Part 2: What every entrepreneur should know about shares and share transfer
As a follow up to my earlier publication on “What every entrepreneur should know about Shares and Share Transfer,” below are possible actions steps you can take to secure your business regardless of your business level.
However, before we answer the questions that follow, let me further explain who a shareholder is and what the rights of a shareholder are.
My explanation will be limited to private Limited Liability Companies.
It is important to note that any two or more persons may form or incorporate a company. Therefore one person cannot form a Limited Liability Company.
Among the documents needed for the formation of a company are The Memorandum of Association (which is generally referred to as The Memorandum) and The Articles of Association (generally referred to as The Articles) and together generally referred to as MEMART.
The Memorandum of Association is akin to the Constitution of the Company, which states the nature of the business or businesses for which the company is established; while The Articles of Association is a document, which states the internal regulations of the company. These documents once registered become binding on the company and every member of it.
These two documents are signed by each of the individuals involved in the formation of the company. These individuals are known as Subscribers. The Subscribers of the Memorandum and Articles of Association are the initial members or shareholders of a company.
Section 79 of the Companies and Allied Matters Act (CAMA), Laws of the Federation of Nigeria 1990 states that:
1. The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company and on its registration shall be entered as members in its register of members.
2. Every person who agrees in writing to become a member of a company, and whose name is entered in its register of members shall be a member of the company.
3. In the case of a company having a share capital, each member shall be a shareholder of the company and shall hold at least one share.
A shareholder is a part owner of the company and takes part in the decision making process of the company. Once an individual has a single share in a company, he or she is a shareholder and shall have all the rights of a shareholder including sharing in the profits and losses of the company.
The rights of shareholders include but are not limited to the following:
1. The Right to a copy of the memorandum and articles of association;
2. The Right to inspect the register of members of the company;
3. The right to receive notice of meetings, as well as full and timely information regarding the issues to be decided at meetings;
4. The right to attend any general meeting of the company and to speak and vote on any resolution before the meeting;
5. The right to be informed of any resolution appointing or approving the appointment of a director;
6. The right to sell and transfer his shares;
7. The right to share in the profits of the company; and
8. The right to seek redress in court if aggrieved.
To register a Limited Liability Company, an individual promoter whose intention it is to promote a company in which he would have ultimate control must include at least one other person so as to fulfill the requirement of CAMA as regards the minimum number of individuals required to form a limited liability company. In most cases these individual promoters include their brother, sister, uncle, aunty, father, mother or friend as a subscriber of the Memorandum and Articles of Association. They do this most times without knowing the implications of it and in some cases they may even allow as much as 50% of the shares to the person whose name is included.
Once an individual, whether a relative or a friend, acquires (whether by subscription, allotment, transfer or transmission) at least one share in a company, that individual will have all the rights of a shareholder including being entitled to dividends and sharing in the profit of the company. It is entirely up to that relative or friend to either relinquish the shares on the request of the individual promoter, or transfer the share(s) to another individual or decide to remain a shareholder of the company in spite f the wishes of the promoter,
However, things become sometimes complicated in the event of the death of a bona fide shareholder or that of a shareholder who was the friend or relative of the promoter who subscribed for him or her. In each case, the shareholder’s shares will devolve to his or her next of kin or to the administrators of his or her estate. This makes it difficult to settle any issue, which may arise as the next of kin of the friend, or relative of the bona fide promoter may have no knowledge of any pre-incorporation agreement.
To avoid most of these issues in future, it is advisable that individual promoters who intend using family and friends in the formation of a company should first seek legal advice and always insist on executing a pre-incorporation contract and or a shareholders’ agreement where applicable to fully state the intentions of the promoters. Such promoters should also limit their exposure by limiting such number of share(s) given to the family or friend to just one unit of the company’s shares in order to limit his exposure in case of the unknown.
Another option I will recommend since the law in Nigeria requires only a minimum of 2 shareholders is to make another company instead of your family member a shareholder in your company. This could be any other company you own and then get a trusted family member to be a signatory to that company. However, in this option, being a signatory does not make you a shareholder. So, in the event there is a falling out between the shareholders and the authorized signatory in the new business, the shareholders can pass another board resolution revoking the authorized signatory’s authority and appointing another signatory to the company’s documents and accounts. As the signatory whose authority was revoked is not a Shareholder in your company under the law, she can never come and tell you that you owe him or her shares.
Thirdly. The fact that someone is a shareholder does not mean that he or she has automatically become a Director in the company and vice versa. This usually confuses people. So, assuming you have made your family member a Shareholder and then fall out with the person, the other shareholders can by a resolution appoint somebody else a Director in the person’s place. It is therefore highly advised to have a minimum of three people as shareholders and 3 people as Directors. So, when you want to plan a coup or you need to remove a Director you are in conflict with, you can sign with the other shareholder to remove him or her as you alone cannot sign a company resolution. This is why it is best to have a minimum of three shareholders and not two in a company.
To conclude, budding entrepreneurs should implement these tips at the point of incorporation:
1) Recall you are trying to meet regulatory requirements; this is why you have brought your shareholders on board. So, what you need to do is to ensure you give them only one share at the minimum until you are clear of what you need to do unless the person is going to pay for shares. This way, it is easy when you need to call for shares.
2) Don’t make your share capital too high. This depends on the industry you want to trade in. Ask your lawyer the best Share capital to register once you are ready to incorporate. Also recall that Share capital is expandable. As your business grows, so do your shares.
3) Put in place a declaration of trust and nominee agreement and get your Shareholders to sign it up front
4) If you have already incorporated and would, after reading this article, want to restructure your business, discuss with your legal adviser on the appropriate forms of re-structuring that can help you review the current allotment of Shares.
5) If you want to give shares to your family members, give them restricted shares so you can still retain controlling shares.
6) Your children can be shareholders but not Directors especially if they are minors.
If you would want to know more about how this impacts your business, send an email to iam@munaiyanm.com
MUNA ONUZO
Muna Onuzo & Dumebi Chukwuma of Hoick and Duke Legal Practitioners