How to enhance minority shareholder protection in Nigeria

Introduction

The minority shareholder is one without controlling interest in a company. A direct consequence of the majority rule in corporate administration is the fact that the minority shareholders are at risk of exploitation by the majority. Thus, there is need to protect this group of shareholders in order that their interest in the corporation is not jeopardised. In Nigeria, protection of the minority shareholder has a strong statutory backing and the corporate law spells out the peculiar rights and remedies available to this group of shareholders beyond the general rights of every shareholder. This includes right to information, right to voice an opinion on the affairs of the company, right to seek redress for wrongful acts of the majority and right to receive distribution of the company’s property after liabilities have been settled. (See sections 224, 242, 300-314 & 480 Companies and Allied Matters Act, 2004).  Most of these rights are limited or could be extended by the shareholders’ agreement or other company contracts like the articles of association.

Factors limiting the exercise of rights by minority shareholders

Despite the protection provided for the minority shareholder, there are certain factors that have hindered the minority shareholders from exercising their rights in Nigeria. One of these is lack of awareness/interest on the part of the shareholders. A majority of shareholders are usually more interested in the returns they can get for their investment rather than how the company is being administered. However, as there is a direct link between the quality of administration of a company and the returns the company makes for its shareholders, there is need for shareholders, particularly the minority to be more actively involved in the affairs of the company they have invested in. Minority shareholders constitute a check on the excesses of the majority in the administration of the company and they must seek to enforce their rights and seek redress where such rights have been infringed by the majority in order to get the best value for their investment.

Another limitation is the legal and judicial system and the role of the courts in company affairs. By the very nature of disputes relating to shareholders, being a contract between them, the court is generally reluctant to interfere in the affairs of companies. For this reason, a high burden of proof is required in order for the court to be willing to adjudicate. This constitutes a source of discouragement for those who genuinely have a case. Moreover, the time consuming factor that is associated with litigation is a disincentive to minority shareholders who may want to employ the judicial facility to enforce their rights.

Closely related to the issue of judicial system is the issue of high costs that would be incurred in the course of pursuing minority rights related actions. Litigation is expensive and may not be a viable option for the minority shareholder whose investment interest may be insignificant. More so, when there is no direct benefit to the minority shareholder as is in the case of derivative actions, the investor may not be willing to pursue a claim in court. Although the law provides for costs to be awarded to parties, it is at the discretion of the court. Thus there is no guarantee that a party would recover all costs incurred in pursuing a legal action to enforce his rights and this creates a large room for uncertainties in the minds those who may want to proceed with a legal action.

Recommendations

In order to ensure a vibrant and transparent capital market and investment climate, it is important for stakeholders to rise to the occasion and take action to encourage small investors. The regulators must seek to ensure a fair playing field for all participants in the market while shareholders need to be more proactive. Some measures that should be considered in this regard are discussed below.

Better regulation and education of shareholders

The Securities and Exchange Commission needs to embark on vigorous shareholder enlightenment programmes, which will keep them, especially minority shareholders well informed of their rights and the remedies available to them where such rights have been abused. Presently, most of the efforts aimed at educating the shareholder is only available via the website of SEC and this is inadequate considering the level of literacy generally and computer literacy, access and availability in particular in the country. It would be more effective for the SEC to organise workshops and seminars across the breadth of the country for the purpose of shareholder enlightenment in order for shareholders to be better positioned to optimize the vehicle of the capital market.

Furthermore, there is need to monitor the activities of listed corporate organisations to ensure that they adopt best practices in the management and governance of their organisations and this includes the protection of minority shareholders’ rights. Of particular interest in this regard is the issue of payment of dividends to shareholders when such dividend has been declared by a company. Recently, SEC reportedly put the figure of unclaimed dividends in the country at an estimated sixty billion naira (N60bn) over three hundred and sixty-seven million ($367m).The figure which has been on the steady rise in the past few years reveals the inefficiency that is prevalent in the capital market and this is a huge disincentive to investors.

Improved shareholder activism

A number of shareholders’ Associations exist in Nigeria with the aim of protecting the interest of shareholders. However, the impact of these groups have not been very strong and there remains much to be done in terms of canvassing and protecting shareholder’ rights, enlightening shareholders and ensuring that corporate entities’ activities are monitored independently of the regulators in order to identify infractions and report same. There is need for improved activism on the part of these groups as it would be easier to initiate and propel development in the capital market as a group rather than as individual shareholders. Whistleblowing, influencing legislation for the advancement of the shareholder and organising enlightenment campaigns for shareholders are some of the ways that shareholders’ associations can contribute to encourage shareholders to know and seek to protect their rights.

Improved infrastructure

Communication is a vital tool in the investment climate. Corporate organisations need to be able to reach shareholders to keep them informed and also to send their entitlements such as annual reports, notice of meetings, dividend warrants etc. There is need for efficient logistics for the purpose of disseminating information. Poor logistics is one problem that has bedevilled the investment climate in Nigeria. Inefficient postal systems, transportation challenges, inadequate communication channels especially for those in the rural areas and failure of shareholders to update their information with registrars have constituted setbacks to an efficient system of communication. This is coupled with the fact that shareholders in rural or remote areas or other parts of the country are never taken into consideration in siting locations for company meetings. Most companies hold their meetings in the commercial centre of the country – Lagos, on a regular basis without any changes year in year out thereby discouraging those who are outside the province from participating. It is suggested that companies should consider rotating venues for their meetings in order to give all shareholders a fair chance to participate in the activities of the company.

Judicial infrastructure should also be improved to encourage investment. The Federal High Court which is the proper court with jurisdiction to hear company related cases is bogged down with an extensive jurisdiction over several matters with limited capacity to handle these. It would be helpful if the jurisdiction of the Investment and Securities Tribunal is expanded to cater for cases between investors and a company in order to fast track the processes and thereby enhance the confidence of investors in the legal system.

Conclusion

In order to sustain a vibrant capital market and by extension, an improved economy, it is imperative to provide a just and fair playing field for investors. One way to do this is to provide the conditions that would promote the protection of the minority shareholder.

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