INTRODUCTION
In recent years, corporate governance has become a focal point for improving business practices and investor confidence, particularly in emerging markets like Nigeria. One of the key components of effective corporate governance is the protection of minority shareholders. The protection of minority shareholders plays a crucial role in strengthening corporate governance practices and improving investment efficiency. By ensuring that smaller investors are treated equitably and that their rights are upheld, companies can foster an environment of trust and stability that encourages both domestic and foreign investments.
This article explores how protecting minority shareholders impacts corporate governance practices and investment efficiency in Nigeria.
WHAT IS CORPORATE GOVERNANCE
Corporate governance refers to the structures, processes, and practices through which companies are directed and controlled as well as the mechanisms of internal and external control of the actions and inactions of the organs of a company in a manner that ensures compliance with public policy, acts in the interest of stakeholders, and ultimately avoids corporate failure and abuse. Essentially, corporate governance provides the framework which aims at building and strengthening corporate transparency, accountability, credibility, integrity, and trust.
WHO ARE MINORITY SHAREHOLDERS?
According to the Court of Appeal in the case of Okoye & Anor v. Ecobank & Anor1, a minority shareholder is defined as a shareholder who owns less than half the total shares outstanding and thus, cannot control the corporation's management, or single handedly elect directors.
THE IMPACT OF MINORITY SHAREHOLDER PROTECTION ON CORPORATE GOVERNANCE
In Nigeria, the protection of minority shareholders is closely linked to the overall quality of corporate governance. When minority shareholders are protected, they are more likely to participate actively in corporate decision-making, thereby enhancing the quality of governance and encouraging better management practices. One of the commonly accepted principles of corporate governance includes the rights and equitable treatment of shareholders. The Financial Reporting Council of Nigeria released a standardised code of corporate governance known as the Nigerian Code of Corporate Governance, 2018 (the Code). This Code provides guidelines for the protection of shareholders rights, by introducing key reforms aimed at improving transparency, fairness, and accountability in corporate decision-making. These reforms emphasise the importance of protecting the rights of minority shareholders, by ensuring that their interests are not overridden by majority holders in critical matters such as mergers, acquisitions, or financial decisions. The Code seeks to ensure equitable treatment and protection of statutory and general rights of shareholders in promotion of good corporate governance.
LEGAL FRAMEWORK FOR THE PROTECTION OF THE RIGHTS OF MINORITY SHAREHOLDERS
As a general rule, when a company faces irregularities or wrongdoing in its management, only the company itself can take action to address or remedy the issue2. This principle, originating from the Foss v Harbottle3 case, is grounded in the concept that a company is a separate legal entity from its shareholders. Since it is the company that suffers from the wrongdoing, it alone can take action. This rule also upholds the principles of corporate legal personality, as seen in Salomon v Salomon4, and ensures corporate sovereignty by respecting the majority rule. As such, courts generally avoid intervening in a company's internal management when issues can be resolved through a general meeting.
EXCEPTIONS TO THE GENERAL RULE IN FOSS v HARBOTTLE AND SECTION 341 OF Companies and Allied matters Act 2020
The rights of a minority shareholder are secured under these exceptions and as such a minority shareholder may apply to the Federal High Court for an order of injunction or a declaration to restrain the company from the following:
- Illegal or Ultra Vires Transactions5: If a company enters into transactions beyond its memorandum of association or object clause, a minority shareholder can apply to the court. In Hogg v. Cramphorn6, the directors were found to have acted ultra vires by distributing company assets unlawfully.
- Improper Use of Ordinary Resolutions7: When an ordinary resolution is used for matters requiring a special resolution, such as reducing share capital or altering the company's object clause, a minority shareholder can challenge it. This was exemplified in Edwards v. Halliwell8.
- Infringement of Individual Rights9: A minority shareholder can seek redress if their personal rights as a member are violated, such as non-payment of declared dividends. In Pender v. Lushington10, the court upheld the protection of voting rights as property rights.
- Fraud or Mismanagement by Directors11: Minority shareholders can take action if the directors engage in fraudulent behavior or misappropriate company assets, as seen in Cook v. Deeks12, where directors acted for personal gain and it was held that fraud was committed against the company.
- Delay in Calling a Company Meeting to redress a wrong13: If a company fails to convene an extraordinary meeting in a timely manner to address a wrong, a minority shareholder can seek court intervention, as established in Hogson v. Nalgo14.
- Director Profits from Negligence or Breach of Duty15: Minority shareholders can challenge situations where directors benefit from their negligence or breach of duty, as in Daniels v. Daniels16, where directors sold company property at an under-value for personal gain.
- Other Acts in the Interest of Justice17: This provision allows for judicial intervention in any other circumstance where justice demands it, ensuring that minority shareholders' interests are protected.
ACTIONS THAT CAN BE BROUGHT BY THE MINORITY SHAREHOLDER AGAINST THE COMPANY.
A minority shareholder has several legal avenues to seek redress against a company for wrongs committed. These actions include:
1. Members Direct Action18:
- Personal Action: A minority shareholder can file a personal action against the company or its controlling members for a personal wrong, aiming to enforce their individual rights.
- Representative Action: A minority shareholder can also bring a representative action on behalf of themselves and other shareholders when a common right is breached. This includes personal representatives of deceased members or individuals to whom shares have been transferred by law.19 Remedies available in both personal and representative actions include damages, injunctions, or declarations. Additionally, courts may award costs to the shareholder, regardless of the success of the action20.
2. Derivative Action21
A minority shareholder may bring a derivative action with the court's approval, either in the company's name or on its behalf. This action allows a shareholder to prosecute, defend, or discontinue a case involving the company or its subsidiary.
3. Relief for Unfairly Prejudicial and Oppressive Conduct22
If a minority shareholder believes the company's affairs are being conducted in a manner that is illegal, oppressive, or unfairly prejudicial to their interests, they can petition the Federal High Court for relief.
IMPACT OF MINORITY SHAREHOLDER PROTECTION ON INVESTMENT EFFICIENCY
Protecting minority shareholders significantly enhances investment efficiency by ensuring fair treatment and reducing the risk of asset expropriation by majority shareholders. When minority rights are safeguarded, it fosters investor confidence, leading to increased capital inflows, both domestic and foreign. Strong protections help mitigate concerns about unfair practices, such as exclusion from decision-making or improper profit distributions, which can discourage investment. Furthermore, when minority interests are protected, companies are incentivised to adopt better financial management and governance practices, improving overall corporate performance. This, in turn, attracts more investment, creating a cycle of sustained growth and efficiency in resource allocation. For instance, a study by the World Bank titled "Corporate Governance and Development- An Update" showed that countries with robust minority shareholder protections tend to have larger stock markets.23 Therefore, for a nation to thrive economically in the long term, it must ensure that its companies prioritise corporate governance that adequately protects the interest of all shareholders, especially minorities.
CONCLUSION
The protection of minority shareholders plays a pivotal role in shaping the quality of corporate governance and improving investment efficiency in Nigeria. While Nigeria has made significant strides in this area, continued efforts are necessary to ensure that minority rights are upheld, corporate governance practices are transparent, and investment efficiency is maximised. Strengthening legal frameworks, improving enforcement mechanisms, and fostering a culture of accountability are essential to creating a more favorable investment climate in Nigeria.
Footnotes
1. (2019) LPELR -47350 (CA)
2. Section 341 CAMA 2020.
3. (1843) 2 Hare 461.
4. (1897) AC 22.
5. Section 343 (a) CAMA 2020.
6. (1967) Ch.24.
7. Section 343 (b) CAMA 2020.
8. (1950) 2 All E.R 1064.
9. Section 343 ( c) CAMA 2020.
10. (1877) Ch. D. 670.
11. Section 343 (d) CAMA 2020.
12. (1916) A.C. 554 P.C; (1916-17) All ER Rep.285.
13. Section 343 (e) CAMA 2020.
14. (1970) 1 All ER 15.
15. Section 343 (f) CAMA 2020.
16. (1978) Ch. 406.
17. Section 343 (g) CAMA 2020.
18. Section 344 CAMA 2020.
19. Section 345 CAMA 2020.
20. Sections 344(3) and 344(4) CAMA 2020.
21. Section 346 CAMA 2020.
22. Sections 353 and 354 CAMA 2020.
23. Stijn Claessens and Burcin Yurtoglu, 'Corporate Governance and Development-An Update' (2012) ,P. 19, https://openknowledge.worldbank.org/server/api/core/bitstreams/ad159147-e68d-5c63-8a7b-d955ba30e8ae/content Accessed 25th October, 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
