These are investment vehicles used by companies to raise funds. The choice of security often depends on whether the need is short term; mid-term or long term.

Internally – shares

Externally – debentures

Shares and debentures are ways the company raises funds.

 

Shares  

See. S 567 CAMA – for definition of shares. Share is a fixed identifiable unit of capital that represents a member’s stake in a company’s share capital. It confers rights and obligations on a holder. It is a transferable property.

 

Rights accruable from share ownership include

• Right to notice of meeting, right to attend meeting, right to vote or be voted for - s 144 (b), right to residual assets of the company in event of winding up, right to be paid dividend, etc.

 

Obligations on share holding

Payment for shares whenever a call is made – s 133 – and payment of outstanding on shares allotted in event of winding up of the company.

 

Types/ classes of shares

 Section 117-119

• Ordinary shares
• Preference shares
• Founders/deferred shares

 

Ordinary shares

Equity shares gives the holder the right to participate in the company’s surplus profit and capital. They bear the major financial risks of the company and are often the “equity shares” of the company.

See S 567 for meaning of  ‘equity shares’ 

They usually attract no special rights and carry no fixed rate of dividend or interest. Dividend is payable only when preference dividends (and arrears) have been paid. 

 

Preference shares

They carry a priorrightto receive anannualdividend of fixed amount. They do not entitle holders in share in surplus assets of the company except …

Types of preference shares

• Redeemable preference shares;
• Convertiblepreference shares;
• Cumulative preference shares;
• Participatory preference shares

 

Founders /deferred shares

Deferred shares…. They are taken up by founders or promoters of the company and are cheaper than the other classes of shares.

Prohibition of non-voting and weighted shares

Prior to the passing of CAMA there was something called weighted shares. It was possible to have one share that had more than one vote and have a share that did not have a vote. But now in CAMA we have one share one vote 

s.116 of CAMA abolished and prohibits the issue of non-voting and weighted shares with the exception of preference shares in certain circumstances.

 

Circumstances where preference shares are permitted to carry more than one vote per share

• Section 143(1)
• Resolution in respect of preferential dividend
• Resolution varying the rights attached to such shares
• Resolution as to the removal and appointment of the auditors, and
• Resolution for the winding up of a company

 

Issue of shares

 CAMA allows for shares to be issued either at a premium or a discount

Issue of shares at a premium – s 120(1)

It is a situation whereby shares are issued at a price higher than the nominal value of the company’s shares.

 

Share premium account

S 120(2)

It is an account held by a company where the value of the premium realized after issuance of shares at a premium is paid into.

 

Use of “share premium account” – section 120(3)

The premium shares can be used to balance up

• Paying up bonus shares/ unissued shares issued to members of the company
• Writing off preliminary expenses of the company;
• Writing off expenses; commission paid; discount allowed; and
• Writing off premium payable on redemption of any redeemable shares of the company

 

Issue of shares at a discount – s 121

 It is where shares are issued at a price lower than the nominal value of the shares. For a company to issue its shares at a discount, there are requirement s to fulfill  - s 121(1)

• It has to be authorized by resolution passed in general meeting of the company, and thereafter is sanctioned by the court
• The resolution specifies the maximum rate of discount at which the shares are to be issued; and
• The shares to be issued at a discount rate are issued within the month after the date on which the issue is sanctioned by the court or within such extended time as the court may allow.

 

Issue of redeemable preference shares  - s 158

A company is allowed or permitted by its articles to issue redeemable preference shares.

It is redeemable through a fund known as “ the capital redemption reserve fund”.

The fund is also used to pay for bonus shares issued to members of the company. Redemption of redeemable preference shares shall not be seen as reduction of the share capital of the company.

Modes of acquisition of shares

• Subscription
• Allotment
• Transfer and
• Transmission

 

Subscription – s 27(2)(b) & 79(1) (3)

 

Allotment – s 124

It is the allocation of a specified number of shares of a company to an applicant. Within 42 days of allotment, an applicant must be notified of the fact of allotment by way of letter.

Method of application and allotment – s 125 (popular exam question)

 

Of allotment or a letter demanding payment of calls on the shares allotted. The name of an allottee must be entered in the register of members.

Return on allotment – s 129, FORM CAC 2A

Procedure on allotment of shares

Investment of

 

Transfer – s151

A person may become a member of a company by having the shares of that company transferred to him by the holder of those shares and his name entered in the register of members.

Transfer of shares is not automatic between the parties, the company has a right to approve or disapprove the transfer of the shares.

The company has to register the transfer – s 152

 S 153 – notice of refusal to register

 

Class scenario

Abeke Nig Ltd. Incorporated on the 1st of June 2013 authorized share capital of 5m divided into 5 m ordinary shares of N1 each, at incorporation 5 members subscribed to the memo and art of association in the ratio of 2:2:2:2:2. Together they subscribed to 2.5 million units of shares. In January 2018 Mr Ayorinde one of the subscribers intends to transfer 50% of his shares in Abeke Nig ltd to Mrs Atinuke.

At incorporation the articles of the company stipulatesthat before a member can transfer his/her shares in the company the shares must first be offered to the other members of the company who shall have a right of refusal. Mr Ayorinde has approached you for legal advice on the steps to take in respect to his proposed transfer of shares to Mrs Atinuke assuming the shares have been offered to the subscribers and refused. 

 

 

Method of application for allotment – Ss 124-129

In the case of a private company or public company, where the issue is not public, an applicant applies in writing stating the number he wishes to purchase.

 

Call on shares – section 133

 This is a demand made by a company upon a member to pay an amount outstanding on his partly paid shares

 

Payment for shares – s 135

 

Lien on shares – s 139

Lien are described as a right to retain possession of property until a debt is paid. It is an equitable charge on the shares and entitles a company to sell the shares in the case of default

 

Numbering of shares – s 145

 

Issue of share certificate – s 146

A company must within 2 months of allotment issue share certificate and in the case of transfer, the period of 3 months

A share certificate is not a document of title, it is just prima facie evidence 

 

De- materialization of share certificates

Due to issues such as:

• Delay in issuance and dispatch of certificates

 

As it relates to companies trading on the capital markets as far as their share certificates are concerned they are subject to central securities clearing system plc – CSCS

 

Benefits

Elimination of risk

 

Dividend warrant – s 382(4)

 

Debenture – s 166

It is an instrument used by the company to its lenders to acknowledge the indebtedness by the company.

Borrowing is controlled by MEMOART

 

Transmission – S154

Only survivor/ survivors and legal representatives (where deceased was sole holder) can be recognized by company as having any title to the interest in the shares. Provision does not release from liability where deceased was joint holder

 

Proof of entitlement – s 148

Personal representative can transfer shares – s 154

Can elect to be registered as holder – s. 155(2) or nominate another

 

Filing notice of transmission – reg. 33

Election would be relevant when it’s a personal representative

 

Borrowing power of a company

A company may limit its director borrowing power there can also be a limit on the company’s borrowing power. If the directors exceed their limit then the company can ratify it

Can company borrow beyond limit in its constitution?

See s. 39(3), 68 & 69

Royal British Bank v Turquand (1856) – where constructive notice was abolished unless creditor is shown to have insider information.

 

Issue of debentures to public

 Also known as corporate bond

 S 44 of ISA – prospectus must be issued

 See s 183

 

Delivery of debentures / certificate of debenture stock – s 167

Within 60 days after allotment. To be delivered to the registered holder.

The documents thereof has to be under the common seal of the company.

 S 167(2) – when defaced , lost or destroyed  CTC of debenture or renewal of debenture stock certificate  to be issued to debenture holder on payment of fee or indemnity for company’s investigation.

 

 Draft the application for CTC of share certificate where the original was stolen. S 146(4)

 

Effects of statement in debentures – s 169

 

Enforcements of contracts relating to debentures – s 170

 A contract with a company to take ….

 

Types of debentures

• Perpetual debentures – s171
• Convertible debentures – s 172
• Secured/ naked debentures – s 173
• Redeemable debentures – s174

 

 Meeting of debenture holders – s 177

 

Fixed and floating charges

 Section 173(1) , s 178

 

Registration of charges – s 197

Both for fixed and floating charges

Filing at CAC must be done within 90 days of the creation of the charge. Must be done even if property is not situated in Nigeria.

Form CAC 8 – Particulars of charge

Who is to register? S 199

 CAC to issue certificate s.198(2). It serves as prima facie evidence of compliance with requirements of registration. S 203(1)

 

Effect of non – registration – s 197

Renders it void against the liquidator or any creditor of the borrower company.

 This does not discharge the debt but it becomes immediately payable as the debenture is rendered unsecured.

 

Regulation 34 and 35

 

Possible remedies

• Extension of time
• Rectification of certificate
• Section 205
• The application to FHC is made by

 

Records to be kept by a company upon issue of a debenture

• Register of charges s. 191
• Records of instruments creating charges s 190
• Register of debenture holders s.193

 by 191(3) the entry shall be made within 30 days of the conclusion of the agreement with the company to become a debenture holder or within 30 days within which he seizes to be a debenture holder

 

Procedure for creation and discharge of charge securing debenture

• Convene board meeting to pass resolution authorizing the loan and preparation of loan documentsincludingprospectusif necessary
• Prepare, execution and stamping of the loandocuments: deed of mortgages - for charge by way of legal

 

Remedies of debenture holders in the event of default

• Sec 209
• Sec 393(1)
• Debenture holder to notify CAC where receiver/manager is appointed . s 206

 

Letters of renunciation and letter of regret is in the handbook – pg 169