COMPANY SECURITIES 1 (SHARES & DEBENTURES)

SHARES

The capital of a company consists mainly of shares and debentures. Public companies raise capital through share subscription known as shares.

Shares is basically the measure of the interest of the member in the company. It represents the totality of rights and liabilities that a shareholder has in a company as provided in the terms of issue and the Articles of the company.

In Borland’s Trustee v. Steel Bros. & Co. (1901) 1 Ch. 279, per Farwell J., shares was defined as –

“The interest of a 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 a series of mutual covenants entered into by all the shareholders...”

Section 567(1) of Companies and Allied Matters Act (CAMA), Cap C20, LFN 2004 defines “share” as –

“the interests in a company’s capital of a member who is entitled to share in the capital or income of such company; and except where a distinction between stock and shares is expressed of implied includes stock”.

The shareholder is a proportionate owner of the company, but he does not own the company’s assets, which belongs to the company as a separate and independent legal entity.

Thus, a share represents the basis of the interests of a member or shareholder in the company. These interests include participation in the management of the company, the right to attend and vote at meetings, etc.

TYPES OF SHARES

Shares are of different classes and have different rights attaching to them. The main types of shares are –

1.      Preference shares;

2.      Ordinary shares; and

3.      Deferred shares.

PREFERENCE SHARES

Section 122 of CAMA provides that a company, if authorised by its Articles of Association, shall issue preference shares which shall, or at the option of the company be liable to be redeemed unless they are fully paid, and redemption shall be made only out of profit; or the proceeds of a fresh issue of share.

These are shares which give their holders priority over other classes of shareholders in relation to dividend before anything is paid on other classes of shares.

The main feature of this type of shares is that it entitles the holder to a fixed preferential dividend – this means that the dividend payable by the company to the holder of such shares is fixed at a specific figure; it may be 5% or 100% etc.

The dividend must be must not be paid out of capital but out of profits because this will amount to an illegal return of capital to the preference shareholder. The dividend must be paid before the ordinary shareholders receive their own dividends, that is, preference shares has priority over ordinary shares.

Preference shares is safer during a period where there is instability in economic growth, but will not be safe (unattractive) during inflationary period. However, where a company is well managed, and the resultant effect will naturally be large profits, it will be disadvantageous to own preference shares because of their fixed percentage dividend and it will give rise to the ordinary shareholders to share the bulk of the profits, since the value of their shares would have risen on the market.

Preference shares is sub-divided into two namely –

1.      Cumulative; and

2.      Non-cumulative.

Cumulative preference shares are where the dividends of a company accumulate to the next year or subsequent years until they are fully paid from the profits of later years; whilst non-cumulative preference shares does not accumulate from one year to another, where a company fails to pay dividend in a particular year, no dividend will be paid for that year nor will it be carried to the subsequent year.

In the event of winding-up of a company and unless it is expressly stated in the Articles of Association, preference shareholders have no inherent priority as to the repayment of capital. If the assets are not enough to pay the preference and ordinary shares in full, both preference and ordinary shares are paid off rateably according to the nominal value of the shares.

ORDINARY SHARES

These are sharers that do not attract special rights or privileges over other shares, but they form bulk of the company’s capital. They are the risk bearers as they are only entitled to dividend when one is declared provided the company has made a profit to warrant the declaration of the dividend. The holders have an equal right to share in the profit of the company declared by way of dividend. In the event of liquidation, they rank after the preference shareholders except the Articles of Association otherwise provide.

However, an obvious advantage of ordinary shares to ordinary shareholders is that their dividends are not fixed and they may rise considerably with the level of profitability of the company.

Another advantage of ordinary shares is that voting power and strength of the ordinary shareholders in general meeting allow them to control the resolution of the meetings.

Ordinary shares carry the remaining of distributed shares after the preference shares have been paid their fixed dividend.

DEFERRED SHARES

These shares are usually held by the founders of the company. They are so called because payment of dividend and return on capital are deferred until payment has been made in respect of other classes of shares.

Section 119 of CAMA provides thus –

“Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share in a company may be issued with such preferred, deferred or other special rights or such restrictions, whether with regard to dividend, return of capital or otherwise, as the company may, from time to time, determine by ordinary resolution”.

RIGHTS AND OBLIGATIONS ATTACHED TO SHAREHOLDERS

By section 114 of CAMA, the rights and obligations carried by or attaching to the shares of a company would depend on the terms of issue and of the company’s Articles of Association.

In Kotoye v. Saraki (1994) SCNJ 524 at 575, the Supreme Court stated that “by being registered as a holder of shares in a company, the registered holder becomes entitled to certain rights, benefits and privileges”.

The rights are thus –

1.      The right to dividend while the company is a going concern and a dividend is declared;

2.      The right of attending any general meeting;

3.      The right to vote at the meeting of members;

4.      The right to participate in distribution of assets in the winding-up of the company, that is, return of capital on winding up.

The principal obligation of a shareholder, whether or not, it is so stated in the terms of issue or articles of the company, is to pay the amount unpaid on the shares he holds. However, payment is to be made when call is made or at a time fixed for payment by the terms of issue.

Another obligation is that, a shareholder may also be personally liable in certain situations, for example, to repay any dividend unlawfully received by him.

ACQUISITION OF SHARES

Section 160(1) of CAMA provides that subject to the provisions of section 160(2) and its articles of association, a company may not purchase or otherwise acquire shares issued by it.

A company may acquire shares for the following reasons –

(a)    Settling or compromising a debt or claim asserted by or against the company; or

(b)   Eliminating fractional shares; or

(c)    Fulfilling the terms of a non-assignable agreement under which the company has an option or is obliged to purchase shares owned by an officer or an employee of the company; or

(d)   Satisfying the claim of a dissenting shareholder; or

(e)    Complying with a court order – section 160(2) of CAMA.

A company may also accept from any shareholder, a share in the company surrendered as a gift, but may not extinguish or reduce a liability in respect of an amount unpaid on any such share, except in accordance with the provisions for the reduction of share capital – section 160(3) of CAMA.

ALLOTMENT OF SHARES

Subject to the provisions of the Investment and Securities Act (ISA), the power to allot shares shall be vested in the company which may delegate it to the directors subject to any conditions or directions that may be imposed in the articles or from time to time by the company in general meeting – section 124 of CAMA.

METHOD OF APPLICATION AND ALLOTMENT OF SHARES

1.      In the case of a private company or a public company where the issue of shares is not public, there shall be submitted to the company a written application signed by the person wishing to purchase shares and indicating the number of shares required;

2.      In the case of a public company, subject to any conditions imposed by the Securities and Exchange Commission where the issue of shares is public, there shall be returned to the company a form of application as prescribed in the company’s articles, duly completed and signed by the person wishing to purchase shares;

3.      Upon the receipt of application, a company shall, where it wholly or partially accepts the application, make an allotment to the applicant and within 42 days after the allotment, notify the applicant of the fact of allotment and the number of shares allotted to him; and

4.      An applicant shall have the right at any time before allotment, to withdraw his application by written notice to the company – section 125 of CAMA.

PROCEDURE FOR ALLOTMENT OF SHARES

1.      After the issuing of the prospectus, open a subscription list (if public).

2.      Receive applications and record in Application and Allotment Sheets.

3.      Convene Board (or Allotment Committee) meeting to pass a resolution of allotment.

4.      Issue Letters of Allotment (and letters of regret).

5.      Deal with letters of renunciation, if any.

6.      Prepare Share Certificates.

7.      Enter allottee's names in the register of Members.

8.      File Return of Allotments (Form CAC 2.5) within one month after allotment.

9.      If the shares are issued for a consideration other than cash –

a)      Have the consideration valued and obtain particulars of valuation.

b)      If consideration involves capital investment of 20,000 Naira or more apply under the Industrial Inspectorate Act.

c)      Prepare and file along with Form Corporate Affairs Commission 2.5 –

                                      i.      Agreement constituting the title of the allottee to the allotment;

                                    ii.      Agreement for sale of property or for services of other consideration; and

                                  iii.      Particulars of Valuation.

TRANSFER OF SHARES

A share is a transferrable property. The shares of a member in a company may be transferred in a manner provided in the articles or other statutory instruments regulating transfer of shares.

It has also been defined as “the voluntary conveyance of the rights and possibly the duties of a member, as represented in a share in the company from a shareholder who wishes to cease to be a member to a person desirous of becoming a member”. Though, a member may wish to transfer just a portion of his shares and still remains a member of the company in relation to other shares owned in the company.

The right to transfer shares is exercisable by every holder of shares in a company. This is because the shares of every registered company are transferrable through legislative provisions. Thus, the right is exercisable even where there is no specific authority or permission in the memorandum or articles of association. In Chief R. A Okoya & Ors. v. Santilli & Ors (1910) 1 Ch. 312 at 316 - 358, it was stated that transfer is a matter between the shareholder who wants to part with his shares and the purchaser or transferee. The company will only ratify by adjusting its books to reflect the new shareholder.

METHOD OF TRANSFER

Transfer of shares shall be effected by delivery of a proper instrument of transfer to the company and the subsequent registration of the transferee in the register of members – section 151(1) and (2). The transferor is deemed to remain a holder of the share until the name of the transferee is entered in the register of members in respect of the shares – section 151(3) of CAMA.

PROCEDURE FOR TRANSFER OF SHARES

This could either be –

1.    Transferring of all shares; or

2.    Transferring of part of the shares.

Transferring of all shares

1.      Prepare the deed of transfer which shall be duly signed by the parties and a witness.

2.      Transferor gives the deed of transfer and the share certificate to the transferee.

3.      The deed of transfer is stamped at the stamp duties office.

4.      The stamped deed of transfer together with the resolution of the company approving the transfer, and Form CAC 2.5 (return of allotment) is filed with CAC.

5.      Transferee registers the stamped deed of transfer with the company.

6.      Company issues share certificate and register transferee as the new owner.

Transferring part of the shares

1.      Prepare the deed of transfer, and both parties will execute the deed of transfer.

2.      The deed of transfer is stamped at the stamp duties office.

3.      The stamped deed of transfer together with the resolution of the company approving the transfer and Form CAC 2.5 (return of allotment) is filed with CAC.

4.      Transferor delivers the certificate and the stamped deed of transfer to the company.

5.      Company cancels the certificate to cover the part that is transferred and register transferee as the new owner of the shares transferred to him.

However, section 152(2) of CAMA provides that until the deed of transfer is registered with the company, the shares are deemed to still be the property of the transferor. The implication of this is that all the rights and liabilities of a shareholder will continue to be addressed to the transferor as if the shares were still his.

DEBENTURES

This is a document which creates or acknowledges a debt due from a company. The document does not need to be under seal, although it is usually under seal and need not charge the assets of the company by way of security, although, it does in most cases – Lemon v. Austin Friars Investment Trust Ltd (1926) Ch. 1

Debentures are instruments issued to people from whom the company has borrowed money. It is often by way of a deed, but not necessarily so – Union Bank Ltd. v. Tropic Foods Ltd (1992) 3 NWLR (Pt. 228) 321.

The power to issue debentures by companies is provided by section 166 of CAMA, which provides that a company may borrow money for the purpose of its business or objects and may charge or mortgage its undertaking or property and issue debentures – General Auction Estate Co. v. Smith (1891) 3 Ch. 432.

In Intercontractors (Nig.) Ltd. v. NPFMB 2 NWLR (Pt. 76) 280 at 292, the court stated that –

“A debenture consists of a debt owed by the company to another secured by a deed which prescribes the condition of the realization of the debt, and it may be created over the fixed or floating assets of the company”.

Generally, at Common law, the power of a company to borrow money must be expressly stated in its Memorandum of Association before it can be exercised. It cannot be implied, except in the case of trading companies. This is no longer necessary under section 166 of CAMA.

The power to borrow money includes the power to charge the assets of the company which constitutes a form of security to the lender and such power is normally exercised by the directors of the company; who must not borrow above its authorised capital.

It should be noted that a debenture is a document which is evidence of a chose in action, that is, it is a document that contains an acknowledgment of indebtedness. The debenture or debenture stock certificate under the company’s common seal must within 60 days after allotment or after registration of transfer of any debenture be delivered by the company to the registered holder – section 167 of CAMA.

Where the debenture or debenture stock certificate is lost, defaced or destroyed by the registered holder, he will be issued at his request, a certified true copy by the company on payment of N5 (five naira) or less subject to the company’s rights to be indemnified and payment of out of pocket expenses for investigating evidences where reasonably required.

Default by the company or officer attracts a fine of N25 (twenty five naira) and they can be compelled by court order to comply, on the application of the registered holder and can be responsible for all the costs of and incidental to the application.

Statements to be included in the debenture includes –

1.      The principal amount borrowed.

2.      The maximum discount which may be allowed on the issue or re-issue of debenture.

3.      The maximum premium at which the debentures may be made redeemable.

4.      The rate of and the dates on which interest on the debentures issued shall be paid and the manner of payment and other statements or matters.

Statements made in debentures are prima facie evidence of the title to the debentures of the registered holder and of the amounts secured.

TYPES OF DEBENTURES

There are several types of debentures. They are –

1.      Perpetual debentures;

2.      Convertible debentures;

3.      Secured and naked debentures; and

4.      Redeemable debentures.

PERPETUAL DEBENTURES

These are debentures that are irredeemable or redeemable only on the happening of a contingency, however remote, or on the expiration of a period, however long – section 171 of CAMA.

CONVERTIBLE DEBENTURES

These are debentures issued on the terms that they are convertible to shares of the company in lieu of redemption and at the option of the holder upon such terms as may be stated in the debentures – section 172 of CAMA. That is, it is issued upon the terms that in lieu of redemption or repayment, a right of option is given to the holder or the company to convert the debentures into shares at some future date.

If a debenture holder exercises this right of conversion, he ceases to be a creditor and becomes a shareholder instead.

SECURED OR NAKED DEBENTURES

A debenture is secured when it is secured by a charge over the properties of the company. The security may be a fixed charge or a floating charge, or by both a fixed charge on a certain property and a floating charge. Whilst, the debenture is naked when it is not secured by any property of the company – section 173 of CAMA.

REDEEMABLE DEBENTURES

These are debentures that are liable to be redeemed at the option of the company – section 174 of CAMA.

REMEDIES OF DEBENTURE HOLDERS

The remedies available to a debenture holder are provided under section 209 of CAMA. They are –

1.      Action for recovery for principal and interest;

2.      Petition for winding-up;

3.      Debenture holder’s action;

4.      Power of sale;

5.      Foreclosure action;

6.      Valuation of security and proving the balance on winding-up; and

7.      Appointment of Receiver/Manager.

ACTION FOR RECOVERY OF PRINCIPAL AND INTEREST

A debenture holder can sue for the recovery of the principal and interest upon default in payment and thereafter levy execution on the property of the company, whether the debenture is a secured or unsecured debenture – section 209(2) of CAMA.

PETITION FOR WINDING-UP

A debenture holder can bring up an action to wind-up the company on the ground of inability of the company to pay its debt. Although, this is subject to any condition imposed by the debenture – section 209(2)(ii) of CAMA.

DEBENTURE HOLDER’S ACTION

A debenture holder may bring a representative action on behalf of the other holders of debentures of the same class (class action) where the debenture is one of a series for payment and enforcement of the security – section 209(2)(a) of CAMA.

POWER OF SALE

The power of sale may be exercised by a debenture holder; subject however, to the condition that such power must be contained in the debenture or trust deed. It may be noted generally that a debenture will contain power of sale to be exercised by the receiver and where there is no such express power; the implied power of sale by a mortgagee may be exercised. Also, power of sale may be exercised pursuant to the order of court following a debenture holder’s action – section 209(3) of CAMA.

FORECLOSURE ACTION

A debenture holder can also bring a foreclosure action which may extend to uncalled capital of the company. However, a foreclosure order will not be made unless all the debenture holders of every class are parties to the action.

VALUATION OF SECURITY AND PROVING THE BALANCE ON WINDING-UP

Where the debenture is secured, the debenture holder is in the same position as any secured creditor of the company. Consequently, on winding up, he may value his security and if it is insufficient, prove for the balance like any unsecured creditor.

CHARGES SECURING A DEBENTURE

Debentures may be secured by 'fixed" or "floating charges" – section 178 of CAMA.

A fixed charge is a mortgage of a specified property of the company such as land. Whilst, a floating charge is an equitable charge over the whole or specified part of the undertaking or assets of the company including cash and uncalled capital both present and future.

PROCEDURE ON CREATION OF CHARGES

1.      Convene Board meeting to pass resolution authorizing the loan and preparation of loan documents including prospects if necessary.

2.      Preparation, execution and stamping the documents:

a)                  Deed of mortgage (charge by way of legal mortgage debenture).

b)                  Power of Attorney (if any).

c)                  Debenture Trust Deed (if any).

3.      Obtain Governor's consent if necessary, and where necessary – NIDB V. Olalomi Ind. Ltd (2002) 5 NWLR 761.

4.      File documents at Land Registry.

5.      File documents for registration at the CAC viz:

                                   i.         Mortgage/Charge by way of Legal Mortgage or Debenture.

                                 ii.         Trust Deed.

                               iii.         Particulars of Charge in Form CAC 3.

6.      Leave copies of documents for inspection at the Registered Office of the Company, that is, in the Record of Instruments.

7.   Enter particulars of charge in Register of Charges and also in the Register of Debenture holders where applicable.

8.      Obtain Certificate of registration of charge from the CAC and have a copy of the charge endorsed on every debenture or certificate of debenture stock issued by the Company the payment of which is secured by the charge.

9.      Obtain Form CAC 6.2 along with Deed of Release or other instrument.

10.  Notify CAC of the appointment of a Receiver or Manager upon enforcement of the security.

REGISTRATION OF CHARGES

Section 197(1) of CAMA requires that where a company creates on its property any of the charges specified in section 197(2), the company must within 90 days of the creation deliver to CAC certain particulars for registration. The registration is effected by filling the prescribed forms – Form CAC 3 is used for the registration of Mortgage(s)/Charge(s).

When the charge is registered, the CAC must issue a registration certificate; the registration certificate is a prima facie evidence of compliance with the requirements of registration – section 198(2) of CAMA. The certificate must be endorsed on every debenture or debenture stock certificate issued by the company and secured on the charge – section 198(1) of CAMA.

EFFECT OF NON REGISTRATION

Failure to register a charge as required will render it void against the liquidator and any creditor of the company – section 197(1) of CAMA. The obligation to pay the debt is, however, not thereby discharged – Capital Finance Co. Ltd. v. Stokes (1969) 1 Ch. 261.

RECTIFICATION OF REGISTER AND EXTENSION OF TIME

This is provided for under section 205 of CAMA. The company and any person interested may apply to the Federal High Court for rectification of the Register of charges and extension of time for registration in respect of omission to register a charge within time or omission or misstatement of any particular with respect to that charge or in the memorandum of satisfaction on any of the following grounds –

1.      That the omission or misstatement was accidental, or due to inadvertence or to some other sufficient cause; or

2.      That the omission or misstatement is not of a nature to prejudice the position of creditors or shareholders of the company; or     .

3.      That on other grounds it is just and equitable to grant relief. If the court is satisfied on any of the grounds, it may grant relief on such terms and conditions as seems just and expedient and order that the time for registration be extended or that the omission or misstatement be rectified – Moses Ola and  Sons (Nig.) Ltd. v.  Bank of the North Limited [1992] 3 NWLR 377.

Every certificate of registration of charge issued by the Commission must be endorsed on every debenture or debenture stock certificate – Section 203(1) of CAMA.

SATISFACTION OF CHARGE

If the company repays the amount of the debenture, it has to file a memorandum of satisfaction of the charge. This is done using Form CAC 6.2 to Form CAC 9 – section 204.

NOTICE OF ENFORCEMENT OF SECURITY

Any person who obtains an order of court for the appointment of a receiver or manager of property of the company or appoints such a receiver or manager under powers contained in any instrument must within seven (7) days from the date of the order or appointment under the powers, give notice of the fact to the Commission which will register the fact in the register of charges – section 206 of CAMA.

CHECKLIST OF RECORDS TO BE KEPT

When a company is issued a debenture, certain records are kept, which are –

1.      Register of Instruments – Every company shall cause a copy of every instrument creating any charge requiring registration to be kept at the registered office of the company – section 190 of CAMA.

2.      Record of Charges – Every company shall keep at the registered office of the company, a register of charges and enter therein all charges specifically affecting property of the company and all floating charges on the undertaking or any property of the company, giving in each case a short description of the property charged, the amount of the charge, and, except in the case of securities to bearer, the names of the person entitled thereto – section 191 of CAMA.

3.      Register of debenture holders – A company which issues or had issued debentures shall maintain a register of the holders thereof – section 193 of CAMA.

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