Alteration of Company Capital in Nigeria


Term Paper, 2021

12 Pages, Grade: 4.0

Anonymous


Excerpt

Contents

1.0. MEANING OF ALTERATION OF COMPANY CAPITAL

2.0. NATURE OF ALTERATION OF COMPANY CAPITAL

3.0. LEGAL REQUIREMENTS FOR ALTERING COMPANY CAPITAL

4.0. CONCLUSION

BIBLIOGRAPHY

Abstract

Company Capital is, without a shadow of doubt, the lifeblood of a company. Whether viewed in the light of the subjective approach, (capital as residing in physical goods which can produce other goods and services), or objective approach (the monetary sum at the investors’ disposal), one thing remains true. Without capital, companies cannot function. However, a company may alter its capital for different reasons, some of them include: to suit the needs of the investors, to write off the deficit and fund current liabilities, to maintain a balance between preference and equity shares, and balance out the financial plan, and even to meet legal requirements. In altering their capital, companies must abide by the hallowed provisions set out in the Companies and Allied Matters Act (CAMA) 2020. To this end, this paper gives a detailed explanation of the meaning, nature, and legal requirements for the alteration of company capital.

1.0. MEANING OF ALTERATION OF COMPANY CAPITAL

Due to the various forms of altering company capital, there is no one encompassing definition or meaning to alteration of company capital. Suffice to state that, an alteration of share capital refers to the changes in the existing capital structure of a company. A company can alter its capital by amending the charter and/or bylaws and register the change with the appropriate regulatory authority.

Alteration of company capital can take any of three forms:
1. Reconfiguration or Reconstruction of share capital
2. Increase of share capital
3. Reduction of share capital

1.1. Reconstruction of capital is to either increase or reduce the value of each share by way of consolidation or subdivision of shares. Section 125 of CAMA 2020 provides that a company with share capital may in a general meeting and not otherwise, alter conditions in its memorandum to; Consolidate and divide all or any part of its share capital into shares of larger amount than its existing shares; Subdivide its shares or any of them into shares of smaller amounts than is fixed by the memorandum.

Consolidation of shares is the process of reconstituting shares of a certain denomination to a greater denomination, resulting in the value of shares being greater than their original value. It is to increase the value upon which shares are divided while reducing the number of shares in issue, for instance, 1,000,000 shares of 1 naira per 1 share can be reconstituted into 500,000 shares of 2 naira per 1 share.

Subdivision is the direct opposite of consolidation. It is the process of reconstituting shares of a certain denomination into a lesser denomination. Subdivision culminates into a reduction of the par value of each share while the number of shares in issue would be increased. For instance, 1,000,000 shares of 1 naira per 1 share can be reconstituted into 2,000,000 shares of 50kobo per 1 share.

Under the old Companies and Allied Matters Act (“CAMA”) 19901, cancellation of shares used to be a form of reconfiguration since it only affected unissued shares, so that the share capital would be diminished by the number of shares so cancelled. However, such alteration can fit into the ambit of section 131(1) of CAMA 2020 which affords companies the right to reduce their share capital in “any way”.

1.2. An increase in share capital is an avenue for more equity to be injected into the company. It is the permission given to a company to raise further capital.2 Section 127(1) of CAMA 2020 provides that a company with share capital may in a general meeting and not otherwise increase its issued share capital by allotment of new shares of such amount which the company considers expedient.

1.3. A reduction of share capital connotes the process of sapping equity away from the company. It could be by way of diminishing liability in respect of unpaid shares, cancelling paid-up shares that are unrepresented by available assets, or returning paid-up shares to shareholders which are in excess of the company’s wants.3 Section 130 of CAMA 2020 provides that unless as authorized by this Act, a company with share capital shall not reduce its issued share capital.4 Section 131(1) of CAMA 2020 provides that, subject to the confirmation of the court, a company with share capital, if authorized by its article may by special resolution reduce its share capital in any way.

2.0. NATURE OF ALTERATION OF COMPANY CAPITAL

The nature of alteration of company capital would vary in the light of the various forms of alteration provided under CAMA, as would be discussed below:

2.1. Reconfiguration of company capital by way of consolidation and subdivision of shares does not affect the share capital of the company as far as third parties5 are concerned. They do not impair the paid-up capital of the company.6 It is merely to reconstruct the capital of the company either by increasing or reducing the nominal value of each share, but the share capital would be unaffected. Consolidation is usually undertaken to meet the minimum trading bid size to ensure its listing status on the stock exchange (in the case of a listed public company).7 The subdivision would usually be embarked upon to improve liquidity and trading activity on the shares by making the shares more accessible and affordable and thereby increase the shareholder base.8 Consolidation and subdivision apply to shares that have been issued.

2.2. Increase in share capital is welcomed by all the stakeholders of the company because by its nature it makes more funds available to the company, enabling it to discharge its obligations to creditors and also engage in profitable ventures of benefit to the shareholders.

2.3. Reduction of share capital by a company adversely affects the interest of shareholders and creditors since the creditors rely on the capital of a company being maintained so that the company can discharge its debt. The nature of the said reduction would depend on the form of reduction stated under section 131(2) of CAMA 2020, which provides that, in particular, and without prejudice to subsection (1), the company may— (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up, (b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost or unrepresented by available assets, or (c) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is in excess of the company’s wants. This section did not create a closed list, as the company would still be able to reduce its share capital in any way.9

The reduction of share capital under section 131(2)(b) is significant because it serves as a disclosure to the public as to the true worth of the company. For instance, if the value of net assets of the company is 750,000 naira and the share capital is 1,000,000 naira, the share capital could be reduced to reflect the real value of assets but nothing is returned to shareholders who have paid 250,000 naira. The interest of those shareholders would be affected. However, it could be argued that the probative value of this form of reduction outweighs its prejudicial effect. It enables the company to survive a disastrous situation, maybe due to a fire accident that destroys the company’s uninsured building or where there is a diminution in value of the asset.10 It is also relevant because the shareholders would be able to recoup from a subsequent declaration of dividend since a company cannot pay dividends without making good its lost asset.11 Also, since creditors and investors would not deal with a company that cannot declare dividends it is important that this form of reduction is carried out.

If a reduction is effected under this section, evidence of such loss and that the capital is not represented by available assets must be given.12

Under section 131(2)(c) the reduction would enable the company to prevent diminishing marginal utility. Where a company carries out trade or business with excess utility, it is unlikely that the company would yield significant returns from the excess utility. So to prevent this, the company returns to shareholders or cancels paid-up shares that are over the company’s want so that they can be utilized by the shareholders in other profitable ventures. This reduction usually results in the incorporation of subsidiaries so that the excess profit can be utilized by the subsidiaries.

3.0. LEGAL REQUIREMENTS FOR ALTERING COMPANY CAPITAL

The legal requirements for the alteration of capital are governed by statute and case law, such that the latter applies to fill the gaps not covered by the former.

3.1. By virtue of section 125 of CAMA 2020, reconfiguration of company capital can only be done in a general meeting by alteration of conditions in the memorandum. Section 49 of CAMA 2020 provides that a company may not alter the conditions contained in its memorandum except in the cases and in the manner and to the extent for which express provision is made in this Act.13 Due to the nature of conditions in the memorandum, alteration of the said conditions would be by special resolutions.14 Section 258(2) of CAMA 2020 defines special resolution as “resolution…passed by at least three-fourths of the votes cast by members of the company as, vote in person or by proxy at a general meeting of which 21 days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given…”

Notice of the alteration must be given to the Corporate Affairs Commission (“CAC”) within one month of the alteration resolution, specifying the shares consolidated, divided, or subdivided.15

3.2. Increase of company capital can only be carried out in a general meeting16 by ordinary resolution17. Section 258(1) of CAMA 2020 defines ordinary resolution as “resolution…passed by a simple majority of votes cast by members of the company as, being entitled to do so, vote in person or by proxy at a general meeting.” The rationale behind the ordinary resolution requirement is that capital increase is usually beneficial to all the stakeholders of the company.18

An increase of capital would not be carried out unless there is authorization under the article of association. Where there is no such authorization, the article would be altered by a special resolution19 to give the company power to increase its capital. Hence, due to the requirement of ordinary resolution for an increase of capital and special resolution for the alteration of article to give the company power to increase capital, they can both be carried out in one meeting since 21 days’ notice only applies to special resolution20 and not ordinary resolution. In Andrews v . Gas Meter Company 21, the issue was whether a company having no power under its Memorandum and Articles of association to issue preference shares could alter its articles to allow the issuance of preference shares through increased capital. The court, in this case, held that as long as the constitution of a company depends on the articles, it is alterable by special resolution under the powers conferred by the Act. Therefore it was proper for the company to alter those articles and issue preference shares. Any regulation or article which purports to deprive the company of this power is therefore invalid, on the ground that such an article or regulation will be contrary to the statute. Lindley L.J 22 observed that, although the memorandum of association is to state the amount of the original capital and the number of shares into which it is to be divided, yet in other respects, the rights of the shareholders in respect of their shares and the terms on which additional capital may be raised are matters to be regulated by the articles of association rather than by the memorandum, and are, therefore, matters which (unless provided for by the memorandum, as in Ashbury v. Watson 23 ) may be determined by the company from time to time by special resolution.

An increase of share capital would take effect where: a) at least 25% of the share capital including the increase must have been paid up, and b) the directors should have delivered to CAC a statutory declaration verifying that fact, as provided under section 128 of CAMA 2020.

Following the increase of a company’s capital, section 127(2) of CAMA 2020 provides that the company shall within 15 days after the passing of the resolution authorizing the increase, give to the CAC notice of the increase and the CAC shall record the increase.

3.3. Reduction of company capital under section 131(1) of CAMA 2020 is accompanied by severe restrictions due to its adverse effect on investors, creditors, and shareholders. The threshold for reduction of capital includes a) subject to confirmation by the court; b) authorization under the article; and c) special resolution. Where the company has no authority under its article to reduce the capital, it shall by special resolution alter the article to give it the power of reduction of capital, and by special resolution reduce the capital. Both of these resolutions cannot be passed in a single meeting, since section 258(2) of CAMA 2020, requires 21 days’ notice for a special resolution. In Re Patent Investment Sugar Co .24, a company that did not have any authorization under its article to reduce capital passed two resolutions on 30 Oct., 1) a resolution inserting in the articles a power to reduce its article and 2) a resolution for reducing capital. Both resolutions were confirmed at a meeting on 16 Nov. It was held that the court cannot confirm the resolution for the reduction of capital because a special resolution for that purpose could not be passed until the article of the company had been altered to authorize a reduction of capital.

[...]


1 Section 100(1)(d)

2 Prof. J. E. Abugu: Principles of Corporate Law in Nigeria, MIJ Professional Publishers ltd. (2014) p. 266.

3 Section 131(2) of CAMA 2020

4 Emphasis added.

5 Third parties in this case would include creditors, shareholders, investors and such other persons who have interest in the company.

6 Prof. J.E. Abugu: Op. cit. p. 265.

7 Teingo: Fundamentals of Shares and Share Capital. https://tennygee.wordpress.com/2013/10/17/fundamentals-of-shares-and-share-capital/ <accessed 30th April, 2021>.

8 Ibid.

9 Carruth v. I.C.I Ltd (1937) 2 All ER 422. Also stated under section 131(1) of CAMA 2020.

10 For whatever reason it is now worth less than the original value or it is disposed or sold at a lesser value.

11 This rule was not followed in relation to fixed assets in Lee v. Neuchatel Asphalte Co . (1889) 41 Ch.D 1. Where a company bought a concession to work mineral products, the concession was due to expire in 1897. The company’s revenue account showed profit in 1887 and it proposed to pay a dividend. One of the shareholders of the company objected to this on the grounds that, a large part of the capital had been lost, that assets were less than share capital and that as the concession was a wasting asset, to pay dividend out of annual yields was to divide the company’s capital assets. The court of Chancery held that the company could not be restrained from declaring dividend on any of these grounds.

12 Re Hoare & Co Ltd . (1933) 150 LT 374. The court in this case held further that a reduction may be confirmed where capital has been lost but still represented by available assets.

13 Emphasis added.

14 Generally, the minimum requirement for the alteration of memorandum is by special resolution, which is made pursuant to section 52(1) of CAMA 2020, subject to the provisions of section 49 and of this section and of any part of Part B (which preserves the rights of minorities in certain cases) any provision in a company’s memorandum, which might lawfully have been in articles of association instead of in the memorandum, may be altered by the company by special resolution, but if an application is made to the court for the alteration to be cancelled, the alteration does not have effect except in so far as it is confirmed by the Court.

15 Section 126(1) of CAMA 2020.

16 Section 127(1) of CAMA 2020.

17 Section 127(8) of CAMA 2020.

18 Prof. J.E. Abugu: Op. cit. p. 266.

19 Alteration of article is provided under section 53(1) of CAMA 2020 which states that, Subject to the provisions of this Act and to the conditions or other provisions contained in its memorandum, a company may, by special resolution, alter or add to its articles, including deletion or modification of the provisions stated in section 27 (1) (a) - (d).

20 Section 258(2) of CAMA 2020.

21 (1897) 1 Ch. 361.

22 Ibid.

23 30 Ch. D. 376.

24 (1885) 51 Ch.D 166.

Excerpt out of 12 pages

Details

Title
Alteration of Company Capital in Nigeria
College
University of Lagos
Course
Company Law
Grade
4.0
Year
2021
Pages
12
Catalog Number
V1064722
ISBN (eBook)
9783346486394
ISBN (Book)
9783346486400
Language
English
Tags
alteration, company, capital, nigeria, alteringcapital, companyequity, corporatelaw, corporation, companylaw
Quote paper
Anonymous, 2021, Alteration of Company Capital in Nigeria, Munich, GRIN Verlag, https://www.grin.com/document/1064722

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