Analysis of CAMA 2020, unissued shares, and impact on shareholders of Nigerian banks

“Special Business,” says the heading. The paragraph reads: “To consider and if thought fit pass the following resolution as an ordinary resolution: “That following the recommendation of the Board of Directors, pursuant to Articles 46 & 47 of the Bank’s Articles of Association and in compliance with the requirements of Section 124 of the Companies and Allied Matters Act (CAMA) 2020 and Regulation 13 of the Companies Regulations 2021, the Bank’s Unissued Share Capital of 10,800,000,000 ordinary shares of 50 kobo each be and is hereby cancelled.”

This is an excerpt from the Notice of AGM issued by UBA on March 9, 2022. Similar clauses have popped up in the AGM announcements of Nigerian banks since the turn of the year as they race to achieve regulatory compliance with an important section of the Companies and Allied Matters Act (CAMA) 2020. Zenith Bank, GTCO, FBNH, Wema Bank and Access Bank, among others, have put out communication similar to this, but with some very key differences between them that could become significant issues down the line.

Should shareholders have a say in the treatment of unissued shares? That ultimately, looks like a question that the bank themselves must answer if the regulatory authorities remain unable or unwilling

To examine an issue that could well become a huge risk factor for Nigerian bank shareholders, this analysis will take a critical look at the regulatory grey area created by an important piece of Nigerian corporate legislation, its potential outcomes and the actions and clarifications that regulators need to make. Six banks will be profiled, with special attention on board-level actions enabled by opaque regulation that could end up having several unintended consequences.

CAMA 2020 and the problem of unissued shares

To understand what is happening and why it is important, some background is needed. The issue centres on “unissued share capital.” Unissued share capital is simply company stock that exists, but has not been issued to, or paid for by any internal or external shareholders. Due to the fact that such shares do not come with voting rights or receive dividends, they are generally thought of as inconsequential to shareholders. Their purpose for existence is typically to enable the company to issue fresh stock later, be it for employee stock options plans or for sale on external investor markets. Until 2020, publicly traded Nigerian companies were allowed to maintain up to 75 percent of their stock as unissued shares.

The problem with unissued shares is that if and when the company decides to issue them, and they turn into issued shares with voting rights and dividends, their entry into the pool of issued shares dilutes the amount of value held by existing shareholders – and potentially reduces share prices and dividends per share. This makes the amount of unissued shares a company has and its plans for issuance, an important issue to investors who stand to lose money in the event of significant stock issuance.

This brings us to CAMA 2020. Signed into law by President Muhammadu Buhari in August 2020, the law expressly forbids the existence of unissued stock, stating that all of a company’s shares in existence must be voting shares. This was decided presumably to correct the situation where vast amounts of unissued company shares could be used to provide a misleading picture of a company’s level of capitalisation. Previously, even the 25 percent of stock required to be issued did not have to be paid for. Now, all this has changed. In trying to simplify the regulatory and investment environment, however, CAMA 2020 may have inadvertently complicated things even further.

In a paper titled “CAMA 2020: Compulsory Disposal Of Unissued Share Capital By Existing Companies,” law firm Udo Udoma & Belo-Osagie offered the following verdict on the updated law’s position on unissued shares:

“The CAMA 2020 does not provide any guidance on how companies are to transition out of the regime of ‘authorised share capital’ under the CAMA 1990. This has led to differing views on this issue. The questions that have arisen include what to do with the unissued shares that companies have carried over from the CAMA 1990 era, and, in the absence of ‘authorised share capital’ under the CAMA 2020, and on the understanding that the CAMA 2020 only recognises issued shares as comprising the share capital of a company, what is the framework for unissued shares under the CAMA 2020? The CAMA 2020 does not expressly require the disposal of the unissued shares neither does it implement a framework or timing for doing so.”

In other words, as is so often the case in Nigeria, a new regulation was promulgated without much thought given to the practicalities of implementation. In response to the perceived regulatory gap, the Corporate Affairs Commission (CAC) issued the Companies Regulations 2021.

Regulation 13 stated that any company with unissued shares in their share capital must issue such shares by June 30, 2021. This was subsequently pushed back to December 31, 2022. Companies with unissued stock were given the options of alloting it to shareholders via a bonus issue, a rights issue or a public offer, or cancelling all unissued stock and reducing share capital in line with Section 130 – 136 of CAMA 2020. This has created an interesting situation in Nigeria’s banking space.

Bank shareholders’ rights in the aftermath of CAMA 2020

In April, FBN Holdings (FNBH) released the public agenda for its 2022 AGM on June 20 at Oriental Hotel, Victoria Island, Lagos. Under the “Special Business” heading in the topics for discussion, the agenda mentioned the issue of compliance with Section 124 of CAMA 2020, with specific regard to unissued share capital. Without offering any detail whatsoever as to the fate of the unissued shares and the fate of shareholders, the tersely worded excerpt read:

“That the Company be and is hereby authorised to take all steps necessary to ensure that the Memorandum and Articles of Association of the Company are altered to comply with Resolution (A) above, including replacing the provision stating the authorised share capital with the issued share capital. “That the Directors be and are hereby authorised to enter into and execute any agreements, deeds, notices and any other documents necessary for and or incidental to resolution (A) above.” “That the Directors of the Company or any one of them for the time being, be and are hereby authorised to appoint such professional parties and advisers and to perform all such other acts and do all such other things as may be necessary for or incidental to the above resolutions, including without limitation, complying with directives of any regulatory authority.”

One notices immediately the key difference between this excerpt and that from UBA’s Notice of AGM mentioned at the outset. While both banks intended to vote on proposals concerning their unissued share capital at their AGMs, the FBNH statement does not provide any information whatsoever about what the bank intends to do with its unissued shares. As outlined earlier, this is valuable and important information for shareholders, but no clarity is volunteered. All that is offered is a vaguely-worded proposal giving the FBNH board sweeping powers to “perform all such other acts and do all such other things as may be necessary for or incidental to the above resolutions, including without limitation, complying with directives of any regulatory authority.”

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What does this mean in practice? Does it mean the FBNH board will cancel all unissued shares like UBA did? Or does it mean the board will clandestinely issue some or all of these shares, potentially altering the bank’s ownership structure and adversely affecting existing investors by diluting their stock value? We do not know.

The ambiguity of this statement and the blanket powers granted to the board, coupled with the regulatory blind spot in CAMA 2020 flagged by Udo Udoma & Belo-Osagie mean that in practice, this board could act in ways that adversely affect shareholders without taking their rights into account.

None of this of course, means that the FNBH board necessarily will act in ways that are potentially harmful to investors without their consent – it just means that it could. Clearly, there is a problem here and it does not stop at unissued share capital or FBNH alone.

Furthermore, while Access Bank and Wema Bank both informed shareholders about the nature of the impending restructuring of their respective shareholders (cancelling of unissued shares), GTCO and Zenith Bank did not. Across all the banks featured in this analysis, the same ambiguously-worded, sweeping powers have been granted to the board.

In fact, of all the banks featured here, only Wema Bank has given shareholders the courtesy of developing a publicly accessible 55-page document that explicitly and in great detail lays out its plan for restructuring share capital to eliminate unissued shares ahead of the December 2022 deadline. With the others mentioned, all that the shareholders get is a tersely worded clause stating some variant of the following:

“The Directors be and are hereby authorised to enter into and execute any agreements, deeds, notices and any other documents necessary for and or incidental to resolution (A) above.”

Should shareholders have a say in the treatment of unissued shares? That ultimately, looks like a question that the bank themselves must answer if the regulatory authorities remain unable or unwilling.