareholders some forms of protection. Such provisions include but are not limited to voting rights, right to first refusal, pre-emptive rights, share transfer restrictions, rights of first offer, tag-along rights.
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