Founder and Managing Partner, Imperial Law Office, Afolake Lawal, says the new Companies and Allied Matters Act (CAMA) 2020 will lead to significant improvement in corporate governance. In this interview with Deputy Group Business Editor, Taofik Salako, Lawal, an alumnus of Harvard Business School, outlines the benefits of the new CAMA 2020 to the investing public.
AS part of the reform of the corporate environment in Nigeria, President Muhammadu Buhari on August 7, 2020 assented to the Companies and Allied Matters (Repeal and Re-enactment) Act, 2020, thus amending and succeeding the Companies and Allied Matters Act 1990. While a significant part of the provisions of the former CAMA was restated or clarified, there were notable amendments which altered the framework, procedural requirements, corporate governance provisions and detailed compliance protocols that should enable a more-conducive business environment.
The recurring themes of the Act include strengthened corporate governance requirements, more flexible business structures, light touch regulation of small and medium businesses and increased options for business rescue, among others.
In all, there are seven thematic provisions in the Act, including corporate governance provisions, focused directorship, reduced compliance obligations for small and medium enterprises (SMEs), virtual meetings, increased insolvency options, impact on capital market and financial reporting provisions and regulation of not-for-profit organisations.
Corporate governance provisions
With respect to corporate governance, Section 265 (6) of the Act prohibits an individual from concurrently holding the offices of Chairman and Chief Executive Officer of a public company. While this requirement is already contained in the Financial Reporting Council’s Nigerian Code of Corporate Governance and other sectoral codes, its inclusion in the Act gives further backing to these subsidiary regulations, as it compels compliance by public companies. A reasonable expectation is that this requirement will improve managerial accountability and transparency processes in public companies, since they are naturally subject to public disclosures and scrutiny.
There is a further requirement under Section 275 for public companies to have at least three independent directors on their boards. These independent directors are expected to act as strong, objective voices on the board, with the goal of improving transparency in the decision-making process for public companies. While it is a useful threshold, there are questions about its impact on the effectiveness of the board, since there is nothing to suggest that a higher number of independent directors is beneficial to maximising the value of a company. Furthermore, it will impose additional costs on companies which now have to appoint additional directors if they currently fall short of the prescribed number.
Focused directorship
The Act imposes a limitation on the number of board memberships that an individual can hold. Section 307 (1) limits directorships to no more than five public companies at a time. The rationale behind this limitation is the need to focus and consolidate the energies of directors towards a smaller set of companies, based on the assumption that directors contribute the most towards creating value in companies when they limit their managerial involvement to fewer companies, since conflicting interests are diminished.There is some measure of data and anecdotal evidence to suggest that this may be true. A frequently cited example is the annual general meeting (AGM) of public companies, in which directors holding multiple directorships can often be absent from the AGM of one or more companies, given the fact that public companies tend to hold AGMs at about the same time.
The Act also imposes an additional duty on persons appointed or proposed for appointment to the board of a public company to self-disclose their directorship in other public company at the meeting where they are presented for appointment, failing which they have committed an offence. Although at present, most public companies conduct due diligence exercise on nominee-directors and their detailed corporate profiles would have been circulated to relevant parties before voting takes place, this responsibility on a nominee-director to disclose is an extra layer of protection that ensures that no relevant information is left out.
Reduced compliance obligations for SMEs
Section 330 of the Act relieves small companies of the obligation to appoint a company secretary, and in the same vein, exempts them from needing to appoint auditors to audit the financial statements for the year. The reduced compliance obligations are a clear departure from provisions in the repealed CAMA. Although this could bring about cost savings for small companies who may choose to dispense with these professional services and allocate their resources to business growth, it raises concerns about the likely effect on the regulatory compliance and adherence to governance principles which hitherto would have been overseen by the secretary. In any case, it can be argued that the importance of audited accounts and good governance structures to company activities like corporate finance would mean that most small companies opt to retain the services of auditors and secretaries despite not being expressly required to do so.
The provision that a single shareholder can establish a company has made it such that entrepreneurs who were hitherto in the informal economy can now migrate to the formal economy. However, it remains to be seen whether subsidiary legislations will address certain issues which had tended to discourage entrepreneurs from operating in the formal economy. These issues include exorbitant taxes, high regulatory and documentation requirement among others.
Virtual meetings
For the first time, a federal legislation legitimises the conduct of company meetings virtually under Section 240(2) of the Act. Although this provision primarily applies to the conduct of meetings of private companies, there is nothing to suggest that public companies may not equally conduct company meetings online or in a virtual environment. This does feel like a missed opportunity on the part of the legislative draftsmen. Nevertheless, one could reasonably surmise that the provision for virtual meetings would allow for more meetings to be held and for improved participation of directors of the affected companies because the cost and effort expended in convening in-person meetings will be significantly reduced.
Increased insolvency options
From the perspective that an investor is ultimately seeking a reasonable return on investment, and that this can only be achieved if the company remains a going concern, the insertion of business rescue provisions may encourage ordinarily risk-averse investors to seek out more risky, but potentially higher returning equity investments in companies as against other investment options with less risk.
According to section 434 (1) of the Act, the directors of a company can now make a proposal to the company’s creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs. This proposal will provide for a nominee, who is an insolvency practitioner, to act as a trustee and otherwise supervise the implementation of the voluntary arrangement.
The Act also sets out a legal framework for administration of distressed companies, which is designed to save these companies by putting measures in place to allow them to continue as a going concern if possible. Section 444 of the Act empowers the Court, as well as holders of a company’s floating charge, in addition to the company’s directors to appoint an administrator to do all that is necessary to manage the affairs and property of a company with the primary objective of rescuing it as a going concern or alternatively achieving a better result for the company’s creditors than would have been achieved if the company was wound up without first going into administration.
In the Act, the financial practice of “netting” has also been given legislative backing with a solid framework that would allow for its immediate adoption. This provision allows companies who have financial obligations to each other to enter into an arrangement whereby payment due to be exchanged between two or more parties is set off and the parties arrive at a net obligation that is payable from one party to the other in full satisfaction of the existing liabilities, which will be enforceable even against an insolvent party without limitations from any law applicable to an insolvent party.
The import of all this new provision is that the insolvency framework has been expanded and there are more enforceable options available to choose from for the stakeholders of the company to address the issue of insolvency should it arise. It would now be left to each creditor or other stakeholder of the company to seek sound legal advice in choosing what option(s) would best achieve their objectives.
Impact on capital market
The changes in the new Act do not directly impact capital markets activities, since these are covered by a different piece of legislation, which is the Investment and Securities Act (ISA). However, from the perspective of creating a deeper environment for greater capital markets related transactions, the Act is set to revitalise an aspect of the business environment that is often neglected, and that is the ease of doing business.
Financial Reporting Provisions
Accounting Standards: Financial statements are required to comply with the accounting standards issued by the Financial Reporting Council of Nigeria, provided such accounting standards do not conflict with the provisions of the Act. This provision, like many other provisions in the Act has tended to strengthen corporate governance processes and procedures in the administration of companies.
Corporate Responsibility for Financial Reports: The Chief Executive Officer and Chief Financial Officer (CFO) of a company (except a Small Company) are required to certify the Audited Financial Statement (AFS) stating that the officer who signed the AFS has reviewed it and based on her knowledge, there are no untrue statements or omission of material facts which would make the AFS misleading, and that the information contained in the AFS fairly represents the financial condition and results of the operation of the company for the period under review. This will undoubtedly increase public trust and participation in companies that adhere to this provision and also foster investment in these companies.
Unclaimed Dividends: Where dividends paid by a company remain unclaimed, the company is required to publish a list of the unclaimed dividends and the names of the persons entitled to the dividends in two national newspapers, and this list should be attached to the notice sent to the members of the company for each subsequent annual general meeting of the company. The company may invest the unclaimed dividend for its own benefit in investments outside the company within three months after the publication has been made and the notices sent, and no interest shall accrue on the dividends against the company. Where it is the case that dividends have been paid to members and there is an omission, due to the fault of the company, to pay dividend to other members, the dividends shall earn interest at the current bank rate from three months after the date on which they ought to have been posted. For the purpose of liability, the date of posting the dividend warrant is deemed to be the date of payment.
In all, the new provisions introduced in the Act will better position business organizations with the ultimate aim of improving the Nigerian economy.
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