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Friday, August
28, 2020 / 11:55 AM / by KPMG Nigeria / Header Image Credit: The Nation
The
repeal and re-enactment of the Companies and Allied Matters Act, 1990 (CAP C20,
LFN 2004) ("CAMA") as CAMA 2020 ("the Act") is a major game changer in the
corporate regulatory landscape. Recall that the National Assembly had passed an
amendment in 2018, which was covered in our Regulatory Alert of May 2018, and
His Excellency, President Muhammadu Buhari GCFR, declined assent to it and
requested the National Assembly's reconsideration of the Bill.
The
newly enacted Act introduces measures to ensure efficiency in the registration
and regulation of corporate vehicles, reduce the compliance burden of small and
medium enterprises (SMEs), enhance transparency and stakeholders' engagement in
corporate vehicles and, overall, promote a more friendly business climate. The
overhaul of the CAMA, which is the foundational legal basis for corporate
vehicle regulation, is long overdue as this is its first comprehensive update
in 30 years.
The Act
has 870 sections which are classified into chapters under Parts A to G. Part A
deals with the composition and administration of the registry which functions
as a regulator - the Corporate Affairs Commission ("CAC"). Part B has 29
Chapters which stipulates the lifecycle of companies from their incorporation
through to liquidation. Parts C & D have 11 and 2 chapters, respectively,
and set out provisions that govern limited liability partnerships and limited
partnerships. Parts E & F reprised sections on the registration and
regulation of Business Names and Incorporated Trustees, with a few changes outlined
in chapters 3 and 7, respectively. Part G introduces the quasi-judicial body -
the Administrative Proceedings Committee - in its first chapter and covers
general miscellaneous matters in its other chapter.
The key
modifications introduced by the Act are categorized as follows:
1. Business registration
1.1
Expansion of CAC's oversight powers - The CAC has now been given wider
regulatory oversight powers with the amendments to the CAMA, and it is now
empowered to act with quasilegislative powers. The CAC's enhanced powers to
make regulations and sanction behavior would complement its role as a registry.
1.2
Electronic registration - To enhance the ease of doing business, the Act has
codified an option to electronically file documents as an alternative to
physical filing with the CAC. This should consolidate gains made in
significantly improving the turnaround time for company incorporation and
business set up processes. Consequently, it is imperative to upgrade the IT
systems of the CAC to minimize downtimes currently experienced, and to ensure
reliability of the electronic filing systems.
1.3
Provision of model articles - The Act requires the CAC to prescribe model
Articles of Association that would apply to all companies, except where a
company specifically chooses to register its distinctive Articles of
Association. The prior Act had prescribed the standard form and content of the
Articles of Association in Table A of the First Schedule to the Act. The
removal of the model Articles from the Act and vesting the CAC with the
authority introduces flexibility and ensures ease of future modifications.
1.4
Stipulation of business object - The Act now recognizes unrestricted objects
for incorporated companies, except where a company elects to restrict its
business objects by its Articles of Association. This should further obviate
the ultra vires rule in relation to companies' objects and remove the need to
incorporate separate companies for independent business lines. While
commendable, this rule change blurs the distinction between the ordinary
profits of a company taxable under the Companies Income Tax Act ("CITA") and
profits from other activities. Special consideration should be given to this,
and companies are advised to seek expert tax advice in evaluating the effect of
this amendment.
1.5
Flexibility on Attorney General's consent for companies limited by guarantee - The approval of the Attorney General of the Federation ("AGF") may no longer be
required to incorporate a company limited by guarantee ("Ltd/ Gte"). Where the
AGF does not give a decision within 30 days to an application for approval of
incorporation of a Ltd/ Gte, CAMA now provides the promoters an alternative to
advertise their intention to register the Ltd/ Gte in 3 national dailies and
call for objections from the public. The CAC can proceed to complete the
registration of the Ltd/ Gte if there is no objection or if any objection has
been addressed. This amendment should make Ltd/ Gte more attractive to
not-for-profits and other interested stakeholders who hitherto might have been
discouraged by the procedure for its registration.
1.6
Statement of compliance - CAMA now admits a Statement of Compliance by an
applicant or their agent as a sufficient alternative to a Statutory Declaration
by a legal practitioner affirming compliance with CAMA's registration
procedures. This measure would contribute to the ease of doing business by
removing the need for legal practitioners to verify documents.
2 Share capital
2.1
Elimination of front-loaded fees - The Act replaces the concept of "authorized
share capital" with "minimum issued share capital" with a minimum threshold of
N100,000 for private companies and N2,000,000 for public companies. This change
effectively increases the minimum nominal amount of share capital assessable to
stamp duties and filing fees at incorporation, from the N10,000 and N500,000
hitherto applicable. Also, this amendment eliminates the requirement for
companies, especially private and unlisted entities, to denominate their
authorized share capital in the Naira. This is consistent with practices in
other jurisdictions such as the United Kingdom (UK). This would be optimal if
their functional business currencies are in other currencies such as the USD or
Euro. This amendment would be an attractive mechanism to enable foreign
investors preserve value in their Nigerian subsidiaries and shield their imported
capital from local inflation until they are ready to deploy such funds into the
business. Consequently, other regulators with a line of sight over foreign
investments may need to update their rules/ regulations to align with this CAMA
rule change.
2.2
Entrenchment of the pre-emptive rights of existing shareholders - The Act
reinforces the first right of refusal for existing shareholders of any newly
created class of shares in the proportion of their substantive holdings before
allotment to the public.
2.3
Valuation report for non-cash consideration for shares - Private companies are
no longer required to obtain a valuation report issued by a third party
professional when they issue their shares for consideration other than cash.
While this modification allows increased autonomy for private companies, it may
lead to disputes between shareholders as to the appropriate valuation of the
business.
2.4
Inclusion of electronic share transfer and clarity on treasury shares - The Act
provides for electronic transfer of shares, simplifies the rules on treasury
shares held by companies and clarifies that such shares can be sold or
transferred to an employees' share scheme.
3. Company re-registration
The Act
provides a robust framework on re-registration of companies, including changing
their forms from private to public; from limited to unlimited or limited by
guarantee, or vice versa. A notable implication of the new changes is how
multi-directional the conversions of any incorporated company can now be.
Particularly, the provisions are aimed at providing flexibility and protecting
shareholders' rights during the conversion process. These changes are
commendable.
4. Formation of single-member companies
To
mitigate entry barriers for Small and Medium Enterprises (SMEs), the Act
provides that a private company can now be formed by one person. This should
stimulate the growth of smaller owner-controlled businesses and assist in
making the business regulatory environment favourable to them.
5. Relaxation of compliance requirements for small companies
The Act
reduces certain compliance requirements for small companies (small companies
are described in the Act as private companies with only Nigerian shareholders
in which the majority shareholding is held by the directors, and with a
turnover of less than N120million and net assets of not more than N60million).
The compliance requirements include: Provision for single directorship; Preparation of modified Financial Statements with fewer disclosure requirements; Exemption from the requirement to undertake a statutory audit; Exemption
from convening statutory and annual general meetings; Exemption from
mandatory provision for appointment of company secretary; and - Discretionary
use of common seal. Easing the financial reporting requirements of small
companies is a commendable development that aligns with global best practice
proposed by the International Federation of Accountants ("IFAC"). However,
commercial considerations other than statutory obligations also drive the
requirement for small companies to audit and report their financial activities.
For
instance, banks require audited financials of SMEs to assess their
creditworthiness, large corporates may require audited financials of SMEs to
approve them as prospective vendors, and the tax laws require audited books to
assess companies properly to tax, etc. Essentially, SMEs are likely to continue
to prepare full financials which are audited by independent third parties. We
hope that subsequent amendments to the CAMA would stipulate alternative
safeguards and measures to enable users of financial statements of SMEs have
adequate confidence in relying on their financial information.
6. Disclosure of significant control and beneficial ownership
6.1 Disclosure
of beneficial ownership for private companies - All shareholders who hold
shares in trust for another person are now required to disclose that fact, and
to state the identity of the beneficial owner of the shares.
6.2
Disclosure of substantial shareholders and filing requirement at the Commission
- The Act has expanded the duty of new shareholders to notify and disclose
acquisition of substantial shareholding control to all companies. Hitherto,
this was applicable to only public companies. Similarly, all companies are now
required to file the particulars of their substantial shareholders with the CAC
within a month of any changes in substantial shareholding structure and to
include details of substantial shareholders in their annual return.
These
new measures are commendable as they would ensure greater transparency and
discourage the opacity of investment activities associated with money
laundering and financing of terrorism. Interestingly, the CAMA does not
prescribe any specific penalty for a Trustee's failure to disclose the nature
of his interest in the shares.
7. Establishment of a legal framework for registration of Limited
Partnerships (LPs) and Limited Liability Partnerships (LLPs)
The Act
provides a framework for the regulation of LPs and LLPs. The framework covers
registration, assignment and transfer of rights, dissolution and other
compliance requirements. These structures are now available to investors across
the entire Federation.
7.1.
Limited partnerships - The scope and nature of business enterprise is now set
to experience new dynamism. Prior to the new CAMA, LPs were unrecognized under
the Partnership Act of 1890 (an Act received from England during Nigeria's
colonialism as a Statute of General Application) and the various Partnership
Laws of the States, except Lagos State where the structure was registrable.
Under
the Act's provisions, some partners have limited liability similar to the
shareholders of a company, in that a limited partner is not responsible for the
conduct or acts of the other partners. However, LPs are required to always have
at least one general partner who would have unlimited liability with respect to
all the debts and obligations of the firm.
7.2.
Limited liability partnerships - The Act ascribes incorporation status to
partnerships registered as LLPs with perpetual succession and power to acquire,
own, and dispose of property. For administrative purposes, LLPs are required to
have at least two designated partners as compliance officers for the provisions
of the Act. With this amendment, the subscribing partners to an LLP and the LLP
itself have separate legal personalities. LLPs should be able to appropriate
benefits of both companies and partnerships - benefits of companies, such as
limited liability and benefits of a partnership, such as tax transparency at
the LLP level. This accords with the practice in the UK and United States,
where LLPs have corporate personality and retain a tax pass-through status. The
introduction of this corporate vehicle will permit an optimization of the
business structures of law firms, accounting firms, private equity firms,
venture capital firms and other similar sophisticated users.
7.3.
Foreign limited liability partnerships - The Act recognizes LLPs registered
outside Nigeria but stipulates that they need to incorporate a local business
structure to carry on business in Nigeria. However, the Act empowers the
Minister to exempt a foreign LLP from the requirement to set up a local
vehicle.
8.
Establishment of a framework for handling insolvency issues Hitherto, the
insolvency mechanisms available to creditors in Nigeria were limited to
receivership and/or liquidation. The Act has now introduced an expanded
insolvency framework which includes tools focused on ensuring overall business
continuity of challenged companies. In circumstances where business failures
are inevitable, these tools may be a precursor to liquidation to ensure optimal
outcomes. The new insolvency mechanisms include administration, voluntary
arrangements, take-overs, striking off, and recognition of netting
arrangements.
8.1.
Administration - Administration is a mechanism to ensure the optimal outcome
for insolvent company which may be its business continuity or its liquidation.
However, the ordinary approach in an administration is to ensure the survival
of the insolvent entity as it is only where an insolvent company's survival is
not feasible that the Insolvency Practitioner may proceed to liquidate the
company in an orderly manner that maximizes returns to all the company's
stakeholders.
8.2.
Voluntary arrangement - A company's Board of Directors is now empowered to
arrange a composition of a company's debts with its creditors to enable it to
vary the terms of its loans and enable the company pay over an extended period
to ensure its survival, or put together a scheme of arrangement to organize its
affairs.
8.3.
Share transfer schemes ("Take-overs") - The Act enables private companies and
public companies (provided the 30% share threshold is not met) to be taken over
by other companies pursuant to conditions stipulated in the Scheme or Contract.
8.4.
Striking off - The Act allows companies which are yet to commence business to
apply to the CAC to have their names struck off the companies' register rather
than going through liquidation process.
8.5.
Netting - The Act contains Netting provisions to mitigate credit and settlement
risks associated with over-the-counter derivatives and related instruments in
the event of the insolvency of one or more of the parties.
Overall,
the new insolvency mechanisms are commendable, as they should promote business
continuity of struggling companies. Nonetheless, inclusion of take-overs may
have introduced some ambiguity on the regulatory oversight among the CAC, the
Securities and Exchange Commission and the Federal Competition and Consumer
Protection Council. Interestingly, the Act now limits the competence of
insolvency practitioners to the Business Recovery and Insolvency Practitioners
Association of Nigeria ("BRIPAN"), although certain other professional bodies
may be recognized by the CAC. The specific reference to BRIPAN may be perceived
as an overreach of legislative power, and potentially lessen healthy
competition especially for excluded bodies.
9. Enhancement of corporate governance
9.1.
Independent directors - To further strengthen corporate governance principles
in public entities, the Act provides for the qualifications, appointments and
minimum threshold for Independent Directors (ID) in public companies. This will
complement the existing corporate governance structure and enhance credibility
of public companies in Nigeria.
However,
there are some conflicts between the Act and the Principle 7 in the Code of
Corporate Governance 2018 (CCG) published by the Financial Reporting Council of
Nigeria (FRCN) on the recommended practices bordering on the qualifications for
ID. The conflict may otherwise disqualify competent directors from holding the
seat of ID. It is hoped that the operations of the Act will align with the
established principles in the CCG to ease the breath of confusion as already
being perceived.
9.2.
Dual position of Chairman and Chief Executive Officer in a public company - The
Act reiterates the established CCG principle which prohibits the MD/ CEO as the
Chairman of the same Company and reinforces the best practice which restricts
the Chairman from the day-to-day running of the operations of the company. This
will ensure the protection of shareholders' interests. Further, the Act limits
the numbers of public entities a person can serve as a director, to five. Prior
to the amendment, there was no limit to the number of public companies that a
director could serve on their boards. These new reforms will strengthen the
corporate governance structure for public companies in Nigeria and boost
shareholders' confidence.
9.3.
Responsibility of Chief Executive Officer and Chief Financial Officer for
financial statements - Departing from the stipulation under the repealed CAMA
that any two directors could attest to the audited financials, the Act provides
that the CEO and the CFO are to make the attestations and they are to be held
responsible if the assertions prove to be wrong.
10. Minority shareholders protection
Based
on the Act, shareholders now have power to bring derivative action against a
company and its affiliated entities. This amendment further enhances minority
shareholders' rights and seeks to promote transparency in corporate governance
in Nigeria.
11. Virtual meetings
The Act
permits private companies to hold virtual meetings subject to the provisions of
their Articles. Virtual meetings have become a necessity, as the Covid-19
pandemic and rules on social distancing have made virtual meetings inevitable.
However, the ability to hold virtual meetings was not extended to public
companies. It is hoped that this gap will be addressed in due course.
12. Financial assistance rules
The Act
has introduced provisions permitting private companies to provide financial
assistance for acquisition of their own shares upon meeting certain conditions.
The conditions include non-reduction of net assets, or where reduced, such
assistance should be financed out of distributable profits. Further, a special
resolution of the shareholders and a declaration of the directors in a form to
be prescribed by the CAC are required to accompany such transaction.
The
rule change is commendable and will unlock value potentials of companies and
trigger economic activities, such as increased mergers, acquisitions and deal
completion activities. However, the changes in financial rules may have adverse
consequences given that the Nigerian market lacks the depth that jurisdictions
that permit such financial assistance have. Further, the change may aid
unsavory practice among majority shareholders who might abuse their voting
power.
It is
hoped that the Minister or the CAC will provide safeguards through a Regulation
to ensure that minority shareholders and creditors are not shortchanged by
aggressive structuring of transactions enabled by this relaxation of the
hitherto prohibitions.
13. Incorporated Trustees - merger provisions and suspension of trustees
The Act
has introduced an avenue for Incorporated Trustees (IT) with similar purposes
to merge. The CAC will issue Regulations for the merger process. This is a
commendable reform to the existing law and will further strengthen ITs to
attain their economic objectives.
A
notable feature of the provision is the power of CAC to suspend Trustees and
appoint Interim Managers to oversee the affairs of the IT where such suspension
is desirable in the public interest or due to incidence of misconduct,
mismanagement or fraud. As with all discretionary oversight powers, it is hoped
that the CAC would be judicious and circumspect in exercising its powers.
Nonetheless, such discretion is always subject to judicial review by the courts
which should provide adequate safeguard against any abuse.
14. Administrative Proceedings Committee
The Act
has introduced an administrative tribunal, the Administrative Proceedings
Committee ("the APC"), to act as an arbiter of first instance for resolving
disputes or grievances arising from the operations of the Act. The APC is also
empowered to impose administrative penalties for contraventions of the Act.
This is
a welcome development, as the concept of the APC, though novel in our clime, is
not peculiar to Nigeria. South Africa has the Companies Tribunal, and India,
the National Company Law Tribunal, which are specialized administrative courts
to provide speedy resolution of company dispute.
There
are concerns, however, that the APC may face objections to its jurisdiction in
view of the provisions of Section 251(1)(e) of the 1999 Constitution (as
amended) which exclusively empowers the Federal High Court to adjudicate on any
disputes arising from the operation of CAMA. These objections might be similar
to legal challenges to the jurisdiction of other administrative tribunals, such
as Tax Appeal Tribunal and Investment and Securities Tribunal, which were settled
by the pronouncements of the courts.
Conclusion
The Act
appears to complement the key objectives of the Presidential Enabling Business
Environment Council in improving the investment climate and business
environment in Nigeria. It is expected that the Act, when fully implemented,
would address some of the difficulties faced by businesses (such as
administrative bottlenecks, high compliance costs, etc.) and lead to
significant improvements in the country's Ease of Doing Business rankings.
Overall,
the Act aligns with financial accounting considerations, as evidenced by the
definition of net assets and distributable profits available for dividends.
Further, the Act seeks to improve the commercial viability of the Nigerian
market as an investment destination by introducing additional insolvency
mechanisms, registration of LLP and LP, etc. These provisions should stimulate
increased economic activity which would create employment, generate additional
wealth and increase tax revenue for the government.
However,
not all is well in Camelot yet. The retention of the requirement for foreign
businesses to incorporate entities to do business in Nigeria is unlikely to
achieve the desired end of retaining more value in Nigeria. We, therefore, hope
that reviews will be done to acknowledge the borderless nature of global
business and the digital economy by introducing measures such as
re-introduction of branch registration of foreign companies, especially the
digital giants and technology companies, and addressing cross border
insolvencies, among others.
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