HOW TO SET UP A TECH ORGANISATION FOR SOCIAL IMPACT IN NIGERIA

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By Seun Timi Koleolu and Praise Adetunmibi

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INTRODUCTION

In Nigeria, technology plays a prominent role in driving the growth and development of the society. In recent times, several tech startups/tech hubs have been established to solve social, cultural, environmental, and even religious matters (“Social Impact Startups”). It is, however, important for these Social Impact Startups to understand what legal structures are most suitable for their operations under Nigerian law.

In this article, we have highlighted the legal structures provided under the Companies and Allied Matters Act 2020 (“CAMA”) and other legal issues to be considered by a Social Impact Startup.

LEGAL STRUCTURES UNDER CAMA

A Social Impact Startup can acquire legal status in Nigeria by registering either as a company limited by guarantee or an incorporated trustee. In determining the most suitable structure, it is important to consider the differences between both structures, as set out below.

 

S/N CRITERIA COMPANY LIMITED BY GUARANTEE INCORPORATED TRUSTEE
1. Profit-making A company limited by guarantee is permitted to make profit. Such profit must however be applied solely towards the objects of the company. An organisation registered as an incorporated trustee is not permitted to make profit in any way. It is to depend on grants and donations.
2. Tax Liability A company limited by guarantee would be required to pay tax on its profits. As organisation is not expected to make profit, it is exempted from paying tax.
3. Registration process The registration process takes at least 3 (three) months as a result of the requirement to obtain the consent of the Attorney General of the Federation (“AG”). CAMA has now provided an alternative which involves the publication of the application for registration in 3 (three) daily newspaper by the Corporate Affairs Commission (“CAC”), where the AG’s consent is not obtained after 30 days. This typically takes a shorter period as only the consent of the Registrar General of the CAC is required.
4. Liability of members in the event of winding up/dissolution In the event of winding up of a company limited by guarantee, the members are required to contribute to the outstanding liabilities of the company. The members of the organisation are not required to make any contributions in the event of its dissolution.

 

In addition, the type of structure to be adopted by the Social Impact Startup is largely dependent on its goals or objects. For instance, where the Social Impact Startup would be making profit through the sale of its products or offering services for a fee, a company limited by guarantee is the most suitable structure.

OTHER LEGAL CONSIDERATIONS

Upon incorporation, there are certain issues to be considered by the Social Impact Startup. Below are some of the issues.

1.Protection of Intellectual Property Rights

In Nigeria, where a software is developed, the copyright in a software automatically vests in the developer. If a Social Impact Startup would prefer that the copyright be vested in them, an agreement that assigns the copyright to the Social Impact Startup would have to be entered into with the developer. This assignment can be done through an employment agreement or a separate copyright assignment agreement. Additionally, it is important that the name and logo of a Social Impact Startup be registered at the trademarks registry.

2. Agreements with Employees, Software Developers etc.

A Social Impact Startup may choose to have both paid and voluntary staff. It is therefore advisable for them to enter into suitable agreements with each staff, such as employment agreements, software development/license agreements, independent contractor agreements etc. As earlier stated, where the Social Impact Startup requires ownership of intellectual property rights, the agreements must expressly provide for the assignment of these rights to the Social Impact Startup.

3. Data Protection Audit

Where the operations of the Social Impact Startup would involve the collection of personal information of members of the public either for training purposes or for grant of access to their technological products, an annual audit must be conducted on their data processing activities by a licensed Data Protection Compliance Organisation (DPCO). Such an organisation is also required to employ a Data Protection Officer (DPO) to ensure compliance with Nigerian data protection laws.

For more information on setting up businesses in Nigeria, please visit https://pavestoneslegal.com/news-publications/

CAMA 2020: SHARE CAPITAL REQUIREMENTS UNDER NIGERIAN LAW

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By Aderonke Alex- Adedipe and Akinyanmi Feyijuwa

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Introduction

After years of anticipating a review of the primary law on companies in Nigeria, the President, Muhammadu Buhari on the 7th day of August, 2020, signed into law the Companies and Allied Matters Act, 2020 (“CAMA 2020”). The CAMA 2020 is one of the most significant laws in the Nigerian commercial space due to the key changes introduced by it. In our previous article, we had provided an overview of some of these changes. Today’s article will briefly discuss the share capital requirement for limited liability companies under the CAMA 2020 and its implications.

What is a Share Capital?

A share capital may simply be defined as the amount of money invested in a company by its members in exchange for ownership of shares[1]. A share capital is fundamental to businesses as it determines the extent of liabilities and dividends or profits that the shareholders are entitled to with respect to the company. Also, many regulators, (for instance, the Central Bank of Nigeria), have set minimum thresholds for the share capital of companies which they regulate and companies whose share capital do not meet those thresholds will not be allowed to do business within the industry.

The Companies and Allied Matters Act, 1990 (the “CAMA 1990”) did not make any provision for the definition of the share capital of a company as it was deemed as the company’s authorized share capital. An authorized share capital refers to the maximum number of shares a company is allowed to issue to its shareholders based on its memorandum of association. The CAMA 2020 on the other hand, specifically defines a share capital as the issued share capital of a company at a given time. This provision implies that the share capital of a company includes only shares that have been issued to its members and that companies no longer have the discretion to leave some of their shares unissued as was provided for in the CAMA 1990.

Therefore, unissued shares will not be counted when determining a company’s share capital and companies can no longer reserve a percentage of their share capital for future investors, employee share options scheme or other purposes. The implication of the current position is that companies intending to allot new shares in the future will now be required to increase their share capital to create new shares at the relevant time(s).

What is the Minimum Share Capital of a Company under the CAMA 2020?

The CAMA 1990 set the minimum authorized share capital for private and public companies at N10,000 (Ten Thousand Naira) and N500,000 (Five Hundred Thousand Naira) respectively[2] and allowed companies to issue at least 25% of their share capital while reserving the remainder for future allotment.  The CAMA 2020[3] on the other hand, has set the minimum issued share capital of every private and public company at N100,000 (One Hundred Thousand Naira) and N2,000,000 (Two Million Naira) respectively.

CAC’s Public Notice

The Corporate Affairs Commission (“CAC”) in the Companies Regulations, 2021[4] (the “Regulations”) instructed all companies to fully issue all their unallotted shares on or before 30th day of June 2021. These companies will not be required to pay filing fees for the issuance of such shares. Upon requests made by various stakeholders, the CAC by a public notice dated 16th April 2021 has extended the deadline to the 31st day of December 2022. The Public notice also includes a warning stating that any company that files an application in compliance with section 124 of CAMA 2020, after the deadline on the 31st of December 2022, will be liable to a daily default fee ranging from N250 to N1000 depending on the type and size of the company. The officers of the company will also be liable to a daily default penalty.

How to Comply with the CAMA 2020 Share Capital Requirements

A company can comply with section 124 of the CAMA 2020 and Paragraph 13 of the Regulations by allotting the unissued part of its share capital to its existing shareholders or new shareholders, or by reducing its share capital to the amount already issued, provided they meet the minimum share capital requirement[5]. The process of allotment must be done in accordance with the provisions of the CAMA 2020, the Regulations and other regulations of other relevant regulatory bodies.

Conclusion

In view of the above, persons intending to incorporate a company must bear in mind that the shares of the company must be fully issued to all the subscribers to the company’s memorandum at incorporation. Also, existing companies that have unissued shares are to comply with the directives of the CAC before the 31st day of December, 2022.

[1] https://www.companybug.com/what-is-share-capital/

[2] Section 27(2) of the Companies and Allied Matters Act, 1990.

[3] Section 27(2) of the Companies and Allied Matters Act, 2020.

[4] Paragraph 13 of the Companies regulations, 2021

[5] Section 130 of the Companies and Allied Matters Act, 2020.

TRADING OF FOREIGN LISTED SECURITIES IN NIGERIA – REGULATORY UPDATE

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By Seun Timi-Koleolu and Baraebibai L. Ekpebu

Introduction

Regulators of financial service sectors all over the world grapple with the overwhelming effect of disruptive technologies which have left policymakers and academics alike scratching their heads in search of a coherent set of regulatory remedies. This trend also applies to Nigeria, as evident by the recent directive of the Securities and Exchange Commission (SEC), that fintech companies facilitating trade in foreign listed securities, should desist from offering such securities to the Nigerian public through the fiat of registered Capital Market Operators.

From a neutral point of view, the above-mentioned platforms which include companies like Bamboo, Chaka, Risevest, etc. have so far offered Nigerians an opportunity that was hard to imagine not too long ago; the ability to invest in some of the juiciest foreign stocks, bonds, and other securities from US companies like Apple, Amazon, Tesla, Facebook, PayPal, etc. with a few swipes on a mobile phone, thereby expanding their investment reach beyond the borders of Nigeria.

As can be expected, this SEC directive on local trading of foreign securities is viewed from different perspectives by concerned Nigerians. This article aims to analyse the rationale/implications of SEC’s recent directive.

What was the legal basis for the directive?

The SEC directive of 8th April 2021[1] referred to existing provisions of the SEC Rules and Regulations 2013 (Rule 414 and Rule 415), and the Investment and Securities Act, 2007 (Section 67 – 70).

Some points to note from the above-mentioned legislation include the following:

  1. Rule 414 of the SEC Rules and Regulations 2013 permits the sale or offer for subscription of foreign securities to the Nigerian public, through the Nigerian Capital Market.
  2. Rule 415 provides that “Every foreign issuer of securities is required to file an application for registration of its securities with the Commission, accompanied by a draft prospectus and under such conditions as prescribed by the Commission.” (Form SEC 6F).
  3. Section 67 of the ISA 2007 permits only authorised public companies, statutory bodies, or banks (in Nigeria), to offer corporate securities to the public, or deposit money with any Nigerian company for such purposes.
  4. Section 67 also mandates compliance with obligations placed on Sub-Brokers, Market Makers, Underwriters, and Issuing Houses under sections 73 to 87 of ISA 2007. Penalties are prescribed for default, and the written consent of the SEC is compulsory for any such public offers of securities to the public.

Analysis

Notably, the SEC does not introduce any new laws, but simply refers affected companies to pre-existing laws. The SEC Rules do not place an absolute restriction on the sale or offer of foreign securities to local investors. Nonetheless, entities who intend to offer foreign securities for sale within Nigeria, are mandated to register such securities with the SEC. This requirement appears reasonable as it is understandable that economies often opt for protectionist policies geared at aiding domestic investment and curbing capital flight. However, regulators and policymakers need to conduct more research on the economic benefits which the exposure of Nigerian citizens to trading in foreign securities may offer to the economy at large. Though it may seem that Nigerian capital is being invested in foreign jurisdictions to the detriment of the local economy, consideration should also be given to the economic benefits which accrue from successful investments by the Nigerian middle class whose spending power is improved and who obtain a level of insulation from naira devaluation.

Furthermore, Section 67 of the ISA permits only Nigerian public companies, banks, or statutory bodies to offer corporate securities to the public or deposit money with any Nigerian company for trading in local or foreign securities. A capital market must be able to pool funds from both local and international financial markets through the formulation and implementation of policies that promote competition and foreign investment. Therefore, by restricting eligibility to public companies, Section 67 of the ISA may hinder foreign companies wishing to make their stock available to the Nigerian capital market and stifle the ease of doing business in this respect. Financial Authorities may need to explore additional options for the ‘onboarding’ of foreign securities to the Nigerian capital market through technological means.

Conclusion

Studies have shown that the efficiency in the way the Nigerian stock market (or any other stock market globally) dispenses with its functions, is a major determinant of economic growth in the country.[2] Although the development of the tech space in Nigeria (particularly Fintech) has created several investment opportunities within Nigeria and outside Nigeria; for evident economic growth, it is imperative that laws evolve to encourage, whilst regulating innovative technological developments.

The SEC in their efforts to ensure proper regulation of the capital market, may choose to ‘borrow a leaf’ from other jurisdictions such as India and the USA, where investments in foreign company stocks are permitted through several specialized, but regulated schemes.

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[1] Securities and Exchange Commission Nigeria ‘Proliferation of Unregistered Online Investment and Trading Platforms Facilitating Access to Trading in Securities Listed in Foreign Markets’’ <https://sec.gov.ng/proliferation-of-unregistered-online-investment-and-trading-platforms-facilitating-access-to-trading-in-securities-listed-in-foreign-markets/>  Accessed on the 10th of April, 2021

[2]Oladayo Timothy Popoola, ‘The Effects of Stock Market on Economic Growth and Development of Nigeria’ (2014) Journal of Economics and Sustainable Development Vol.5, No.15

DOING BUSINESS IN NIGERIA: THE RELEVANCE OF THE CERTIFICATE OF CAPITAL IMPORTATION TO FOREIGN INVESTORS IN NIGERIA

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By Aderonke Alex-Adedipe and Praise Adetunmibi

Introduction

While foreign investors often seek opportunities to invest in emerging markets, one major concern is whether there are any foreign exchange controls and the impact that such rules may have on the repatriation of their capital and earnings on their investments.

In recognition of the above and to encourage foreign investments in Nigeria, the federal government to a large extent[1], guarantees repatriation of capital, dividend and profits provided that the capital was imported by the investor by obtaining a Certificate of Capital Importation (“CCI”).

In this article, we have highlighted the relevance of a CCI to foreign investors and the procedure for obtaining it.

What is a CCI?

A CCI is a document issued by an authorised dealer (usually a commercial bank licensed by the Central Bank of Nigeria (“CBN”) to deal in foreign exchange) to an investor as evidence of inflow of foreign currency or goods such as plants, equipment, machinery or raw materials, into Nigeria for investment purposes.  Thus, where an investor imports capital through the official foreign exchange market, a CCI is usually issued in this case, within 24 of inflow of funds into Nigeria and in the case of equipment or raw materials, within 24 hours of submission of final shipping and other relevant documents.

In September 2017, the CBN introduced the electronic CCI (e-CCI) which replaced the paper CCI. The e-CCI has the same effect as the paper CCI and can be issued, managed and monitored via an electronic platform administered by the CBN, referred to as the Electronic Certificate of Capital Importation System (eCCIS).

Why is a CCI relevant to foreign investors?

The possession of a CCI confers certain benefits on the foreign investor which includes the following:

  1. the right to repatriate capital, dividends, and profits at the official foreign exchange market rates in a freely convertible currency subject to payment and deductions of all applicable taxes. This is particularly important to investors in a country like Nigeria where currency devaluation is a frequent occurrence;
  2. the right to operate a domiciliary account with any authorised dealer for investment purposes; and
  3. the right to invest in the securities of Nigerian companies.

How is a CCI obtained?

An application should be made to the authorised dealer, prior to the arrival of funds/equipment, requesting a CCI. The letter will be accompanied by supporting documents which the bank will request, depending on the nature of the capital being imported.

Conclusion

In summary, every foreign investor requires assurance that their investments can be returned to the source without hassle. To achieve this, it is important that investors are aware of the requirements for obtaining a CCI and whether there are any existing rules or legislation that may impact their ability to repatriate.

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[1] In 2016, due to the consistent paucity of foreign exchange in the Nigerian market, the Central Bank of Nigeria placed a restriction on 42 imported items that are ineligible for foreign exchange at the official market.

NIGERIAN COMPANIES AND ALLIED MATTERS ACT 2020 -DOES THE REMOVAL OF A DIRECTOR RESULT IN HIS OR HER DISQUALIFICATION AS A DIRECTOR OF OTHER COMPANIES?

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By Seun Timi-Koleolu and Eustace Aroh

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The Nigerian Companies and Allied Matters Act, 2020 (“CAMA 2020”), introduced various changes to the law governing companies in Nigeria, most of which are positive changes.[i]

There is, however, a revision in CAMA 2020 to the grounds for the disqualification of directors (section 283), that has resulted in ambiguity with respect to the implication of the removal of a company director prior to the end of his or her term. In this article, we highlight this ambiguity.

What are the grounds for the disqualification of directors under CAMA 2020 vis-a-vis CAMA 1990?

Below we have compared the grounds for the disqualification of a person from being a director in the Companies and Allied Matters Act 1990 (“CAMA 1990”) vis-a-vis the grounds set out in CAMA 2020.

   

Grounds for disqualification

 Contained in
Section 257 CAMA 1990 Section 283 CAMA 2020
The following persons shall be disqualified from being a director    
(a) an infant, that is, a person under the age of 18 years Yes Yes
(b) a lunatic or person of unsound mind; Yes Yes
(c) a person suspended or removed under section 288 of the Act No Yes
(d) a person disqualified under sections 279, 280, 284 of the Act (sections 253, 254 and 258 of CAMA 1990) Yes Yes
(e) A corporation other than its representative appointed to the board for a given term. Yes Yes

 

How does this affect the provisions on the removal of a director?

Under Section 262 of CAMA 1990, a company could by ordinary resolution remove a director prior to the expiration of his or her term as a director, provided a special notice is issued and the director is given the opportunity to make representations to the shareholders on the removal.

Although CAMA 2020 has a similar provision for removal in section 288, by the inclusion of section 283(c) detailed in the table above, there is now an impression that where a director has been removed under section 288 (i.e. prior to the end of his term or prior to a rotation), regardless of the reason for the removal, he will be disqualified from being a director in any other company.

This is because the prevalent view is that, a director who fits within any of the grounds in CAMA for disqualification is not permitted to be a director in other companies.

 

Analysis

In our view, the interpretation of section 283(c) to mean that a director removed before his term would be disqualified from being a director anywhere else is illogical, particularly as a director may be removed by the company for any reason and such reason might not be as a result of a fault or misdeed by that director.

It is likely that the intention of the lawmakers by introducing 283(c) was to limit the disqualification of the director to the particular company removing the director and not all companies. Consequently, if Mr. A is removed by the shareholders from being a director in company X, Mr. A is only disqualified from holding the position of a director in company X.

Conclusion

The foregoing ambiguity would need to be clarified to avoid differing interpretations of section 283(c). In the meantime, directors may wish to consider resigning instead of being removed under section 288 to avoid being deemed as a disqualified director under CAMA.

 

[i] See our article on The Nigerian Companies and Allied Matters Act https://pavestoneslegal.com/the-nigerian-companies-and-allied-matters-act-2020/