I remember I heard quite a lot about shares growing up. I did not really understand what shares meant but I knew investment in shares produced returns (that is, money was usually the result of an investment in shares). There was also the curiosity that came with seeing thick books being brought to the house when my dad came back from a shareholders’ meeting. Many have heard about shares but do not really know how to become shareholders. This article will address the pertinent question of who a shareholder is, types of shareholders in Nigeria, the different ways of becoming a shareholder in a Nigerian company, and even what those ‘thick books’ are. All of these will be addressed based on the provisions of the Nigerian Law on Shares.
Who is a shareholder?
A shareholder is one who holds a share or shares in a company. Proprietary interest comes with holding such shares. As a result, a shareholder owns those shares which represent a part of the company. In essence, if you are a shareholder in a company, you have a stake in that company and become a proportionate owner of the company.
A person can only become a shareholder in a company that has a share capital.
Types of shareholders
Ordinary shareholders: These are shareholders that hold shares with no special rights or restrictions attached to them. The main financial risk of the company is borne by the ordinary shareholders; as such, where the company is unsuccessful, they bear the greater loss but if it succeeds, they have a greater reward.
Preference shareholders: These are shareholders that participate to a specified amount in any distribution by the company whether by way of dividend or on redemption. They have a fixed rate of dividend paid to them but ordinary shareholders do not have such fixed rates.
Founders or Deferred shareholders: These are those shareholders in a company that have special rights as a result of selling their business to that company in exchange for shares in the company. Deferred shareholders rank in priority after the ordinary shareholders.
Ways of becoming a shareholder
You can become a shareholder in a Nigerian company through any of the following ways:
- Transfer of shares
- Transmission of shares
Becoming a shareholder in a Nigerian company by subscription entails being a shareholder right from the incorporation of the company. What this means is that a person signs the memorandum of association of the company at the incorporation of the company. Upon signing such, at least one share in the company is taken by the person signing. This translates to that person being a shareholder and a member of the company automatically.
Allotment of Shares implies that there has been an application made by a person interested in the shares of a company to purchase the shares of that company. So, one becomes a shareholder in a company by applying to the company to buy its shares. The company (which may delegate such powers to its directors) then allocates a specified number of shares to the person upon his application and payment of the required sum. It should be noted that although a person becomes a shareholder in a company upon being allotted the shares, however, one does not automatically become a member of the company. To become a member of the company, your name must be entered in the Register of Members of the Company. Then, you become a shareholder and a member of that company.
Transfer of Shares is another way of becoming a member of a company in Nigeria. This basically involves the purchase of shares from a shareholder in the company rather than directly from the company. So, if ‘A’ is interested in buying the shares of ‘B’ Company and ‘C’ is already a shareholder in the company, ‘A’ may decide to buy C’s shares where ‘C’ is desirous of selling his shares for whatever reason. When this happens, ‘A’ becomes a shareholder in the company and then his name is also subsequently entered in the register of members of the company for him to become a member of the Company. ‘C’ who has ceased to become a member of the company will have his name removed from the register of members as holding the number of shares he sold to ‘A.’
Transmission of Shares: Here, a shareholder dies vesting his shares in legal personal representatives or a survivor where he held the shares jointly with another person before his death. The legal personal representative entitled to the shares of the deceased shareholder may either elect to be registered a holder of the shares in question, or may nominate another person to whom he transfers the shares as a transferee of the shares.
It should be noted that the different methods highlighted above are not mutually exclusive. More than one method can be employed in becoming a shareholder of a company.
Benefits of becoming a shareholder in a company (Rights of a shareholder)
These are basically those rights a person has by virtue of being a shareholder in a company.
- First, being a part of the profits of the company. In so doing, the shareholder makes money on the stock market especially when huge profits are made by the company and even in periods of stability. Dividends which are paid to shareholders confer this benefit.
- A shareholder is entitled to notice of meetings of the company.
- The right to attend company meetings and vote. This ensures that your opinions count and you influence decisions that are made concerning the company.
- A shareholder can transfer shares to another person since shares are regarded as personal property that can be transferred.
- A shareholder also has a right to receive dividends once declared by the company.
Duties required of shareholders
In as much as there are rights and benefits accruing to a shareholder, a shareholder also has certain duties he owes to the company. A shareholder has a duty to:
Pay up all the shares allotted whenever a call is made else the shares will be forfeited to the company and the shareholder will lose his membership; and
Inform the company before transferring his interest in the shares of a company to another person.
Laws guiding shares and shareholders in Nigeria
- The Companies and Allied Matters Act 1990 CAP C20 LFN 2004 (ii) The Investment and Securities Act (iii) The Securities and Exchange Commission Rules.
These laws further provide that the shares of a company may be paid for in cash or where the articles of the company allow, by a valuable consideration other than cash or part cash and part valuable consideration other than cash.
Also, a shareholder to whom shares have been allotted or transferred is entitled to a Share Certificate, unless the conditions of the issue of the shares otherwise provide. The Share Certificate is proof that the shareholder has title to the shares.
Those thick books
I was soon to find out that the thick books I mentioned earlier are the annual reports given to shareholders and members of a company as well as other interested people at the annual general meeting of the company. The Annual Report is given to shareholders to encourage accountability and transparency on the part of the company. It comprehensively shows the company’s activities, achievements and financial operations throughout the preceding year. This forms the foundation for a discussion of the company’s view of the upcoming year and its prospects.
*Dividend: A portion of a company’s earnings or profits distributed pro rata to its shareholders usually in the form of cash or additional shares.
*Memorandum of Association: A legal document setting up a company. It includes the company’s name, address, object, type and subscribers to the memorandum of the company.
*Personal Representative: A person who manages the legal affairs of another because of incapacity or death.
- Companies and Allied Matters Act 1990, CAP C20 LFN 2004
- Nelson C.C.S. Ogbuanya: Essentials of Corporate Law Practice in Nigeria
- Bhadmus on Corporate Law Practice, 2nd edition. Chenglo Ltd, 2013,
- Olakunle Orojo: Company Law and Practice in Nigeria, 5th edition.
- Bryan A. Garner: Black’s Law Dictionary, 8th Edition