Definition of Shares
The subject ‘shares’ is a fundamental concept enshrined in the very core of the Nigerian corporate practice. Hence, it is imperative that anyone who intends to start or run a company successfully should have the knowledge and eventually be grounded in its roots.
A share according to section 868 of CAMA 2020, is “the interests in a company’s share capital of a member who is entitled to share in the capital or income of such company…” in other words, a company is only able to generate shares from the contribution of its members in exchange for an interest or a stake in the company.
A share is also referred to as a unit of a company that not only defines the interests of a shareholder but also vests certain rights and liabilities on the holder and these rights are all provided for in the memorandum and articles of the company.
Shares are securities that the companies issue to members of the public in order to raise money either to float the company or to finance its operations and projects. It is an investment that determines the rights, liabilities, and dividends or profits that its holder is entitled to. A person who owns shares in a company is called a ‘Shareholder’.
A share is a choice in action (intangible property which gives the owner a right of action for possession) and it can be transferred.
Persons Qualified to Take up Shares
All persons are qualified to take up shares at the event of a call but there are certain persons who are an exception:
1. A person below 18 years except the company already has 2 other eligible shareholders.
2. A person with an unsound mind as declared by a competent court in Nigeria or elsewhere
3. An undischarged Bankrupt
4. A person disqualified from being a director of a company under CAMA 2020 due to a conviction for fraud.
What are the Rights of Shareholders in a company?
As earlier stated shares bestow on their holder certain benefits and rights, these rights include:
i. Right, to vote at company meetings and proceedings. All shares issued must be accompanied by a vote.
ii. Right, to receive dividend or profit when declared. This is ascertained by the number of shares owned.
iii. Right to attend meetings such as AGM etc. and also make contributions. Shares give the holder the power and ability to influence decision-making in the company.
iv. Right, to inspect the statutory books of the company. This right gives them an overview of their investments and also a need to safeguard their monetary interest.
v. Preemptive rights, in the event of a subsequent call for shares, existing shareholders have the right to purchase a specific number of share before it is given to intending shareholders.
Why are Shares important in the Formation of a Company?
The importance of shares or their allocation or class cannot be undermined as it is through the issuing of shares, a company’s first membership is created i.e. the first subscribers become the members of the company, and subsequently others who subscribe in the future. It is also pertinent that members of the public who intend to acquire shares should know the class and its attendant features.
Classes of Shares
Shares are classified into (7) seven categories in Nigeria;
1. Ordinary Shares.
2. Preference Shares.
3. Deferred Shares.
4. Redeemable Preference Shares.
5. Convertible Preference Shares.
6. Treasury Shares.
7. Cumulative Shares.
These shares are the lowest when it comes to ranking as regards importance and priority. They carry no special rights and no obligations. There are at the bottom of the tier when it comes to the distribution of dividends and proceeds in the event of the winding up of a company or liquidation. Lastly, such shareholders are entitled to one (1) voting right. This is provided for in Section 140 of the Companies and Allied Matters Act 2020.
These shares have additional rights attached to them and the holders of these shares benefit far more than ordinary shareholders. They are at the top of the tier when it comes to the distribution of dividends and proceeds in the event of liquidation and winding up a company. According to section 168 (1) of the Act, preference shareholders not only carry the right to attend general meetings but also are entitled to more than one vote per share during certain occasions such as: winding up; removal, and appointment of an auditor of a company.
Also known as “Founders Share”, these are shares allocated to the founder’s company or its main financiers. It is a share that does not have any right to the assets of the company which is undergoing liquidation or bankruptcy until the common and preference shareholders are paid.
Redeemable Preference Shares
These are shares that can be purchased or redeemed by the issuing company at a fixed rate and date which is at the discretion of the directors. They allow for the repayment of the principal capital to the shareholders.
Convertible Preference Shares
These shares usually carry rights to a fixed dividend for a particular term, which at the end of the term can choose to convert to an ordinary share or leave it as a preference share.
These shares were introduced by the CAMA 2020, due to the opportunity given to limited liability companies to purchase their own shares. Here, the company’s Article of Association must first approve and then fellow shareholders must also in a special resolution grant the approval of such shares. Where a company is listed as the owner of any treasury shares, it is not allowed to exercise the right to attend or vote at meetings, and no dividend is payable to the company.
These shares come as a result of dividends not being fully paid or being outrightly missed by shareholders during a financial year. Hence, it accumulates until the company has sufficient distributive reasons to issue.
Shares are very sensitive and fundamental to any business or setup and hence should be taken very seriously. For startups looking to raise funds for their company through equity, the class of shares such a company offers to investors in exchange for their investments may determine whether or not such investment transaction will pull through.
Need further clarity on shares as it concerns your company? Feel free to reach out to us through the Whatsapp icon on the lower right part of this page or HERE, and a member of our team will respond to you.