SUPERVISORY ROLE OF GENERAL MEETING OVER BOARD OF DIRECTORS IN NIGERIA

ABSTRACT

The performances of corporate entities in Nigeria leave much to be desired. Due to poor performances,  corporate  entities  have  lost some  of the  confidence  which  they  hitherto enjoyed. This loss of confidence has led to the collapse of several companies. The major reasons for company failure are mismanagement and fraudulent practices by key players in the corporate terrain, as well as the inability of the in-built monitoring devices to perform their roles. The management and governance of a company is a partnership between key stakeholders  such  as  shareholders,  board  of  directors,  management,  external  auditors, regulatory and supervisory authorities.  The objective  of this dissertation  is to critically analyse  the supervisory  powers  of the members  in general  meeting  over  the board  of directors in modern corporate governance in Nigeria. The dissertation aims at examining the relationship existing between the general meeting and the board of directors in modern corporate  governance  in  Nigeria.  This  work  adopts  doctrinal  methodology.  Relevant statutes and case law  constitute the primary research materials. The secondary research materials comprise textbooks, journal articles, internet posts, newspapers and workshops and conference papers. The approach is descriptive and analytical. The scope is limited to an appraisal  of the supervisory role of general  meeting over  board of directors  within Nigeria. Where reference is made to other subject matter or to jurisdiction outside Nigeria, it is  merely  for  illustration  or  analogy.  The  dissertation  is presented  in five  chapters. Chapter one is the general introduction.  Chapter two reviews the structure of  corporate governance. Chapter three analyses the role of general meeting in corporate  governance. Chapter  four appraises  the  control of corporate  governance  by the  board  of directors. Lastly, chapter five summarises the findings, makes recommendations  and concludes the dissertation.  The work finds that one practical  advantage  of the  general meeting,  as a primary organ of the company,  is that it  makes for corporate democracy and facilitates checks and balances. However, it is  recommended  that the members in general meeting should  be charged  with  executive powers that are presently exercised  by the board of directors  through  shareholders  executive  committee  in  order  to  dismiss  the  directors, individually or collectively, whenever found wanting without any recourse to any court or other  regulatory body. This will make it easy to always nip in the bud any oppressive conducts of the board of directors, as shareholders are the owners of the company, and the only pecuniary interested party. The National Assembly should amend the extant laws and confer this power on duly elected shareholders executive committee.

CHAPTER ONE GENERAL INTRODUCTION

1.1.        Background of the Study

A company is “a union or association  of persons for carrying on a commercial  or industrial  enterprise.”1   Burke  defines  company  as:  “An  association   of  persons formed for the purpose of some business or undertaking carried on in the name of the association, each member having the right of assigning his shares to any other person,  subject  to  the  regulations  of the  company”.2   It  follows  from  the  above definitions that a company has a separate legal personality.  This personality is not automatic on formation of the company, but it is conferred on the company upon registration or incorporation.3

On incorporation,  a company is vested with legal status which enables it to be treated as a person, though, an artificial person in the eyes of law.4 A company is a juristic person capable of bearing rights and duties equivalent to those of human beings. It can hold property, sue and be sued, and have perpetual succession.5 Thus, having been  cloaked  with  legal  personality,  it is  deemed  a separate  and  distinct entity from its operators,  whose liability is  limited in the manner provided by the

Companies and Allied Matters Act, 2004 (hereafter CAMA).6

The concept of the legal entity of a company distinct from its members became finally established  at common law in the case of Salomon  v. Salomon  & Co. Ltd., where Lord Macnaughten stated the position as follows:

…the company is at law a different person altogether from the subscribers to the memorandum,  and although it may be that after incorporation,  the business  is  precisely  the  same  person  as  it  was  before,  and  the  same

1  M. A. Black, Black’s Law Dictionary (6th edn., St. Paul Minn: Ust. Pub. Co., 1990), p. 281. See also

Merriam Webster’s Dictionary of Law (1996), p. 89.

2 J. Burke, Osborn’s Concise Law Dictionary, (6th edn., London: Sweet & Maxwell, 1996), p. 83.

3 NDIC v. Obende [2002] FWLR (Pt. 116) 921 at 938 C-A.

4   O.  Olajide,  Companies  and  Allied  Matters  Act:  Synoptic  Guide,  (2nd  edn.,  Lagos:  Law  Lords

Publications, 2007), p. 15; CAMA, s. 37, CBDI v. COBEC (Nig.) Ltd. [2004] 13 NWLR (Pt. 890) 376 at

394-395 paras. H-C

5 Companies and Allied Matters Act. 2004 Laws of the Federation, CAMA, s. 37; Okatta v. The

Regd. Trustees, DSC [2008] 13 NWLR (Pt. 1105) 632 at 634 at 645 paras B-C; F.

6 See Trenco Nigeria Ltd v. African Real Estate Ltd. [1978] I LRN 146 at 153.

persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers  or trustee for them. Nor are the subscribers as members pliable, in any shape or form, except to the extent and in the manner provided by the Act.

This separate  legal  entity  of a company  is also  extended  to  the subsidiary  of  a corporation as well. In the case of Marina Nominees Ltd. v. Federal Board of Inland Revenue,7  the appellant sought to avoid its corporate liability by claiming to be an agent of another  company.  The Supreme  Court of Nigeria,  in  rejecting  the claim

observed inter alia, that:

…the  device  of  agency  by  using  the  incorporated  company  for  the purpose  of carrying  on an assignment  for another  company or  person must not overlook  the fact that an incorporated  company is  a separate legal entity, which must fulfill its own obligations under the law.

The  independent  legal  personality  of  the  company  is  fundamental  to  the  whole operations of business through companies. This legal concept affects its structures, existence,  capacity,  power,  rights  and  liabilities.  Although,  a  company  is a legal entity, and has independent legal personality, it is, of course, an artificial person or entity. Therefore, all the operations have to be carried on by its organs and agents.8

The principal organs of a company comprise the members in general meeting and the board of directors that share amongst themselves corporate functions. In the traditional corporate governance model, the shareholders or the members in general meeting  stand  as the highest  authority.  Fundamental  matters relating to structural changes in the company are decided by the  shareholders.9  Also, they decide on the distribution of dividends upon recommendation by the board of directors,10  and they reserve the right to appoint and remove the directors, with or without cause.11

7 [1986] 2 NWLR (Pt. 48) 31.

8 See Trenco (Nig.) Ltd. v. African Real Estates Ltd. [1978] I LRN 146 at 153.

9   Illustratively,  it  is  only by  a special  resolution  of  members  in  general  meeting  that  a company  can alter  its articles  or memorandum  of association  or reduce  the  company’s

capital. See CAMA, s. 44 – 48, 102.

10 Ibid., s. 379.

11 Ibid., ss. 248 and 262.

The  primary  duty  of  boards  and  managers  is  the  efficient  use  of  the company’s resources to create value and achieve the objectives of the company. The realization of the company’s objectives depends to a large extent  on how well the company  is  governed.   Efficient  use  of  company’s   assets   coupled  with  good governance,   invariably   translates   to   higher   probability   of   good   returns   on investments.  Corporate  governance  impacts  on  the  wellbeing  of  a  company,  its

economic performance, and the ability to attract capital on a sustainable basis.12

With the emergence of large corporations,  and the separation of  ownership and control, there appears to be an erosion of the traditional corporate governance in what is now known as the classical corporate governance. Under the latter, the board of directors  has acquired  more powers, and is not  answerable  to the members  in general meeting when acting within the powers conferred upon it by CAMA or the articles of association.13

This modern trend led to arguments against shareholders’ participation in the decision making process. Easterbrook and Fischel14  argue that shareholders’  views are best expressed through buying or selling of shares, a method which they consider more effective than voting on board’s decision.

The above views notwithstanding,  this dissertation proceeds on the  premise that  shareholder’s  vote,  despite  the  problems  of  inefficiency,  is  still  a  common management control measure. It is an effective way of disciplining the management. It assures shareholders’ supremacy over management, and affirms the philosophy of corporate structure.

12   F.  Ajogwu,   Corporate   Governance   in  Nigeria:   Law  and  Practice,   (Lagos:   Center   for

Commercial Law Developments, 2007), p. xvii.

13 Ibid., s. 63 (4).

14 Easterbrook and Fischel, “Voting in Corporate Law”, Journal of Law and Economics (1983) at p. 395.

It must be accentuated that a company is either private or public  company. This division is commonly found in company laws of States. In Nigeria, section 20 of the  CAMA  stipulates  that  a  private  company  is  one  which   is   stated  in  its memorandum to be private company. Consequently, every private company shall by its article restrict the transfer of its shares. The total number of members of a private company  shall  not  exceed  fifty,  not  including  persons  who  are bona  fide in the employment of the company, or were while in that employment and have continued

after the determination of that employment to be, members of the company.15  On the

other  hand  any  company  other  than  private  company  is  a  public   company.16

Consequently, public company is free to sell shares to the public. It is manifest that the  advocacy  on  corporate  governance  is  more  focused  on  public  companies. Application to private company depends on the nature, size and  importance of the company employing many people or operating in a critical sector of the economy, such  private  company  will  be  strongly  encouraged   to   apply  strong  corporate governance principles.

The  most  acceptable  means  of  corporate  monitor  is  through  the  general meeting.  Although,  the  general  meeting  is  not  saddled  with  management  powers explicitly, they still perform some supervisory role over the exercise of management powers by the board of directors. The reason is that  the members  in the general meeting are those that really have pecuniary interest in the company, as the success of such company enhances their earning, whereas the directors have nothing to lose in

event of mismanagement, except where they are also members of the company.17

15 CAMA, s. 22(2) and (3).

16 Ibid., s. 24.

17 Amupitan, op. cit., p. 27.

The inexpensive resort to the Corporate Affairs Commission to investigate the affairs of a company is rarely followed.18   This work is a critical appraisal  of the extent of supervisory powers of general meeting over the board of directors given the

scenario painted above.

1.2.     Statement of the Problem

Corporate governance is not just about how a company is governed or controlled, but also how to make the controllers responsible to their companies and  shareholders. The aspect of making the directors responsible necessarily involves the shareholders in corporate governance, as for instance in putting the board in place, and to act as checks  to  the  power  of  the  board.  Thus,  corporate   governance  examines  the relationship  amongst  the  various  constituents  of  a  company,  including  all  the identifiable stakeholders. A central issue arising there from is accountability.  Thus, there must be some safeguards which will ensure that directors are accountable, not

only to the shareholders, but also to creditors and other stakeholders.19

The corporate governance issues and debates transcend the exercise of power of control by the board, but also  the powers of the shareholders,  and  limitations imposed by law, including legal frameworks and regulatory institutions such as the Corporate Affairs Commission, Securities and Exchange Commission, Central Bank of Nigeria etc.

The problem  that this research  sets out to address  is the effectiveness,  or otherwise of the laws, and institutional frameworks charged with management and

control of corporate  governance  between  the shareholders  or members  in  general

18  S. A. Danwanka, et al., Corporate Governance, Shareholders Right and Directors in Mergers and

Acquisition: Contemporary Frontiers in Nigerian Law (Makurdi: Oracle Business Ltd., 2006), p. 335.

19   J.  O.  Amupitan,  et  al  “An  Evaluation  of  the  OECD  Principles  of  Corporate  Governance”,  in

Contemporary Frontiers in Nigerian Law (Makurdi: Oracle Business Limited, 2006), p. 297.

meeting and the board of directors or management with particular reference to public companies.

There  seem  to  be  some  controversy  as  to  whether  the  shareholders  can effectively supervise their directors. Based on this position, the question is whether the Corporate Affairs Commission and the use of courts as a means of checkmating the board of directors by the general meeting is actually efficient and prompt?

Sections  314  and  315 of the CAMA  stipulate  that “the  Commission  may appoint one or more competent inspector to investigate the affairs of a company and report on them in such manner as it may direct”.

But it is opinion of this writer that where the commission,  in exercising its powers, discover that the affairs of the company are being managed fraudulently or prejudicially  to  some  of its  members,  or  that  the  company  was  formed  for  any unlawful purpose, the commission or the general meeting should possess the express powers to punish the board of directors without any recourse to courts.

It  is  trite  that  delay  defeats  equity.  The  Nigerian  Courts  remain  slow, inefficient and expensive.20  In the case of Rossek v. African Continental Bank Ltd.,21 the  then  Chief  Justice  of  Nigeria,   Hon.  Justice  Mohammed   Bello,  expressed

dissatisfaction over a case which lasted for 18 years and was being sent back to the trial court for retrial.

Shareholders are hesitant to invoke the powers under sections 314 and 315 of CAMA as well as explore judicial remedies due to delay, and as a result, the directors rule and dominate the corporate governance with impunity.

By section 63 (4) of CAMA,  unless the Articles of Association  otherwise

provide, the board of directors, when acting within their powers, shall not be bound to

20 Bello v. Attorney General of Oyo State [1987] 2 NWLR (Pt. 381) 1.

21 [1993] 8 NWLR (Pt. 312) 382.

obey the directions or instructions of the members in general meeting, provided that the directors’  acted in good faith and with due diligence.  The implication  of this provision is that the directors’ power cannot be controlled by an ordinary resolution of  the  general  meeting.  This  provision  preserves  the  incident  of  management  in

corporate governance in favour of the directors.22

The  ways  the  general  meeting  can  control  the  directors  are  by  giving direction,  alteration  of  the  articles  of  association,  removal  of  the  directors  and ratification of director’s acts,23 but no alteration shall invalidate any prior act of the directors  which would have been valid  if that alteration  has  not been made.  The question is who determines what is “acted in good  faith and due diligence” by the directors? Supposing that the directors actions were done in good faith and with due diligence, but it is obvious that the act is detrimental and adversely injurious to the interests, growth or survival of the company? In the opinion of the writer, the phrases

“due diligence” and “act in good faith” are vague. The directors might use it  as a sword rather than as a shield and hide under it as a cover up even when their actions are detrimental to the company. It would amount to great error in the opinion of the writer.  The phrases  “with due diligence”  and  “act  in good  faith”  are not  clearly defined. They are not only vague but also nebulous.

All the directors need to do is to rely on these phrases and claim that  they acted  in good  faith  and  with due diligence  as  a canopy or  protection  over  their injurious and non-beneficial  actions. The only option available to  the  members in general meeting are to invoke their power under sections 314 and 315 of CAMA for investigations by the Corporate Affairs Commission, which will eventually end up in

court for adjudication, the same court the writer has already discussed above of its

22 Amupitan, op. cit., p. 28.

23 Ibid., p. 29.

inefficiency, expensiveness and time wasting. Maybe by the time the courts deliver its judgment to determine “due diligence” and “in good faith”, the consequences of the delay would either be that most members may have died out of frustration or that the company might have been wound up due to directors mismanagement.

Who determines  the time and venue of the general meeting? The  directors only are charged with the powers to determine  when to fix the  meeting, where it would hold, the agenda of the meeting and notices to the members about the meeting. It means that the members have no power to convene the meeting except through the court or when the directors are deadlocked, or  refused to do so. The directors may deliberately refuse to include in the agenda  of the meeting any matter which may adversely affect their interests,  whether  the company suffers or not, provided  that their interest are protected.

The directors may deliberately fix the date for the meeting when it will not be convenient  for the majority of the members  to attend,  such as during  Christmas, Easter and Sallah periods in Nigeria, knowing well that majority will be celebrating the anniversary in preference to attending the meeting. The directors may select the venue for the meeting at a place very far away from the majority of the members, and even the minority who dared to attend despite all odds will pay heavily to get to the venue.

Moreso, unless the shareholders acted unanimously, they would not be able to direct   the  directors   on  what  to  do,  if  the   directors   refused,   advertently   or inadvertently, to include some issues or topics in the agenda for the meeting.

In the United States with regards to corporate governance, the mechanism for shareholders participation in management is through express provision in the articles of incorporation,  but it has been observed  that this is hardly done by  companies.

O’Kelly and Thompson observed that the original articles of incorporation can give shareholders right to control or participate in control of ordinary business matters, but this is not often done.24

UK  Corporate  Governance  Code (formerly  the  Combined  Code)  sets  out

standards  of  good  practice   in  relation  to  board  leadership   and   effectiveness, remuneration,  accountability and relations with shareholders. All  companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to

report on how they have applied the Code in their annual report and accounts.25  The

Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the main principles of the  Code, and either to confirm that they have complied with the Code’s provisions or – where they have not – to provide an explanation.  Some of the provisions  of  the Code require

disclosures to be made in order to comply with them.26

Where shareholders in a corporation that has not made advance provision for direct shareholder  management  in the articles of association,  become  disillusioned with  some  corporate  policies  or  practices,  how  would  they  attempt  to  change corporate policies or affect the ordinary business decisions of the corporation? One obvious rule will be to amend the articles of incorporation to give shareholders the right to make business decisions, or to prescribe directly whatever change desired. Apart  from  the difficulty  of the  shareholders  in gaining  the  necessary  votes,  the shareholders still run head on into the normal corporate law rule that an amendment

to the articles may be initiated by the directors.

24  J. O. Amupitan, Corporate Governnace: Models and Principles (Abuja: Hilltop Publishers, 2008), p.

34.   See Delaware General Corporation Law (United States), s. 141(a) and 8.01 of the Modern

Business Corporation Act (United States) the Act that Governs Corporate Management in the US.

25 The relevant section of the Listing Rules can be found at:

http://fsahandbook.info/FSA/html/handbook/LR/9/8 (last accessed 26 May 2015).

26 UK Corporate Governance Code, Schedule B.

What happens if the directors are not willing to initiate an amendment  that will curb or restrain their own powers? Even where the articles allow the shareholders to amend the articles, they may not do so to make ordinary business decision or to establish corporate policy. That power belongs to the directors and can only be taken away from them by contrary provision in the articles of incorporation.

Directors’  management  authority  extends  to  chairing  and  controlling  the agenda  of  shareholders  meetings.27    The  day-to-day  management  operations  are delegated to the corporations’ officers and other agents. No direct management role is

left to the shareholders.

Under the American system, where the shareholders did not make  advance provision  in  the  articles  of  incorporation  for  certain  direct  rights  to  control  or participate in control of ordinary business matter, they have shot themselves in their foot and should  lick their wounds, because no matter how  the shepherds yell and shout they cannot scare a lion from the animal it has killed. Only the ability of the shepherd determines the security of the sheep. If they continue to sleep, the board will continue to milk them even to winding up of their company.

There is a need here to emphasize more on the rivalry between the board and shareholders in general meeting. Their interests may not necessarily be the same. The directors may have different agenda from the shareholders. Where the directors are not constrained, they may only be interested in expanding the firm, thus, holding back profit, as against declaration of dividends in order to enhance and boost their career. Unlike the shareholders who are more interested in profit maximisation.

The employees also align with the goal of the management, as they always

want their firm enlarged, not to be downsized, because of the promotion opportunities

27 Amupitan, op. cit., p. 35.

and enhancement of career. Therefore, there is always a tension built between these corporate entities,28  and as a result of the diversified interests militating against the stakeholders, the shareholders in general meeting would not exercise a result oriented

supervisory control over the board of directors.

1.3.     Literature Review

Quite a number of previous authors, even those writing introductory textbooks on company law, have said a couple of things relating to corporate governance. Some other  authors  have  examined  the  organs  of  corporate  governance.  They  have considered the roles and powers of the general meeting and those of the board of directors. It appears that no literature exists specifically appraising the supervisory role  of  the  general  meeting  over  the  board  of  directors  in  modern  corporate governance in Nigeria.

The Cadbury Report29 defined corporate governance as “the system by which

companies are directed and controlled”. Whilst management processes have been widely studied, relatively little attention has been paid to the processes  by which companies  are  governed.  It  is  clear  that  good  corporate  governance  practice adopted by board of directors is reflected in the value it adds to its operations and insulates generally the company from corporate failures. The failure of big corporate organizations  all  over  the  world  without  any prior  sign  or indications  ultimately points to loose and fraudulent practices which ordinarily would have been detected

by the regulators where a good corporate governance practice had been in force.30

28 Ibid., p. 36.

29 The Report of the Committee on the Financial Aspects of Corporate Governance otherwise known as the Cadbury Report published in 1992 and was later described as a landmark in

thinking  on  Corporate  Governance”.  The  report  included  a  Code  of  Best  Practice  (The

Cadbury Code).

30  Sir Adrian Cadbury’s speech on the 20th Anniversary of the Corporate Governance Code Event –

October 2012.

Aina31  explains that corporate governance is not about the day to day operational management of the company by the managers and executives, but is concerned with the overall strategic plan to move the company forward. Good corporate governance enhances  the value  of the company  and  attracts  investment  to the  company.  It enables the company to meet its objectives and contributes to its growth and profits. On a national scale, countries that adopt good corporate governance models attract more direct foreign investments than those that ignore its principles. The root cause of most corporate failures can be attributed to failure of corporate governance. Due to the importance of some of these big companies to the economy of the nation and stability of the economy, the governments of developing countries like Nigeria have

now taken the issue of corporate governance more seriously.32

Barnes33    addresses  the  issue  of  corporate  governance  under  the  rubric “management”.34    The  learned  author  asserts  that  the  general   meeting  of  the company−whether statutory, annual, extraordinary or court-directed−is a vital organ

of  the  company.  He  adds  that  the  general  meeting  provides  an  occasion  for shareholders to air their views on company matters and take effective action, within their  powers,  if  they  are  dissatisfied   with  company  policies,   practices,  or  its

officers.35

Barnes notes that previously the decisions of shareholders in general meeting were regarded as the acts of the company itself. The board of directors was regarded merely as agent of shareholders in general meeting. According to Barnes, it is well established that the ultimate control of the company lies with the general meeting. As one organ of the company, it shares power with the board of directors as the

31 K. Aina, “Board of Directors and Corporate Governance in Nigeria”, International Journal of Business and                    Finance                    Management                   Research,                    available                    at htt p://www.bluepenjournals.org/ijbfmr/pdf/2013/October/Aina.pdf (last acessed 27 May 2015).

32 Ibid.

33  K. D. Barnes, Cases and Materials on Nigerian Company Law (Ile-Ife: Obafemi Awolowo University

Press Limited, 1992).

34 Ibid., chap. 5.

35 Ibid., p. 167.

other  organ.  Barnes  considers  Automatic  Self-Cleansing   Filter  Syndicate  Co.   v. Cunningham36   the progenitor of the established division of powers between  these two  organs.  In this case,  the Court of Appeal  held  that  where powers  had  been vested in the board of directors, the general meeting could not interfere with their existence.  With  the  established  division  of  powers  comes  rivalry  between  the general  meeting  and  the  board.  Barnes  notes  that  the  reality  of  the  division  of

powers between the board of directors and the shareholders in general meeting is that the: “Power to call general meetings vested in the board of directors gives it practically dictatorial power to decide whether a meeting shall be held or not, and if it is held what its agenda will be”.37  This directors’ control over the day-to-day affair of  the  company  gives  them  practical  control  over  corporate  governance.  This situation daunts the shareholders in general meeting, who react by finding ways of reducing the directors’ control and indeed playing supervisory control over the board of directors.

Oshisanya38      insists   that   the   main   agent   who   deals   with   company

management   and  business  is  the  board  of  directors  normally  elected  by  the members and the officers are normally appointed by the board.39  From Oshisanya’s standpoint,  it appears that the members by appointing the board  have mortgaged their powers to the board and resigned themselves to supervision of the exercise of these   powers.   Where   the   board   becomes   overbearing   in   handling   of   its responsibilities,  the remedy available to the  members may be to refrain from re- electing the board. Oshisanya’s postulations appear to tally with Davies’ elucidations. According to Davies:40  “Although the Act41  requires all companies to have directors, it  leaves  the  determination  of  the  functions  of  the  board  very  largely  to  the company’s constitution, which is of course under the control of the shareholders”.42

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