Friday, August28, 2020 / 11:55 AM / by KPMG Nigeria / Header Image Credit: The Nation

Therepeal 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 thecorporate regulatory landscape. Recall that the National Assembly had passed anamendment in 2018, which was covered in our Regulatory Alert of May 2018, andHis Excellency, President Muhammadu Buhari GCFR, declined assent to it andrequested the National Assembly's reconsideration of the Bill.

Thenewly enacted Act introduces measures to ensure efficiency in the registrationand regulation of corporate vehicles, reduce the compliance burden of small andmedium enterprises (SMEs), enhance transparency and stakeholders' engagement incorporate vehicles and, overall, promote a more friendly business climate. Theoverhaul of the CAMA, which is the foundational legal basis for corporatevehicle regulation, is long overdue as this is its first comprehensive updatein 30 years.

The Acthas 870 sections which are classified into chapters under Parts A to G. Part Adeals with the composition and administration of the registry which functionsas a regulator - the Corporate Affairs Commission ("CAC"). Part B has 29Chapters which stipulates the lifecycle of companies from their incorporationthrough to liquidation. Parts C & D have 11 and 2 chapters, respectively,and set out provisions that govern limited liability partnerships and limitedpartnerships. Parts E & F reprised sections on the registration andregulation of Business Names and Incorporated Trustees, with a few changes outlinedin chapters 3 and 7, respectively. Part G introduces the quasi-judicial body -the Administrative Proceedings Committee - in its first chapter and coversgeneral miscellaneous matters in its other chapter.

The keymodifications introduced by the Act are categorized as follows:

1. Business registration

1.1Expansion of CAC's oversight powers - The CAC has now been given widerregulatory oversight powers with the amendments to the CAMA, and it is nowempowered to act with quasilegislative powers. The CAC's enhanced powers tomake regulations and sanction behavior would complement its role as a registry.

1.2Electronic registration - To enhance the ease of doing business, the Act hascodified an option to electronically file documents as an alternative tophysical filing with the CAC. This should consolidate gains made insignificantly improving the turnaround time for company incorporation andbusiness set up processes. Consequently, it is imperative to upgrade the ITsystems of the CAC to minimize downtimes currently experienced, and to ensurereliability of the electronic filing systems.

1.3Provision of model articles - The Act requires the CAC to prescribe modelArticles of Association that would apply to all companies, except where acompany specifically chooses to register its distinctive Articles ofAssociation. The prior Act had prescribed the standard form and content of theArticles of Association in Table A of the First Schedule to the Act. Theremoval of the model Articles from the Act and vesting the CAC with theauthority introduces flexibility and ensures ease of future modifications.

1.4Stipulation of business object - The Act now recognizes unrestricted objectsfor incorporated companies, except where a company elects to restrict itsbusiness objects by its Articles of Association. This should further obviatethe ultra vires rule in relation to companies' objects and remove the need toincorporate separate companies for independent business lines. Whilecommendable, this rule change blurs the distinction between the ordinaryprofits of a company taxable under the Companies Income Tax Act ("CITA") andprofits from other activities. Special consideration should be given to this,and companies are advised to seek expert tax advice in evaluating the effect ofthis amendment.

1.5Flexibility on Attorney General's consent for companies limited by guarantee - The approval of the Attorney General of the Federation ("AGF") may no longer berequired to incorporate a company limited by guarantee ("Ltd/ Gte"). Where theAGF does not give a decision within 30 days to an application for approval ofincorporation of a Ltd/ Gte, CAMA now provides the promoters an alternative toadvertise their intention to register the Ltd/ Gte in 3 national dailies andcall for objections from the public. The CAC can proceed to complete theregistration of the Ltd/ Gte if there is no objection or if any objection hasbeen addressed. This amendment should make Ltd/ Gte more attractive tonot-for-profits and other interested stakeholders who hitherto might have beendiscouraged by the procedure for its registration.

1.6Statement of compliance - CAMA now admits a Statement of Compliance by anapplicant or their agent as a sufficient alternative to a Statutory Declarationby a legal practitioner affirming compliance with CAMA's registrationprocedures. This measure would contribute to the ease of doing business byremoving the need for legal practitioners to verify documents.

2 Share capital

2.1Elimination of front-loaded fees - The Act replaces the concept of "authorizedshare capital" with "minimum issued share capital" with a minimum threshold ofN100,000 for private companies and N2,000,000 for public companies. This changeeffectively increases the minimum nominal amount of share capital assessable tostamp duties and filing fees at incorporation, from the N10,000 and N500,000hitherto applicable. Also, this amendment eliminates the requirement forcompanies, especially private and unlisted entities, to denominate theirauthorized share capital in the Naira. This is consistent with practices inother jurisdictions such as the United Kingdom (UK). This would be optimal iftheir functional business currencies are in other currencies such as the USD orEuro. This amendment would be an attractive mechanism to enable foreigninvestors preserve value in their Nigerian subsidiaries and shield their importedcapital from local inflation until they are ready to deploy such funds into thebusiness. Consequently, other regulators with a line of sight over foreigninvestments may need to update their rules/ regulations to align with this CAMArule change.

2.2Entrenchment of the pre-emptive rights of existing shareholders - The Actreinforces the first right of refusal for existing shareholders of any newlycreated class of shares in the proportion of their substantive holdings beforeallotment to the public.

2.3Valuation report for non-cash consideration for shares - Private companies areno longer required to obtain a valuation report issued by a third partyprofessional when they issue their shares for consideration other than cash.While this modification allows increased autonomy for private companies, it maylead to disputes between shareholders as to the appropriate valuation of thebusiness.

2.4Inclusion of electronic share transfer and clarity on treasury shares - The Actprovides for electronic transfer of shares, simplifies the rules on treasuryshares held by companies and clarifies that such shares can be sold ortransferred to an employees' share scheme.

3. Company re-registration

The Actprovides a robust framework on re-registration of companies, including changingtheir forms from private to public; from limited to unlimited or limited byguarantee, or vice versa. A notable implication of the new changes is howmulti-directional the conversions of any incorporated company can now be.Particularly, the provisions are aimed at providing flexibility and protectingshareholders' rights during the conversion process. These changes arecommendable.

4. Formation of single-member companies

Tomitigate entry barriers for Small and Medium Enterprises (SMEs), the Actprovides that a private company can now be formed by one person. This shouldstimulate the growth of smaller owner-controlled businesses and assist inmaking the business regulatory environment favourable to them.

5. Relaxation of compliance requirements for small companies

The Actreduces certain compliance requirements for small companies (small companiesare described in the Act as private companies with only Nigerian shareholdersin which the majority shareholding is held by the directors, and with aturnover 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; Exemptionfrom convening statutory and annual general meetings; Exemption frommandatory provision for appointment of company secretary; and - Discretionaryuse of common seal. Easing the financial reporting requirements of smallcompanies is a commendable development that aligns with global best practiceproposed by the International Federation of Accountants ("IFAC"). However,commercial considerations other than statutory obligations also drive therequirement for small companies to audit and report their financial activities.

Forinstance, banks require audited financials of SMEs to assess theircreditworthiness, large corporates may require audited financials of SMEs toapprove them as prospective vendors, and the tax laws require audited books toassess companies properly to tax, etc. Essentially, SMEs are likely to continueto prepare full financials which are audited by independent third parties. Wehope that subsequent amendments to the CAMA would stipulate alternativesafeguards and measures to enable users of financial statements of SMEs haveadequate confidence in relying on their financial information.

6. Disclosure of significant control and beneficial ownership

6.1 Disclosureof beneficial ownership for private companies - All shareholders who holdshares in trust for another person are now required to disclose that fact, andto state the identity of the beneficial owner of the shares.

6.2Disclosure of substantial shareholders and filing requirement at the Commission- The Act has expanded the duty of new shareholders to notify and discloseacquisition of substantial shareholding control to all companies. Hitherto,this was applicable to only public companies. Similarly, all companies are nowrequired to file the particulars of their substantial shareholders with the CACwithin a month of any changes in substantial shareholding structure and toinclude details of substantial shareholders in their annual return.

Thesenew measures are commendable as they would ensure greater transparency anddiscourage the opacity of investment activities associated with moneylaundering and financing of terrorism. Interestingly, the CAMA does notprescribe any specific penalty for a Trustee's failure to disclose the natureof his interest in the shares.

7. Establishment of a legal framework for registration of LimitedPartnerships (LPs) and Limited Liability Partnerships (LLPs)

The Actprovides a framework for the regulation of LPs and LLPs. The framework coversregistration, assignment and transfer of rights, dissolution and othercompliance requirements. These structures are now available to investors acrossthe entire Federation.

7.1.Limited partnerships - The scope and nature of business enterprise is now setto experience new dynamism. Prior to the new CAMA, LPs were unrecognized underthe Partnership Act of 1890 (an Act received from England during Nigeria'scolonialism as a Statute of General Application) and the various PartnershipLaws of the States, except Lagos State where the structure was registrable.

Underthe Act's provisions, some partners have limited liability similar to theshareholders of a company, in that a limited partner is not responsible for theconduct or acts of the other partners. However, LPs are required to always haveat least one general partner who would have unlimited liability with respect toall the debts and obligations of the firm.

7.2.Limited liability partnerships - The Act ascribes incorporation status topartnerships registered as LLPs with perpetual succession and power to acquire,own, and dispose of property. For administrative purposes, LLPs are required tohave at least two designated partners as compliance officers for the provisionsof the Act. With this amendment, the subscribing partners to an LLP and the LLPitself have separate legal personalities. LLPs should be able to appropriatebenefits of both companies and partnerships - benefits of companies, such aslimited liability and benefits of a partnership, such as tax transparency atthe 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. Theintroduction of this corporate vehicle will permit an optimization of thebusiness 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 registeredoutside Nigeria but stipulates that they need to incorporate a local businessstructure to carry on business in Nigeria. However, the Act empowers theMinister to exempt a foreign LLP from the requirement to set up a localvehicle.

8.Establishment of a framework for handling insolvency issues Hitherto, theinsolvency mechanisms available to creditors in Nigeria were limited toreceivership and/or liquidation. The Act has now introduced an expandedinsolvency framework which includes tools focused on ensuring overall businesscontinuity of challenged companies. In circumstances where business failuresare inevitable, these tools may be a precursor to liquidation to ensure optimaloutcomes. The new insolvency mechanisms include administration, voluntaryarrangements, take-overs, striking off, and recognition of nettingarrangements.

8.1.Administration - Administration is a mechanism to ensure the optimal outcomefor insolvent company which may be its business continuity or its liquidation.However, the ordinary approach in an administration is to ensure the survivalof the insolvent entity as it is only where an insolvent company's survival isnot feasible that the Insolvency Practitioner may proceed to liquidate thecompany in an orderly manner that maximizes returns to all the company'sstakeholders.

8.2.Voluntary arrangement - A company's Board of Directors is now empowered toarrange a composition of a company's debts with its creditors to enable it tovary the terms of its loans and enable the company pay over an extended periodto ensure its survival, or put together a scheme of arrangement to organize itsaffairs.

8.3.Share transfer schemes ("Take-overs") - The Act enables private companies andpublic companies (provided the 30% share threshold is not met) to be taken overby 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 toapply to the CAC to have their names struck off the companies' register ratherthan going through liquidation process.

8.5.Netting - The Act contains Netting provisions to mitigate credit and settlementrisks associated with over-the-counter derivatives and related instruments inthe event of the insolvency of one or more of the parties.

Overall,the new insolvency mechanisms are commendable, as they should promote businesscontinuity of struggling companies. Nonetheless, inclusion of take-overs mayhave introduced some ambiguity on the regulatory oversight among the CAC, theSecurities and Exchange Commission and the Federal Competition and ConsumerProtection Council. Interestingly, the Act now limits the competence ofinsolvency practitioners to the Business Recovery and Insolvency PractitionersAssociation of Nigeria ("BRIPAN"), although certain other professional bodiesmay be recognized by the CAC. The specific reference to BRIPAN may be perceivedas an overreach of legislative power, and potentially lessen healthycompetition especially for excluded bodies.

9. Enhancement of corporate governance

9.1.Independent directors - To further strengthen corporate governance principlesin public entities, the Act provides for the qualifications, appointments andminimum threshold for Independent Directors (ID) in public companies. This willcomplement the existing corporate governance structure and enhance credibilityof public companies in Nigeria.

However,there are some conflicts between the Act and the Principle 7 in the Code ofCorporate Governance 2018 (CCG) published by the Financial Reporting Council ofNigeria (FRCN) on the recommended practices bordering on the qualifications forID. The conflict may otherwise disqualify competent directors from holding theseat of ID. It is hoped that the operations of the Act will align with theestablished principles in the CCG to ease the breath of confusion as alreadybeing perceived.

9.2.Dual position of Chairman and Chief Executive Officer in a public company - TheAct reiterates the established CCG principle which prohibits the MD/ CEO as theChairman of the same Company and reinforces the best practice which restrictsthe Chairman from the day-to-day running of the operations of the company. Thiswill ensure the protection of shareholders' interests. Further, the Act limitsthe numbers of public entities a person can serve as a director, to five. Priorto the amendment, there was no limit to the number of public companies that adirector could serve on their boards. These new reforms will strengthen thecorporate governance structure for public companies in Nigeria and boostshareholders' confidence.

9.3.Responsibility of Chief Executive Officer and Chief Financial Officer forfinancial statements - Departing from the stipulation under the repealed CAMAthat any two directors could attest to the audited financials, the Act providesthat the CEO and the CFO are to make the attestations and they are to be heldresponsible if the assertions prove to be wrong.

10. Minority shareholders protection

Basedon the Act, shareholders now have power to bring derivative action against acompany and its affiliated entities. This amendment further enhances minorityshareholders' rights and seeks to promote transparency in corporate governancein Nigeria.

11. Virtual meetings

The Actpermits private companies to hold virtual meetings subject to the provisions oftheir Articles. Virtual meetings have become a necessity, as the Covid-19pandemic and rules on social distancing have made virtual meetings inevitable.However, the ability to hold virtual meetings was not extended to publiccompanies. It is hoped that this gap will be addressed in due course.

12. Financial assistance rules

The Acthas introduced provisions permitting private companies to provide financialassistance for acquisition of their own shares upon meeting certain conditions.The conditions include non-reduction of net assets, or where reduced, suchassistance should be financed out of distributable profits. Further, a specialresolution of the shareholders and a declaration of the directors in a form tobe prescribed by the CAC are required to accompany such transaction.

Therule change is commendable and will unlock value potentials of companies andtrigger economic activities, such as increased mergers, acquisitions and dealcompletion activities. However, the changes in financial rules may have adverseconsequences given that the Nigerian market lacks the depth that jurisdictionsthat permit such financial assistance have. Further, the change may aidunsavory practice among majority shareholders who might abuse their votingpower.

It ishoped that the Minister or the CAC will provide safeguards through a Regulationto ensure that minority shareholders and creditors are not shortchanged byaggressive structuring of transactions enabled by this relaxation of thehitherto prohibitions.

13. Incorporated Trustees - merger provisions and suspension of trustees

The Acthas introduced an avenue for Incorporated Trustees (IT) with similar purposesto merge. The CAC will issue Regulations for the merger process. This is acommendable reform to the existing law and will further strengthen ITs toattain their economic objectives.

Anotable feature of the provision is the power of CAC to suspend Trustees andappoint Interim Managers to oversee the affairs of the IT where such suspensionis desirable in the public interest or due to incidence of misconduct,mismanagement or fraud. As with all discretionary oversight powers, it is hopedthat the CAC would be judicious and circumspect in exercising its powers.Nonetheless, such discretion is always subject to judicial review by the courtswhich should provide adequate safeguard against any abuse.

14. Administrative Proceedings Committee

The Acthas introduced an administrative tribunal, the Administrative ProceedingsCommittee ("the APC"), to act as an arbiter of first instance for resolvingdisputes or grievances arising from the operations of the Act. The APC is alsoempowered to impose administrative penalties for contraventions of the Act.

This isa welcome development, as the concept of the APC, though novel in our clime, isnot peculiar to Nigeria. South Africa has the Companies Tribunal, and India,the National Company Law Tribunal, which are specialized administrative courtsto provide speedy resolution of company dispute.

Thereare concerns, however, that the APC may face objections to its jurisdiction inview of the provisions of Section 251(1)(e) of the 1999 Constitution (asamended) which exclusively empowers the Federal High Court to adjudicate on anydisputes arising from the operation of CAMA. These objections might be similarto legal challenges to the jurisdiction of other administrative tribunals, suchas Tax Appeal Tribunal and Investment and Securities Tribunal, which were settledby the pronouncements of the courts.

Conclusion

The Actappears to complement the key objectives of the Presidential Enabling BusinessEnvironment Council in improving the investment climate and businessenvironment in Nigeria. It is expected that the Act, when fully implemented,would address some of the difficulties faced by businesses (such asadministrative bottlenecks, high compliance costs, etc.) and lead tosignificant improvements in the country's Ease of Doing Business rankings.

Overall,the Act aligns with financial accounting considerations, as evidenced by thedefinition of net assets and distributable profits available for dividends.Further, the Act seeks to improve the commercial viability of the Nigerianmarket as an investment destination by introducing additional insolvencymechanisms, registration of LLP and LP, etc. These provisions should stimulateincreased economic activity which would create employment, generate additionalwealth and increase tax revenue for the government.

However,not all is well in Camelot yet. The retention of the requirement for foreignbusinesses to incorporate entities to do business in Nigeria is unlikely toachieve the desired end of retaining more value in Nigeria. We, therefore, hopethat reviews will be done to acknowledge the borderless nature of globalbusiness and the digital economy by introducing measures such asre-introduction of branch registration of foreign companies, especially thedigital giants and technology companies, and addressing cross borderinsolvencies, among others.

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