The Legality Of Transactions By A Company In Its Own Shares Under Nigerian Law

This article talks more about the provisions of the Companies and Allied Matters Act (CAMA) on the topic of transactions by a company involving its own shares, particularly the topics of :

– The Redemption of Redeemable Preference Shares

– Financial assistance by companies for transactions in their own shares

– Payment for share buybacks

– Acquisition by companies of their own shares

Redemption of Redeemable Preference Shares

– The provisions of CAMA 2020 apply with respect to the redemption by a company of any redeemable preference share issued by it.

– The shares are not redeemed unless they are fully paid, and redemption shall be made only out of:

(a) profits of the company which would otherwise be available for dividend ; or

(b) the proceeds of a fresh issue of shares made for the purposes of the redemption.

-Before the shares are redeemed, the premium, if any, payable on redemption, shall be provided for out of the profits of the company or out of

the company’s share premium account.

-Where shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve fund, to be called “the capital redemption reserve account”, a sum equal to the nominal amount of the shares redeemed, and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the capital redemption reserve fund were paid-up share capital of the company.

Prohibition of financial assistance by a company for the acquisition of Its own shares

– Under CAMA 2020:-

(a) “financial assistance” means a gift, guarantee, any form of security or indemnity, a loan or any form of credit or any other financial assistance given by a company, the net assets of which are thereby reduced by up to 50%, or which has no net assets ;

(b) “net assets” means the aggregate of the company’s assets, less the aggregate  ofits liabilities (“liabilities” to include any charges or provision for liabilities in accordance with the applicable accounting standards applied by the company in relation to its accounts).

– Subject to the provisions of this section:

(a) where a person is acquiring or is proposing to acquire shares in a company it shall not be lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place ; and

(b) where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of this acquisition, it shall not be lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.

– Nothing in of the provisions above shall be taken to prohibit:

(a) the lending of money by the company in the ordinary course of its business, where the lending of money is part of the ordinary business of a company ;

(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fullypaid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company ;

(c) the making by a company of loans to persons, other than directors,bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully-paid shares in the company or its holding company, to be held themselves by way of beneficial ownership ;

(d) any act or transaction otherwise authorised by law including:

(i) a distribution of a company’s assets by way of dividend lawfully made or a distribution made in the course of the company’s winding-up,

(ii) the allotment of bonus shares,

(iii) a reduction of capital confirmed by order of the court under this act, and

(iv) a redemption or purchase of shares ;

(e) anything done in pursuance of an order of the court under a scheme of arrangement ; a scheme of merger or any other scheme or restructuring of a company done with the sanction of the Court ; or

(f ) an assistance given by a company where its principal purpose in giving the assistance is not to reduce or discharge any liability incurred by a person for the purpose of the acquisition of shares in the company or its holding company, or the reduction or discharge of any such liability, but an incidental part of some larger purpose of the company, and the assistance is given in good faith in the interests of the company.

Acquisition by a Company of its own Shares

-A limited liability company may purchase its own shares including redeemable shares provided that:

(a) a company may only purchase its own shares if so permitted by its articles;

(b) the shareholders shall, by special resolution, approve the acquisition by the company of the shares that it intends to purchase ;

(c) only fully paid up shares of a company may be purchased by the company, and the terms of purchase shall provide for payment for the purchase;

(d) within seven days after the passing of the special resolution referred to in paragraph (b), the company shall cause to be published in two national newspapers, a notice of the proposed purchase by the company of its own shares ;

(e) within 15 days after the publication in two national newspapers, the directors of the company shall make and file with the Commission, a statutory declaration of solvency, to the effect that the company is solvent and can pay its debts as they fall due, and that after the purchase of its shares, the company shall remain solvent and can pay its debts as they fall due ;

(f ) a company may not under this section purchase its shares if, as a result of the purchase, there would no longer be any issued shares of the company other than redeemable shares or shares held as treasury shares.

– Within a period of six weeks following the publication in two national newspapers, any of the company’s creditors may make an application to the Court for an order cancelling the resolution and a dissenting shareholder who did not vote in favour of the share buyback shall also have the right to seek an order of court cancelling the resolution.

Payment for Share Buybacks

– Where a company buys back its shares, payment for the share buyback shall be made from the distributable profits of the company.

Persons from who shares can be bought back

-A company may buy back its shares:

(a) from the existing shareholders or security holders on a proportionate basis;

(b) from the existing shareholders in a manner permitted pursuant to a scheme of arrangement sanctioned by the court ;

(c) from the open market ; and

(d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or any other similar scheme.

Limit on number of shares acquired

-A company shall not hold more than 15% of the nominal value of the issued share capital of any class of its shares as treasury shares.

-Where a company buys back more than 15% of the issued share capital of any class of its shares, the company shall, before the end of 12 months beginning with the date on which that contravention occurs:

(a) reissue,

(b) cancel, or

(c) reissue and cancel such number of shares that will ensure that the company holds not more than 15% of the issued share capital of any class of its shares as treasury shares upon the completion of the transaction.

– Notwithstanding anything contained under the act, a company shall not exercise any right in respect of the treasury shares (including any right to attend or vote at meetings) and any purported exercise of such a right shall be void.

-No dividend shall be paid, and no other distribution (whether in cash or otherwise) of the company’s assets (including any distribution of assets to members on a winding-up) shall be made to the company, in respect of the treasury shares.