3.2 Private Companies
A
private company is one which is stated in its memorandum to be a private
company. Every private company shall by its articles restrict the transfer of
its shares. The total number of members of a private company shall not exceed 50,
not including persons who are bona fide in the employment and have continued
after the determination of that employment to be, members of the company. Where
two or more persons hold one or more shares in a company jointly, they shall
for the purpose of subsection (3) of this section, be treated as a single
member. A private company shall not unless authorised by law invite the public
to subscribe (a) subscribe for any shares of debentures of the company or (b)
deposit money for fixed periods or payable at call, whether or not bearing
interest[1].
LAW
It
is worthy to note that if a private company makes default in complying with any
of the above conditions; it will cease to be entitled to the privileges and
exemptions conferred on a private company under the Act, and the Act, and the
Act will apply to the company; but a court many on an application by an
interested person grant relief to the company if it is satisfied that the
failure to comply was accidental or due to inadvertence or to some other
sufficient cause, or that on other grounds it was just and equitable to grant
relief[2].
Thus, the process of formation or incorporation is necessary for the operation
of a company whether it is public or private.
Therefore,
any two or more persons may form and incorporate a company upon fulfilling the
statutory requirements for the particular type of company. The responsibility
for formation of a company is vested exclusively in legal practitioners[3].
The
legal practitioners shall thus, take instruction(s) from the promoter(s),
prepare the documents of Incorporation and fill the Incorporation documents
with the Corporate Affairs Commission and obtain the certificate of
Incorporation.
The
subscribers details, the object that is the Articles and Memorandum of the
Association, the name of the company, the date of the completion of the
registration are all necessary.
Note
that the name shall not be identical with that by which a company in existence
is already registered or so nearly resembles that name as to be calculated to
deceive[4].
Company
and Allied Matters Act[5]
2004 provides that no company, association or partnership consisting of more
than twenty persons shall be formed for the purpose of consigning on any
business for profit or gain, unless it is registered as a company under the
Act, or is formed in pursuance of some other enactments in Nigeria. There are
however, some exceptions, namely, co-operative societies registered under the provision
of any law, and partnerships for the purpose of carrying on practice as legal
practitioners or as accountants by dully qualified persons.
Consequent
upon the above, it is now a matter of legal right from the commencement of CAMA
any two or more persons may form and incorporate a company by complying with
the requirements of this Act in respect of registration of such company[6].
Formation
being a legal concept has other limitations. Thus, the individual intending to
take the benefit of the Act in respect of formation or incorporation of a
company must have the capacity to form a company and consequently as a member[7].
Therefore,
subject to subsection(2) of this section, an individual shall not join in the
formation of a company under this Act if (a) he is less than 18years of age; or
(b) he is unsound mind and has been so found by a court in Nigeria or elsewhere
or (c) he is undischarged bankrupt or (d) he is disqualified under section 254
of this Act from being a director of a company.
A
person shall not be disqualified under paragraph(9) of this section[8]
if two other persons not disqualified under that subsection have subscribed to
the memorandum. Therefore, if two adult men and with no incapacity have
subscribed to the memorandum, the presence of a child as a third person or
subscriber while not invalidate the incorporation for the reason of his age.
A
corporate body in liquidation cannot join in the formation of a company. With
regard to an alien, he can join in forming a registered company provided he has
complied with the provision of any applicable law.[9]
Also,
any person failing with the provisions of subsection[10]
(1) of this section is a member of a company by reason of being a shareholder
of the company, his share shall vest in his committee of trustee, as the case
may be.
Note
that the company can either be limited by shares, by guaranteed or even
unlimited[11].
After
all the processes and conditions necessary to the incorporation of a company is
fulfilled. The company will come into existence and members shall become body
corporate to be known by the name in the memo as well as the certificate of
incorporation. In incorporated trustee, it is the Board of Trustees that become
body corporate not all the members. Capable of exercising all powers and
functions of an incorporated company as if it’s adult human being. Maintains
separate legal personality; sue and be sued, and contract in its own name, can
hold land in its own name. In incorporate trustee, properties are vested in the
board of trustees. Have perpetual succession, subject to winding up. Have
common seal with which it executes certain documents members’ liabilities are
limited, except unlimited company[12].
Ownership Pattern
In a company
having a share capital, there can be no membership except by the medium of
shareholding. In such companies, each member shall be a shareholder and shall
hold at least one share.
A shareholder is therefore one who
has acquired at least one of the company’s shares. The words “member” and
shareholder in this context can be used interchangeably. However, in a company
without a share capital as company’s limited by guarantee, there can be no
shareholders but members. The term “members” is therefore of a more general
application, while shareholding is important since shares delineate the quantum
of the rights and liabilities of a holder in the company, it is in the capacity
of a member that most of these rights can be enjoyed or exercised[13].
Subscribers that
is persons who sign the Memorandum of Association for a number of shares and
the Articles of Association. The full particulars of the subscribers must be
obtained. They must have capacity to form a company, must not be less than two
and must together subscribe shares amounting in value to at least 25% of the
authorised share capital. If there are non Nigerian subscribers application must
be made under the Nigerian Investment Promotion Commission Act[14]
and must have fulfilled other requirements of the law[15].
Directors are
persons appointed by the company to manage the affairs of the company. Every
company must have at least two directors. The number of directors shall be
determined in writing by subscribers of the memorandum or a majority of them or
may be named in the Article. A person may be appointed directors for life. Note
that the directors need not be members of the company.
It is therefore
save, to say that one can be a member of a company by subscription, by
allotment, by transfer and by transmission[16].
It is therefore wise to note that every company is composed of members, though
the company itself is legally distinct from its members.
Thus, the
popular and most celebrated case in company; Salamon v. Salome 8 Co[17].
Salomon, a leather merchant, was the owner of a boat and shoe business. He
decided to convert it into a limited liability company and for this purpose
Salomon and Co Ltd was formed. The company consisted of Salomon, the managing
director and his family members who hold one share. Salomon lent £10,000 to the
company in debentures. Some years later the company went into liquidation. The
assets of the company were valued £6,000 and apart from the £10,000 owing to
Salomon secured by the debentures there were unsecured debentures to the amount
of £7,000. The unsecured creditors maintained that Salomon & Co Ltd could
not owe money to him self, so that they should be entitled to claim the £6,000
worth of assets. The Court of Appeal had held that the company was nothing more
than an agent for Salomon and that he must therefore indemnify his agent in
respect of losses sustained.
The House of
Lords, however, reversed this decision and laid down that once a company is
incorporated it must be treated like any other person. The company could not be
considered as an agent for Salomon because if legal person it acted for itself.
If it were not a legal person it would be impossible for it to act as an agent.
As a result, Salomon was entitled to the £6,000 asserts of the company as
against the unsecured creditors who get nothing.
This case above
illustrate that the company is legally distinct from its members. They are like
natural persons and capable of enjoying rights and bearing liabilities. One can
therefore, conclude that a member of a company includes any person financially
interested in a company.
The rights[18]
includes but not limited to the following, right to attend any general meeting
of the company and to speak and vote any resolution during the meeting. He is
entitled to be given notice of all the company meetings. The right to vote is a
very important right. An unrestricted power to vote at the general meeting of
the company normally on the rule of one vote for every share registered in the
name of the most important and the most cherished rights attending to an
ordinary share.
Another
important right of a shareholder is to the payment of dividends where such has
been declared. The general principle governing the payment of dividends is that
they are payable out of profits. Dividends[19]
shall be a special debt due to and recoverable by shareholders within 12years
and thus gives the shareholders the rights to sue for dividends only when
declared.
A shareholder
also has the right to be protected against oppressive conduct of the Directors
or the majority shareholders[20].
He has also the right to have the provisions of the articles and memorandum of
association complied with in daily management of the company[21].
In addition, a shareholder has the right to inspect the books of the company
such as the register of members and register of charges respectively, to be
given his share certificate (which constitute evidence of membership of the company),
and to receive a copy of the memorandum and articles of association of the
company, and every balance sheet to be placed before the general meeting.
Finally, a
member has the right to resolve by special resolution that the company be wound
up by the courts or voluntarily by the members[22].
On the other
hand, and prior to the winding up of a company, a member of the company with
shares shall be liable to contribute the balance if any of the amount payable
in respect of the shares held by him in accordance with the terms of the
agreement under which the shares were issued or in accordance with a call
validly made by the company pursuant to its article[23].
In the event of
a company being wound up every present or past member shall be liable to
contribute to the assets of the company an amount sufficient for payment of its
debts and liabilities and for the costs charges and expenses of the winding up.
This is applicable to unlimited liability companies.
Note that where
a company carries on business without having at least two members and does so
for more than 6 month, every director or officer of the company involved shall
be liable jointly or severally with the company for the debts contracted during
that period[24].
MANAGEMENT STRUCTURE
The
corporate organs, the board of directors and shareholders in general meeting.
This gives statutory recognition to the well known principle that although a
company is a person in a technical legal sense, it has no person in the
practical sense because it is only an artificial person created by law. It can
therefore only act through its human organs, agents and officials[25].
The
implication of this is that the powers and responsibilities of a company are to
be exercised or discharged through its human organs, officers and agents. For
this purposes, it became necessary to assign these functions of the company and
its management to various organs, agents and officers of the company.
The
crucial question however, is which organ is to exercise the company’s power to
manage its business. The issue is one which for a long time had been surrounded
by controversy both from academic writers and judges. While it has not been in
doubt that the articles often confer the powers on the directors, the next
issue is whether shareholders in general meeting are engifled
by way of ordinary resolutions to give directions to the board on
matters of day-to-day management[26].
The
old concept[27]
was that the shareholders were regarded as the company itself where as the
directors were considered as mere agents of the company and thus subject to the
control of the shareholders in general meeting. It was not until the case of
Automatic Self Cleansing Syndicate Co v. Cunning Horne[28],
that it became acceptable that directors as an organ of the company could not
be compelled to carryout the directives of the company in general meeting while
power of general management and control had been conferred on the directors by
the articles. The court made it clear that the division of powers between the
board and the company in general meeting depended in the case of registered
companies entirely on the construction of the articles of association and that
where powers had been vested in the board the general meeting could not
interfere with their exercise.
The brief
summary of the case was that a resolution was passed by the shareholders to
sell some assets of the company but the directors refused to do so. The
shareholders instituted an action against the directors for a declaration that
the board was bound to carry out their instructions, the court held that the
directors were not agents of the shareholders and therefore, the court not be
compelled to carry out the directives of the shareholders.
This new
approach was also approved in Grana Phone and Typewriters Ltd v. Stanley[29]
were the court pointed out that where the general management of the
company is vested in the directors, and so long as they are acting at a
properly constituted in the directors, and so long as they are acting at a
properly constituted board meeting and within the powers conferred by the
memorandum and articles of association, a resolution of the company in general
meeting not binding upon them.
Asomugha,[30]
asserts that 1968 Companies Act did not do much to improve the situation. Article 80 of Table A first schedule of the
Act provides as follows:
“the business of
the shall be managed by the directors who… may exercise all such powers of the
company as are not by the Degree or by these regulations, required to be
exercised by the company in general meeting, subject, nevertheless, to any of
these regulations, to the provisions of the Decree and to such regulations,
being not inconsistent with the aforesaid requoutions, or provisions, as may be
prescribed by the company in general meeting shall Invalidate any prior act of
the directors which would have been valid if that regulation had not been
made”.
However, Article 80 which was the law in
existence was subject to two conflicting interpretations. Majority of the
writers like professors Gower, and Pennington and Dr. Mukubena had taken the
view that once the management of the company is vested in the directors by the
articles, they alone can exercise those powers and they are not to be subject
into shareholders intervention. That the shareholders could only sack the board
or amend the articles and after the directors mandate. This majority view is
supported by a long time of cases[31].
In Quinn an Axten v. Salmon[32]
it was held that the effect of Article 80 was to render the general meeting
incapable of interfering with a decision of the directors unless they are
acting contrary to provisions of the Act or the articles. The brief fact of the
case was that the directors passed resolution with the object of acquiring and
letting premises from which one of the managing directors, the plaintiffs, duly
dissented; but resolutions to the same effect were passed by an extra-ordinary
general meeting of the company by a simple majority of the shareholders. The plaintiff
brought a representative action, and the court held that the resolution of the
company were inconsistent with the provisions of the article laid that the
company must be restrained from acting on them.
However,
other writers like G. R. Sullivan, G. D. Coleberg and Professor Ayua viewed the
terms of the provisions of Article 80 Table A, that the shareholders could
exercise such control and that the directors are to manage but subject to the
constraint of the articles. This view was supported by the case of Marshall’s Valve Gear Co Ltd v. Manning,
Wardle & Co Ltd[33].
In that case, the directors of a company declined to initiate cooperate
action to vindicate rights of the company held in a patent. Consequently, the
majority shareholders commenced proceedings in the name. The directors sought
an injunction to strike out the action on the ground that a decision to
initiate a suit by the company was a management matter exclusively delegated to
them under Article 80. Neville J. dismissed their claim and held that on the
proper construction of the articles, the majority of shareholders had the right
to control the action of the directors.
CAMA,[34]
codified the relevant common law principles enunciated in the judicial
decisions and argument of the learned writers above. Thus, the Act has done by
adopting the principle of allowing each organ independent rights to exercise
its powers unless some becomes necessary in the interest of the company[35] the Act makes it clear that a company
is to act through:
(a) Its members in
general meetings, or
(b) Its members of
directors, or
(c) Through officers
or agents, appointed by or under authority derived from the members in general
meeting or the board of directors.
The Act also
made it clear that subject to the provisions of this Act, the respective powers
of the members in general meeting and the board of directors shall be
determined by the company’s articles. They Act specifically reserves some
matters for the general meeting. This include important issues like changes to
be made in the memorandum and articles of association, alteration of share
capital, reduction of capital, appointment and removal of directors,
secretaries and auditors and voluntary winding up. The Act also provides that
the business of the company is to be managed by the Board of Directors except
the articles provide otherwise. This therefore, has settled the age long
controversy. It is worthy of note that in the course of such management, the
directors are entitled to exercise all the powers of the company that have not
been specifically reserved by this Act or the articles for the members in
general meeting. The Act also permits the directors, when acting within the
powers conferred upon them by this Act or the articles to disregard any
directions or instructions of the members in general meeting provided they act
in good faith and with due diligence.
Note that the
general meeting may exercise the powers vested in the Board of Directors. For
instance where there is a deadlock on the board[36],
where there were no directors or where an effective forum could not be obtained,[37]
or where the directors were disqualified from voting[38]
etc.
In Baron v. Potter[39],
two directors of the company were not on speaking terms, so that effective
board meeting could not be held. The plaintiff had requisitioned a shareholders
meeting at which additional directors had purportedly been appointed but the
defendant objected that the power to make such appointments was vested by the
company’s articles in the directors. It was held that in view of the deadlock,
the power in question reverted to the general meeting so the appointment was
valid.
Note that the
general meeting can commence proceeding or ratify unauthorised proceedings
already commenced, on behalf of the company if the director fails to do so[40].
The Act also
provides that the general meeting has the power to make recommendations to the
board of directors regarding actions – to be taken by the board. Also that no
alteration of the article shall invalidate and prior act of the board of
directors which would have been valid if that alteration has not been made.
Note the board
of directors to delegate the exercise of their power to committees consisting
of such numbers of the body as they think fit; or from time to time, appoint
one or more of their body to the office of managing director and may delegate
all or any of their powers to such managing director. This is to say that the
board need not act as a collective body at all time.
Finally and in
conclusion, the separation and division of power in the manner discussed above
between the board of directors and the general meeting is often inappropriate
with a small private company where the individual concern may act both as
shareholders and as directors without clear differentiation, a fact which is
not always reflected in the above argument[41].
[1] Section 22(1) – (5) CAMA,
Principles of Nigerian Company Law by J. T. Agbadu – Fishim, first edition, IPS
Educational Press. pgs 9-10
[2] Section 23 CAMA, Company Law and
Practice in Nigeria, by Hon. Dr. J. Olakunle Orojo, 5th edition, Butterworths
2008. Pg 34
[3] Section 35(3) CAMA
[4] Section 30(1)(a); Lagos Chambers
of Commerce v. Registrar of Companies 14 WACA 197; Niger City Chemists Ltd v.
Niger Chemists (1961) IAIINLR 117
[5] Section 19
[6] Section 18
[7] Section 20 and 80 CAMA
[8] Ibid
[9] Ibid, section 8 of Immigration
Act, cap 11 LFN 2004, Nigerian Investment Promotion Commission Act, cap N117
LFN 2004, Orojo
[10] Section 80 of CAMA
[11] Section 21 CAMA
[12] Section 37 CAMA, Essentials of
corporate law practice in Nigeria by Nelson C. S. Ogbuanya, first edition, Novena
Publishers Ltd, 2010. pg 189, section 37 CAMA
[13] Principles of Nigerian Company
Law by J. T. Agbadu – Fishim, first edition, IPS Educational Press, 1998. Pg 72
[14] No 16 of 1995
[15] Investment and Securities Act
1999 (No 45), National office of Industrial Property Act (transfer of
technology), Immigration Act. Lasis v. Registrar of Companies (1976), FNLR 101,
course handbook on company law & practice, 2003 edition pg 5.
[16] Sections 27(2)(b), 125(c), 115
and 155(1) CAMA
[17] (1897) AC 22
[18] Section 81 CAMA
[19] Section 385 CAMA
[20] Under Section 311 (2) (a)
empowers a member of a company who alleges that the affairs of the company are
being conducted in a manner but is oppressive or unfairly prejudicial to, or
unfairly discriminators, against him or in a manner that is in disregard of the
interests of a member of the members as a whole to avail himself of the
remedies provided on section 303 of derivative action in the name or on behalf
or the company or to petition to court under 3(1)(1).
[21] Section 41 CAMA
[22] 408(1)(a) and 40(1)(b) CAMA
[23] Section 92 CAMA this is also
applicable to companies limited by guarantee – section 26.
[24] Section 93 CAMA
[25]Lennard Carrying Co. v. Asiatic
Petroleum Ltd (1915) AC 704 at 713 - 714
[26] Principles of Nigeria Company
Law first ediction by J. T. Agbadu-fishin, IPS Educational Press 1998. Pg 67.
[27] Isle of Wight Rly v. Tohourdin
(1883) 25 ch.D 320 were the English Court of Appeal held, refusing an
application by the directors for an injunction to restrain the holding of a
general meeting, that directors are subject to the control of shareholders in
general meeting.
[28] (1906) 2 ch 34 CA
[29] (1908) 2KB 89 CA
[30] The Division and exercise of
Powers between the Corporate organs Akanki ed. 112, The Position and Powers of
Directors and the General Meeting pg 146 Akanki ed. And Article 80 of the
English Companies Act 1948.
[31] Starting from Automatic Self
Cleansing Syndicate Co v. Chunningham (1906) 2 ch D.34
[32] (1906) 1 Ch. 311 CA
[33] (1906) 1 Ch. 267
[34] Section 63
[35] E. O. Akanki (ed) Essay on
Company Law – P 116
[36] Baron v. Potter (1914) 1 Ch D.
895
[37] Alexander ward & Co v.
Samyong Navigation Co. (1975) I. W. L. R. 673, Foster v. Foster (1916)I Ch 532
[38] Grant v. UK Switchback RxS
(1888) 40 Ch. D 135
[39]
[40] Marshall’s valve Gear Co. v.
Manning, Wardle & Co (1909)1 Ch 267.
[41] Principles of Nigerian Company
Law, first ediction by J. T. Agbadu-Fishin, IPS Educational press 1998. Pg 71
and sections 63(1) – (6) and 64 CAMA.