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A Review of the Companies & Allied matters Act 2020 as it Relates to Majority Rule & Minority Protection

CM Advocates - Nigeria > Dispute Resolution  > A Review of the Companies & Allied matters Act 2020 as it Relates to Majority Rule & Minority Protection

A Review of the Companies & Allied matters Act 2020 as it Relates to Majority Rule & Minority Protection

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Introduction

The President of the Federal Republic of Nigeria, Muhammadu Buhari assented to the Companies and Allied Matters Act 2020 (the “New CAMA or CAMA 2020”), on 7 August 2020, thereby repealing the 30-year-old Companies and Allied Matters Act 1990 (the “Old CAMA or CAMA 1990”).

This article focuses on the changes introduced in the provisions of CAMA 2020 as it relates to majority rule and minority protection.

Generally, under common law and statute, there is an inclination towards majority rule in the enforcement of a company’s rights when a wrong is done to a company. This proposition is the foundation of the rule in Foss v. Harbottle which posits that only a company can sue in respect of a wrong done to it or defend an action instituted against it. Since the decisions of the company are taken by the majority, it follows that the power rests on the majority to decide whether a company should sue or not sue.

Just as every general rule admits exceptions, the majority rule does admit certain exceptions. The exceptions are created to protect the interest of the minority shareholders who may not have the power to make decisions that would bind the company especially as it affects their rights as shareholders in the company. The protection of minority interests is important because it balances the interests of a company’s operation and management and those of the minority investors who have no control over the company’s management. We will now consider the minority protection rule which is typically the exception to the majority rule vis-à-vis CAMA 2020.

Minority Protection Action

The grounds for filing minority protection action for injunction and declaration in the provisions of the old CAMA remain the same in CAMA 2020 except for the inclusion of an omnibus ground in section 343(g) of CAMA 2020. Therefore, a Plaintiff may now rely on all or any of the following grounds:

  1. Illegal or ultra vires act of the company
  2. The doing by ordinary resolution what ought to be done by special resolution.
  3. Invasion of personal rights of members
  4. allegation of fraud by the minority
  5. where time is not enough to call a company meeting to redress a wrong
  6. Where directors have or are likely to derive personal benefits from their negligence or breach of duty.
  7. Any other act or omission where the interest of justice so demands

Minority Actions

Personal and representative action – CAMA 2020 now permits claims for damages.

Under the provisions of the old CAMA, a member who institutes a personal or derivative action to enforce a right due to him was only entitled to seek or claim injunctive or declaratory reliefs and was expressly barred from claiming damages. The New CAMA however expressly provides that members who institute personal or representative actions are now allowed to claim injunctive or declaratory reliefs and can also claim damages for any loss incurred on account of a breach of their rights as shareholders. See section 301(1) and (2) of the Old CAMA; Section 344 (1) of the New CAMA.

This new inclusion clearly opens the window for shareholders to make specific claims for damages resulting from breach of duty or negligence by directors especially as it relates to shareholders’ dividends, valuation/devaluation of their shareholdings, etc.

Damages to be paid by Directors

Under the provisions of the Old CAMA, a company is bound by the acts of the people it holds out as its directors. The implication of this is that directors could not be held personally liable for their wrongdoings and the damages arising therefrom. Typically, companies automatically assumed responsibility for the wrongdoings of their directors. Under the old regime, Courts could only attribute personal liability to directors in a very narrow sense i.e., when directors undertook personal liability for their wrongdoings. Indeed, this rarely happened. This position was unequivocally stated by the Court in Fairline Pharmaceutical Industries Ltd. & Anor v. Trust Adjusters Nig. Ltd. (2012) LPELR-20860(CA) where it was held that a director could only be personally liable where he undertook personal liability for the wrongdoing such as where he executed the contract in his personal capacity.

The New CAMA however turns the table around. It imposes personal liability on directors for their wrongdoing (with or without an undertaking for personal responsibility) and effectively allows minority shareholders to claim damages against directors for their breach of duty and negligence. The new CAMA also empowers the Court to hold errant directors personally liable in damages to aggrieved shareholders. This is irrespective of the provision or otherwise of an undertaking of personal liability for wrongdoing by the director.

This new inclusion essentially expands the scope of protection or remedies afforded to shareholders, protects companies from liabilities arising from the acts of errant directors, and removes the shield protecting directors from being personally responsible for their negligent actions and breach of duty.

Derivative Actions

Commencement of Derivative ActionsDerivative actions can now be commenced on behalf of a Company’s subsidiary.

Under the Old CAMA, an application for leave to file derivative action and a derivative action itself could only be commenced on behalf of a company. However, the New CAMA provides that an application for leave to file a derivative action and by implication a derivative action can now be instituted either on behalf of a company or its subsidiary. The New CAMA continues to restrict the filing of derivative action on behalf of members or shareholders of a company. See section 303(1) of the Old CAMA and section 346(1) of the New CAMA.

Conditions for leave to commence derivative action

The conditions for leave to commence a derivative action under the provisions of the Old CAMA have been modified in the New CAMA. There are three major changes.

The requirement for prove that the directors are the wrongdoers who were in control and would not take necessary steps to remedy their wrong – is no longer a condition for seeking leave to file a derivative action under the provisions of the New CAMA. See section 303(2)(a) of the Old CAMA. Notably, this provision did not define the term “wrongdoing” in the first place.

There is now need for an applicant to prove actual or proposed act or omission involving negligence, default, breach of duty, or trust by a director. This condition requires an applicant to provide particulars and prove of negligence, default, breach of duty or trust by a director as against the presentation of mere factual allegations or inferences to the Court.

The Notice of Intention to the directors of the intention to apply to court must now contain factual basis for the claim and the actual or potential damage caused to the company. This means that acts of negligence, default, breach of duty or trust by directors are no longer actionable per se. Applicants must provide proof of actual or potential damages. In other words – Previously, an applicant in a derivative action was just required to give reasonable notice to the directors of the company of his intention to apply to the Court, if the directors failed to diligently prosecute, defend or discontinue the action Section 303 (2) (b) CAMA 1990. But under the New CAMA, the applicant’s notice must now contain a factual basis for the claim and the actual or potential damage caused/to be caused to the company Section 346 (2) (d) CAMA 2020.

The conditions requiring the applicant to show that he is acting in good faith and in the interest of the company remain the same.  These new conditions set out in paragraphs (b) and (c) above are contained in the provisions of section 346(2) (a) and (d) of the New CAMA. For ease of reference, the entire provisions of the section with the relevant paragraphs in bold are set out to wit:

“No action may be brought, and no intervention may be made under subsection (1) unless the court is satisfied that:

  1. A cause of action has arisen from an actual or proposed act or omission involving negligence, default, breach of duty or trust by a director or a former director of the company;
  2. The applicant has given reasonable notice to the directors of the company of his intention to apply to court under subsection (1);
  3. The directors of the company do not bring, diligently prosecute defend or discontinue the action;
  4. The notice contains a factual basis for the claim and the actual or potential damage caused to the company;
  5. The applicant is acting in good faith;
  6. It appears to be in the best interest of the company that the action be brought, prosecuted, defended or discontinued.”

It must be noted that the provisions of section 346(2)(a) of CAMA 2020 are an outright adaptation of Section 260 (3) of the United Kingdom’s Companies Act 2006 which was introduced in the UK to deviate from the strict common law approach of only suing based on the specific grounds previously replicated in Section 300 CAMA 1990. See section 261(2) of the Companies Act and the case of Lesini v. Westrip Holdings Ltd [2009] EWHC 2526 at paragraph 78. Whereas CAMA requires the applicant to fully satisfy the court that he has met the conditions.

Derivative action can now be brought against Directors and Third Parties

The category of persons against whom a derivative action can be commenced has now been expanded under the provisions of the New CAMA. By the provisions of section 346(3) of the New CAMA, an applicant can now bring a derivative action against a director or any other person or both. Under the Old CAMA, a derivative action could only be brought against a company.

A plaintiff in a derivative action now has the right to obtain relevant documents from the defendants

Although the Old CAMA did not make provisions for obtaining information and documents from an adverse party in a derivative action, however, the general position of the law as provided in the Federal High Court Rules was that parties could make applications for discoveries. With the advent of the New CAMA, a Plaintiff in a derivative action, now has the right to obtain any relevant documentation from the defendant(s) and witnesses at trial and may in pursuance of that right, request categories of documents from such persons even without identifying the specific documents. See section 346 (3) and (4) of CAMA 2020.

The amendment to the New CAMA on derivative actions informs lawyers and judges that the level of attention, detail, seriousness and evidence that must be presented by an applicant who seeks leave to file a derivative action must be factual, cogent, and compelling.

Minority actions instituted on grounds of unfairly prejudicial and oppressive conduct.

The provisions relating to minority actions on grounds of unfairly prejudicial and oppressive conduct under the New CAMA substantially remain the same with those in the Old CAMA other than:

  1. the removal of surplus words used in section 304(2) of the Old CAMA in section 347(2) of the New CAMA; and
  2. review of the penalty imposed in section 312(5) of the old CAMA from N50 and N25 respectively to a sum that will be determined by the commission.

Imposition of penalties

Previously under the Old CAMA, failure to register the CTC of an Order for the alteration of a company’s memorandum or articles with the Commission within 14 days attracted a penalty of ₦50 and a daily fine of ₦20. However, under the New CAMA, the fine has now been reviewed and the Commission has been vested with the discretion to specify in its regulation the amount of the penalty.

Effect of the new CAMA on pending litigation

The provisions of section 869(1) of the New CAMA repealed the provisions of the Old CAMA. However, section 869 (2) of the New CAMA[1] contains provisions validating all matters either

  • Section 869(2) of the New CAMA provides that “Nothing in this Act shall affect any order, rule, regulation, appointment, conveyance, mortgage, deed or agreement, made, resolution passed, direction given, proceeding taken, instrument issued or thing done under the enactment hereby repealed; but any such order, rule, regulation, appointment, conveyance, mortgage, deed, agreement, resolution, direction, proceeding, instrument or thing if in force immediately before the commencement of this Act shall, on the commencement of this Act, continue in force, and so far as it could have been made, passed, given, taken, issued or done under this Act shall have effect as if so made, passed, given, taken, issued or done”

completed or ongoing under the Old CAMA. To this extent, all pending litigation commenced before the enactment of the New CAMA remains valid.

 

The position of the law is that the substantive law applicable to a matter is the law in force at the time the cause of action arose except the new law is made to have retrospective effect. In Rossek v. ACB Ltd, the Supreme Court held that:

“It is trite law that the substantive law existing at the time a cause of action arises governs the determination of the action and the rights and obligations of parties must be determined in accordance with the substantive law when the cause of action arose. Thus, a change of law after the cause of action has arisen will not affect accrued rights and obligations unless the change is made retrospective.”

Also, in the case of Sossa v. Fokpo, the court stated as follows:

“It is now settled law that it is cannon of construction that the repeal or amendment of law does not affect any act or powers exercised under it before the repeal or amendment … The law applicable to a cause or matter and therefore the jurisdiction and competence of the court is determined by the existing law or the law prevailing at the time the suit was filed and not by the change of the existing law. It is immaterial that during the trial the law has been repealed.”

To the extent that the cause of action, in any case, precedes the New CAMA and to the extent that the New CAMA is not expressed to be retrospective, any litigation which was pending prior to the enactment of the New CAMA will continue to be governed or administered by the old CAMA (CAMA 1990).

General Observation

The new CAMA seems to make personal and representative actions more attractive because aggrieved minority shareholders can now claim damages in addition to injunction and declaration, a right which was not available under the Old CAMA.

On the other hand, the conditions for leave to commence a derivative action are now more stringent. It is not exactly clear why this is the case. Perhaps it is to curtail frivolous actions or reduce the amount of litigation that companies may be exposed to. However, to the extent that directors can now be held personally liable for their wrongdoings, the need to proceed against companies should naturally decline. In essence, the New CAMA generally protects companies more and exposes errant directors.

The improvement introduced to the provisions relating to derivative action tends to advance the point that applications for leave to file a derivative action is not granted as a matter of course and the decision to grant leave must be given more seriousness. Ten years before the New CAMA was passed, Adekeye JSC (as she then was) had talked about the level of seriousness that should be given to the determination of the question on whether leave should be granted to file a derivative action Agip (Nigeria) Limited v. Agip Petroli International [2010] 5 NWLR (Pt. 1187) 348. She described it as a stage where a determination must be made as to whether there is substance in a potential derivative action especially as it has the grave implication of stripping directors of their statutory rights. This is what she said:

I have to explain at this juncture that this issue relates to an interparty hearing. A preliminary stage in a derivative action where it is determined whether there is substance in the main action. The effect of the provision of section 301(1) is to deprive the Directors of the Company the power as duly authorized organ of the company, to authorize the bringing of an action in the name of the company. The action is that brought by the minority shareholder in the name of the company. An order which has the effect of stripping the Directors of their statutory right must be one in respect of which they should be given the right to be heard before it is made as their civil rights and obligations would be affect.

The amendment to the New CAMA on derivative action seems to have taken into account Justice Adekeye’s position. Lawyers and Judges must therefore appreciate the fact that the level of attention, detail, seriousness, and evidence that must be presented by an applicant who seeks leave to file a derivative action under this new regime must be factual, cogent, and compelling.

Lastly, it is only natural to expect that aggrieved minorities may now prefer to commence their actions by personal and representative action since it allows them to claim damages in addition to injunctive and declaratory reliefs.

Conclusion

I applaud the Commission for introducing legal reforms aimed at easing the processes for running the affairs of corporate bodies and tackling corporate governance challenges both internally and externally. We do hope that stakeholders and the legislature will continue to monitor and observe the practicality of the new provisions and make further amendments as may be required from time to time without long waits.

End Note

  1. Joshua Abe is the Managing Partner of CM Advocates, Nigeria and the head of the firm’s dispute resolution team.
  2. Section 299 of the Old CAMA and section 341 of the New CAMA.
  3. Section 300 of the Old CAMA; Sections 343 of the New CAMA.
  4. Section 301(1) and (2) of the Old CAMA; Section 344 (1) of the New CAMA.
  5. Section 250 and 283 (2) of the Old CAMA; Section 344 (2) of the New CAMA.
  6. Section 303(1) of the Old CAMA; Section 346(1) of the New CAMA.
  7. Section 346(2) of the New CAMA
  8. The Rules of the Federal High Court allows parties to make applications for discoveries during an action. Section 346(4) of the New CAMA has now given the plaintiff express legal right to request for documents from the defendant(s) without the hassle of filing an application for discovery or even identifying the documents in specific details.
  9. Section 869(2) of the New CAMA provides that “Nothing in this Act shall affect any order, rule, regulation, appointment, conveyance, mortgage, deed or agreement, made, resolution passed, direction given, proceeding taken, instrument issued or thing done under the enactment hereby repealed; but any such order, rule, regulation, appointment, conveyance, mortgage, deed, agreement, resolution, direction, proceeding, instrument or thing if in force immediately before the commencement of this Act shall, on the commencement of this Act, continue in force, and so far as it could have been made, passed, given, taken, issued or done under this Act shall have effect as if so made, passed, given, taken, issued or done”
  10. [1993] 8 NWLR (Pt.312) 382
  11. [2001] 1 NWLR (Pt.693)16

Disclaimer

The content of this article is intended to provide a general guide to the subject matter. The views and opinions contained therein are those of the writer and should not be considered as an independent legal advice to be relied upon for any purpose whatsoever.  Specialist advice should be sought about your specific circumstances.

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