Towards achieving better corporate governance in Nigeria: Assessing the legal framework of shareholders’ enforcement role

Abstract

The risk that directors may act in ways that are contrary to their duties is always present. One of the legal responses is to ensure that shareholders are statutorily positioned to take steps that would ensure that the opportunistic behaviours by the directors are met with punitive consequences. In spite of this, corporate failures or near corporate failures in Nigeria are recurring decimals in Nigeria’s corporate equation. It is on this premise that the ability of shareholders to take enforcement steps is reviewed. The paper reviews relevant statutory provisions and whether there are inherent gaps that impact shareholders’ position.

Acknowledgement

The author would like to thank Mr Aled Griffiths of the School of Law, Bangor University for his immeasurable comments and guidance on the earlier drafts of this paper which formed part of the author’s Ph.D thesis.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 UK, USA. The companies included Enron, Bear Stearns, Citigroup, Lehman Brothers, Merrill Lynch (in the U.S.), HBOS and RBS (in the U.K.), and Parmalat, Dexia, Fortis, Hypo Real Estate and UBS (in continental Europe).

2 <http://www.vanguardngr.com/2009/08/cbn-sacks-5-banks-directors/> accessed 10 February 2012.

3 CBN is the major regulatory body for banks and other financial institutions in Nigeria and any information that emanates from them is deemed accurate. As such, it was the CBN governor that made the announcement in 2009 that 10 out of the 25 commercial banks had fundamental corporate governance challenges and in order to stop the banks from failing, the CBN would bail them out by injecting some funds into the banks’ covers.

4 Cadbury Nigeria and Lever brothers had corporate governance challenges especially with regards to accounts falsification.

5 In 2003, the Securities and Exchange Commission released Nigeria’s first code of corporate governance and in 2006 after the consolidation exercise in the banking sector, CBN released the Code of Corporate Governance for Banks post consolidation. All these were aimed at ensuring that corporate organisations engage in good governance practices.

6 Companies and Allied Matters Act 1990 (CAMA) is the main legislation on company law in Nigeria and like the UK’s Companies Act 2006, makes no specific mention of corporate governance although it has provisions which are corporate governance based and are aimed at promoting corporate governance.

7 Shareholders are sometimes mis-described as the owners of the company. However, the jurisprudence of company law provides that a company is a different entity to the shareholders and directors owe their duties to the company and not to individual shareholders. See Salomon v Salomon & Co Ltd [1897] AC 22

8 J Abugu, ‘Primary of Shareholder Interest and The Relevance of Stakeholder Economy Theory’ (2013) 34 (7) Comp. Law. 202–214.

9 B Ahunwan, ‘Corporate Governance in Nigeria’, 2002 37(3) Journal of Business Law 269–287; I Bolodeoku, ‘Corporate Governance: The Law’s Response to Agency Costs in Nigeria’, (2006–2007) 32 Brook. J. Int’l L. 467; E Adegbite, ‘Corporate Governance Regulation in Nigeria’, (2012) 12 (2) Corporate Governance 257–276; E Adegbite, K Amaeshi and C Nakajima, Multiple Influences on Corporate Governance Practice in Nigeria; Agents, Strategies and Implications, (2013) International Business Review 22; E Adegbite, Corporate Governance in the Nigerian Banking Industry: Towards Governmental Engagement’ (2012) 7(3) International Journal of Business Governance and Ethics 209–231; N Ofo, ‘Securities and Exchange Commission of Nigeria’s Draft Revised Code of Corporate Governance: An Appraisal’ (2011) Journal of African Law 280–299; N Ofo, ‘What Role for Independent Directors in Nigeria?’ 2012, 23(3) International Company and Commercial Law Review 117–123; N Ofo, Much Ado about Independent Directors in Nigeria, 2011, 22(8) International Company and Commercial Law Review 250–257.

10 B Ahunwan, ‘Corporate Governance in Nigeria’ 2002 37(3) Journal of Business Law 269–287; I Bolodeoku, ‘Corporate Governance: The Law’s Response to Agency Costs in Nigeria’ (2006–2007) 32 Brook.J.Int’l L. 467; E Adegbite, ‘Corporate Governance Regulation in Nigeria’ (2012) 12 (2) Corporate Governance 257–276; E Adegbite, K Amaeshi and C Nakajima, Multiple Influences on Corporate Governance Practice in Nigeria; Agents, Strategies and Implications, (2013) 22 International Business Review; E Adegbite, Corporate Governance in the Nigerian Banking Industry: Towards Governmental Engagement’ (2012) 7(3) International Journal of Business Governance and Ethics 209–231; N Ofo, ‘Securities and Exchange Commission of Nigeria’s Draft Revised Code of Corporate Governance: An Appraisal’ (2011) Journal of African Law 280–299; N Ofo, ‘What Role for Independent Directors in Nigeria?’ 2012, 23(3) International Company and Commercial Law Review 117–123; N Ofo, Much Ado about Independent Directors in Nigeria, 2011, 22(8) International Company and Commercial Law Review 250–257.

11 Section 303 of CAMA grants shareholders the power to enforce directors’ breach of duty.

12 <http://www.nse.com.ng/market_data-site/other-market-information-site/NSE%20Fact%20Sheet/Q2%20Fact%20Sheet%20-%202014.pdf> accessed 19 October 2014.

13 O Amao and K Amaeshi, ‘Galvanising Shareholder Activism: A Prerequisite for Effective Corporate Governance and Accountability’ (2008) 82 (1) Journal of Business Ethics 119–130 at 5.

14 See <http://www.bpeng.org/sites/bpe/concluded%20transactions/Pages/default.aspx> (accessed on the 19 October 2014.) for a list of privatised companies.

15 M Tanko, ‘The Impact of Privatisation on Capital Market Development and Individual Share Ownership’ (October 2004) – Available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=689702> Accessed on 19 October 2014).

16 V Nmehielle and E Nwauche, ‘External-Internal Standards in Corporate Governance in Nigeria’ (2004) Study presented at the Conference on Corporate Governance and Accountability in sub Saharan Africa. The George Washington University Law School, Public Law and Legal Theory Working study No. 115 October 29, 2004. Available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=627664>.

17 S 5(4) of Privatisation and Commercialisation Act 1999.

18 A Keays, ‘An Assessment of Private Enforcement Actions for Directors’ Breaches of Duty’ (2014) 33 Civil Law Quarterly 79–92.

19 J McCahery, Z Sautner, T Starks, Behind the Scenes: the corporate Governance preferences of Institutional Investors. (2010) available at <http://dare.uva.nl/document/462716> last visited on August 4, 2014. According to the researchers, 80% of the institutional investor respondents indicated that this was the preferred option.

20 Ibid., at 7.

21 S 259 of CAMA.

22 Para 19 SEC Code 2011.

23 Para B.7.1 UK Corporate Governance Code 2018.

24 S 262(1) of CAMA.

25 The word actually used in CAMA is ‘forthwith’. The archaic word used reflects the historical English influence on Nigerian law and highlights the urgent need for an update.

26 S 262(2) CAMA.

27 Ibid., at S 262(3)(a) (b)

28 Ibid., at S 262(3).

29 See S 215(4) CAMA.

30 S 216 CAMA.

31 S 215(6) CAMA.

32 S 223 CAMA.

33 Iwuchukwu v Nwizu (1994) 7 NWLR (Pt 257) 379 at 404.

34 Longe v FBN [2010] 6 NWLR (pt 1189) SC 1.

35 [2010] 6 NWLR (pt 1189) SC 1 This case as decided by Nigeria’s Supreme Court illustrates that no matter the level of breach of duty committed by a director, if the removal of such a director does not follow the procedure laid down in CAMA, the removal would be illegal. This is because of the level of protection the law gives directors as a result of the unique position they occupy.

36 The Judge’s comments relating to the possibility of being able to validate the removal by following the correct procedure at a later date seems to be an obiter comment. His fellow Justices make no such observation. It is therefore uncertain as to whether mistakes in following statutory procedure can be rectified as suggested.

37 [1843] 2 Hare 461.

38 (1994) 3 NWLR (Pt 330) 66; see also Ejekam v Devlom Ind Ltd (1998) 1 NWLR (Pt 54) 419.

39 (1997) 8 NWLR ( Pt 515) 110 C.A.

40 (2006) 4 NWLR (Pt.969)172.

41 S 299 CAMA.

42 I Oreweme, ‘Cost Awards in Nigeria’. Available online at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1626823> at page 3 last visited on 5 August 2014. Examples of the inadequacy of costs awarded in Nigeria are exhibited in the following Nigerian cases. In Texaco v Shell [2002] 3 MJSC 1, the plaintiff/Appellant in 1994, made a claim for the sum of five million, seven hundred and eighty thousand American dollars ($5,780,000) against the respondent for negligence. The appeal was dismissed by the Nigerian Supreme Court in 2002 with an award of ten thousand naira (N 10,000) as cost in favour of the respondent. Also, in Melwani v Five Star [2002] 3 MJSC 117, a shareholder and director of a company brought an action against the company in 1986 in respect of a disputed transfer of shares. In 2002 the plaintiff/appellant was successful at the supreme court and a cost of ten thousand naira (N10,000) was awarded in favour of the plaintiff/appellant.

43 O Aderibigbe, ‘Corporate Litigation and Majority Rule: Retreating from the Precipice’ (2012) 3 (3) International Journal of Advanced Legal Studies and Governance 35–40 at 37.

44 A Keays, ‘An Assessment of Private Enforcement Actions for Directors’ Breaches of Duty’ (2014) 33 Civil Law Quarterly 76–92 at 82.

45 S 300(f) of CAMA.

46 There was no provision for negligence under the English law until the 2006 Act.

47 K.W Wedderburn, ‘Shareholders Rights and The Rule in Foss v Harbottle’ (1957) Cambridge L.J 194.

48 (1992) 4 NWLR (Pt 145) 422 SC.

49 That is the balance of probability rather than beyond all reasonable doubt.

50 Sometimes referred to as the ‘cogent evidence rule’.

51 (1950) 2 All ER 458 at 459. See also Continental Insurance Co. v Dalton Cartage Co., (1982) 13 SCC Canlii, (1982) 1 SCR 164, 131 DLR (3d) 559 Laskin CJ agrees with this approach where he said ‘I do not regard such an approach as a departure from a standard of proof based on a balance of probabilities nor as supporting a shifting standard. The question in all civil cases is what evidence with what weight that is accorded to it will move the court to conclude that proof on balance of probabilities has been established’.

52 A Keay, ‘An Assessment of Private Enforcement Actions for Directors’ breach of duty’ (2014) 33 (1) Civil Justice Quarterly 76–92.

53 Whitten v Dabney 171 cal 621 (1915).

54 Unipetrol (Nigeria) Plc v Agip (Nigeria) Plc (2002) 14 NWLR (Pt 787) 312.

55 Agip (Nigeria) Ltd v Agip Petroli International [2010] 5 NWLR (Pt 1187) p 348.

56 Australia, Canada and UK are some of the countries with a low level of Derivative action based cases.

57 A Keay ‘An Assessment of Private Enforcement Actions for Directors’ breach of duty’ (2014) 33 (1) Civil Justice Quarterly 79–92 at 84.

58 I Ramsay and B Saunders, ‘Litigation by Shareholders and Directors: An Empirical Study of The Statutory Derivative Action’ (2006) Research Report, Centre for Corporate Law and Securities Regulation, The University of Melbourne at 23.

59 Ibid., at page 24.

60 M Hofmann, ‘The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in Australia in Comparison to the United States, Canada and Singapore’ (2005) Corporate Governance eJournal. Available online at <http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1012&context=cgej> accessed 14 April 2014 at page 7.

61 M Hofmann, ‘The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in Australia in Comparison to the United States, Canada and Singapore’ (2005) Corporate Governance eJournal. Available online at <http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1012&context=cgej> accessed 14 April 2014 at page 8.

62 Choo, Pearlie Koh Ming, ‘The Statutory Derivative Action in Singapore- A Critical and Comparative Examination’ (2001) 13 (3) Bond Law Review 64–94 at 64. Available online at <http://epublications.bond.edu.au/blr/vol13/iss1/3/> accessed 14 April 2014.

63 S 303(2)(c) CAMA.

64 McAskill v TransAtlantic Petroleum Corp ( 2003) 5 WWR 178 (Alta).

65 Central Estate Ltd v Woolger (1971) 3 All ER 647.

66 (1985) 1 WLR 370.

67 A Nwafor, Shareholder Derivative Action-Nigerian Statutory Innovation- Not Yet A Victory for The Minority Shareholder (2010) MqJBL Vol 7.

68 (1999), 30 C.P.C (4th) 127 (B.C.S.C).

69 (199) BCJ No. 637(19 March 1998) Vancouver No. C954447 (BCSC).

70 S 303(2) (d) CAMA.

71 Ibid.,

72 S 303(2)b of CAMA.

73 M. O’Connor, ‘The Enron Board: The Perils of Groupthink’ (2003) 71 U. Cin. L. Rev. 1233; D Forbes and F Milliken, ‘Cognition and Corporate Governance: Understanding Boards of Directors as Strategic Decision-Making Groups‘ (1999) 24 Academy of Management Review 489.

74 A Keay, ‘An Assessment of Private Enforcement Actions for Directors’ Breach of Duty’ (2014) 33(1) Civil Justice Quarterly 76–92 at 79.

75 S 303(2)(a) CAMA.

76 [1902] AC 83.

77 In Prudential Assurance Co. Ltd v Newman Ind. Ltd. (No. 2) [1982] Ch 204 at 219 the court said that ‘control embraces a broad spectrum extending to an overall absolute majority of votes at one end, to a majority of votes at the other end made up of those likely to be cast by the delinquent himself plus those voting with him as a result of influence or apathy’.

78 Prudential Assurance Co. Ltd v Newman Ind. Ltd. (No. 2) [1982] Ch 204.

79 A Nwafor, Shareholder Derivative Action-Nigerian Statutory Innovation- Not Yet A Victory for The Minority Shareholder (2010) 7 MqJBL 214.

80 (1950) 2 All ER 1064.

81 Smith v Croft (no 2) (1988) Ch 114 at 185.

82 Ibid.,

83 (1950) 2 All ER 1064.

84 S 260 Companies Act 2006.

85 S 260(4) and (5) of the Companies Act 2006.

86 S 261(1) of the Companies Act 2006.

87 Ibid., at S 261(2).

88 Ibid., at S 263.

89 Franbar Holdings v Patel (2009) 1 BCLC 1.

90 Ibid., at Par 36.

91 Ibid., at para 2.

92 Boyle & Birds’ Company Law (2011) Jordans 8th edtn.

93 Kiana v Cooper (2010) 2 BCLC 422; Iesini v Westrip Holdings Ltd (2011) 1 BCLC 498.

94 See above at page 108.

Additional information

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Mayowa Awosika

Dr. Mayowa Awosika teaches law at the Faculty of Law, Lead City University, Nigeria