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Common Questions on Outside Directors' Rights and Protection of Minority Shareholders under Nigerian Law
Can minority shareholders restrain majority directors' decision to enter or continue with a transaction?
Section 300 of the Companies and Allied Matters Act ("the Act") provides that minority shareholders may apply to court to grant an injunction or declaration to restrain the Company from;
i. Entering into an illegal or ultra vires transaction;
ii. Doing by ordinary resolution an act which requires special resolution;
iii. An act which affects the individual rights of the minority shareholders;
iv. Fraud committed against the Company and directors refuse to redress the wrong;
v. Where a Company meeting cannot be called to redress a wrong against minorities' shareholders;
vi. Where the directors are likely to benefit or profit from negligence arising from breach of duty.
Though the minority shareholders have the right to apply for injunction or declaration to restrain the Company from continuing with the project on any of the above grounds, the Court would refuse to grant the reliefs except the minority shareholders satisfactorily proves one of the above grounds.
What are the rights of an outside director in a Board with inside majority?
a. Right to notice of meetings
Section 266 of the Act provides that every director is entitled to receive a 14 days' notice of directors meetings, unless the director is disqualified by any reason under the Act from continuing with the office of the director. The notice is required by the Act to all directors entitled to receive notices and failure to give notice in accordance with the Act invalidates the meeting.
b. Right to convene and attend meetings
Section 219 of the Act provides that every director is entitled to attend Annual General Meetings of the company which is held once a year and Extra- ordinary General Meetings which can be convene by the Board of Directors or a single Director if there are no sufficient directors in Nigeria to form a quorum or shareholders holding one-tenth of the paid up share capital of the Company.
c. Right to be removed as director in accordance with the provisions of the Act
Section 262 of the Act provides for removal of a director before the end of his tenure. A director must be removed in accordance with the provisions of Section 262 of the Act and not the whims and caprices of the Board of Directors.
All directors have the right to participate in appointment and removal of directors.
d. Right to vote
Under Section 263 of the Act every director has the right to vote both at Board Meetings and in Annual General Meetings (if he is a shareholder). By Section 263 (9) of the Act, each director is entitled to one vote in all directors' meetings.
If the director is also a shareholder, he is also entitled to the following rights;
1. Right to be paid dividends when declared by the Annual General meeting.
2. Right to transfer shares as a personal property,
3. Right to demand poll and appoint proxy in company meetings,
4. Right to requisition Extra-Ordinary Meeting,
5. Right to take up minority protection actions to protect his rights in the Company.
What are the rights of minority shareholders?
a. Right to attend meetings
Every shareholder shall have the right to attend any general meeting of the company in accordance with the provisions of Section 81 of the Act. These meetings include;
(i) Statutory meeting which is held by public companies within 6 months of incorporation;
(ii) Annual General Meeting which is held by companies 18 months after incorporation and once a year subsequently;
(iii) Extra-ordinary General Meeting which is requisitioned by the Board of Directors, one of the Directors or the shareholders holding one-tenth of paid up shares of the Company.
b. Rights of shareholders in meetings
(i) Shareholders should be furnished with sufficient and timely information concerning the date, location and agenda of the general meetings, as well as full and timely information regarding the issues to be decided at the meetings.
(ii) Shareholders have the right to speak and vote on any resolution before the meeting in accordance with the provision of Section 81 of the Act.
(iii) Shareholders have the right to vote in person or by proxy, and equal effect shall be given to votes whether cast in person or by proxy.
(iv) They shall be given the opportunity to ask questions from the Board and to place items on the agenda at the general meetings, subject to reasonable limitations.
(v) They have the right to be informed of any resolution appointing or approving the appointment of a director.
c. Right to dividends
Shareholders have the right to be paid dividends when declared in General Meeting and also have the right to sue for the dividends if not paid in accordance with Section 385 of the Act.
d. Right to Memorandum and Articles of Company
Shareholders have right to a copy of the Memorandum and Articles of the Company, and any enactment which alters the Memorandum and Articles in accordance with Section 42 of the Act.
e. Right to Inspection
Shareholders have the right to inspect the register of members in the Company.
f. Right to be represented in the audit committee
Shareholders have a right to be represented in the audit committee of the Company.
g. Right to requisition Extra-Ordinary General Meeting to address a wrong against the Company
Section 215 of the Act provides that for a Shareholder to requisition an Extra-ordinary Meeting, such shareholder must be holding at the time of the requisition not less than one-tenth of the paid up capital of the Company. The requisition notice shall state the objects of the meeting, and be signed by the requisitionists and deposited at the registered office of the Company.
Are outside directors and minority shareholders entitled to financial reports?
Section 331 of the Act provides that a company must keep accounting records to sufficiently show the transaction of the company and disclose its financial position to enable directors to ensure that the financial statement comply with the provision of the Act.
Section 332 of the Act provides that Company reports shall be kept at the registered office of the Company and be open for inspection by officers of the Company.
Section 334 of the Act provides that the directors shall prepare financial statements for the year and it shall contain statement of the accounting policies, the balance sheet as at the last day of the year, a profit and loss account, note in the accounts, the auditor's report, the director's director, a statement of the source and application of fund, a value added statement for the year, a 5 year financial summary and file same at the commission.
Section 344 of the Act provides that the directors shall furnish the financial statement to every shareholder 21 days before the date of the Annual General Meeting.
Section 345of the Act provides that that the directors shall prepare a financial statement within 18 months after incorporation and subsequently at least once a year. The statement shall be for a period not exceeding 9 months to the date of the general meeting.
Section 349 of the Act provides that every shareholder is entitled to be furnished with the Company's last financial statement upon demand.
What is the minimum liability which the majority directors have towards the outside director and minority shareholders from a reporting point of view?
The majority directors shall maintain an accounting record including receipts of all expenditure, all sale and purchases of the Company and its assets and liabilities at the registered office of the Company which shall be open to all the shareholders.
The Board of Directors shall prepare yearly financial statement which shall be filed at the Commission. The majority directors shall furnish the outside director and minority shareholders with the financial statement of the Company, 21 days to the date of the Annual General Meeting. The minority shareholders are entitled to a copy of the last financial statement of the Company upon demand.
If the minority shareholders believe that they are not heard and they accuse the majority directors of negligence, what are the legal measures they can take?
In such circumstance, the minority shareholders may commence an action to redress an alleged infringement of their rights as shareholders by commencing a minority protection proceeding under Section 300 of the Act.
Section 301 of the Act provides that they are entitled to only injunction and declaration if their action succeeds. They are not entitled to damages. Nevertheless, they are entitled to cost of proceedings whether their action succeeds or not.
In the same vein, they may commence a derivative action under Section 310 and 311 by bringing an action in the name of the Company against the majority directors or executive management who committed the alleged wrong against the Company. It is settled law that before the minority shareholders can successfully commence a derivative action, the Company must have passed an ordinary resolution by majority shareholders and the minority shareholders must have obtained leave of Court.