An Allotment at a Discount and a Refused Transmission
Northbridge Agro Limited is a private company with five shareholders: Bello 40%, Okafor 25%, Ade 15% and two employee trusts 10% each. The articles contain pre-emptive rights on any issue of new shares. In January the board, without holding a general meeting, allotted 200,000 ordinary shares of N1.00 each to Tanwa, a friend of the managing director, at N0.80 per share, raising N160,000. The register was updated and a return of allotment filed with the Corporate Affairs Commission. In February the company received a transfer deed and probate documents from the widow of Ade, who had died holding 150,000 shares, requesting registration in her name. The directors refused, saying the articles require new members to be approved by the board and that family members are not suitable shareholders. Bello wants to challenge both decisions. Before the allotment the company had 1,000,000 ordinary shares in issue, fully paid.
1. Assess the validity of the January allotment and explain Bello's remedies.
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Issues. (a) The board's power to allot without member approval; (b) breach of pre-emptive rights; (c) issue at a discount.
Rule. Under CAMA 2020 directors may not allot shares without the prior approval of the company in general meeting. Where the articles confer pre-emptive rights, new shares must first be offered to existing members in proportion to their holdings. Shares may not be issued for less than their nominal value; if they are, the allottee is liable to pay the discount with interest, and the company and officers in default commit an offence.
Application. No general meeting approved the allotment, the offer to Bello, Okafor, Ade's estate and the trusts was skipped, and shares of N1.00 were issued for N0.80, leaving N40,000 (200,000 × N0.20) unpaid.
Conclusion. The allotment is irregular. Bello can seek an injunction, rectification of the register, and damages or an account, and can bring a derivative action for breach of directors' duties. The company should demand the N40,000 plus interest, make a proper pre-emptive offer or obtain a disinterested members' ratification, and consider whether Tanwa had notice of the defects. Filing the return of allotment cures none of this.
2. Advise whether the directors may refuse to register the widow's transmission of Ade's shares.
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Rule. On a member's death, shares vest in the personal representatives by operation of law. The articles usually let the board require probate or letters of administration before registering a transmission, and may permit the personal representative to transfer the shares without being registered.
Application. The widow produced probate. The stated grounds - that the articles require board approval of new members and that family members are not suitable - are not a proper exercise of the directors' discretion. A power to refuse must be exercised in good faith and in the company's interest, not on a blanket policy against relatives. Refusal also had to be communicated with reasons within the period allowed by the articles and CAMA 2020, and the transfer documents returned.
Conclusion. The refusal is likely to be set aside. The widow should be registered as holder of the 150,000 shares, or her nominee at her direction, with rights and dividends preserved from the date of death. If the board maintains its position, she can apply to the Court for rectification of the register and an order that the company register the transmission, with costs likely to follow.
3. What should the company secretary do about the register of members and the governance failures revealed?
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Registers. The register of members should record the transmission only on a proper board decision; the secretary must not enter Tanwa's shares as fully paid when N40,000 is outstanding. Maintain a separate record of the unpaid discount and of the pre-emptive offer (or its absence).
Governance. The board should review the allotment, disclose the MD's connection with Tanwa, and exclude him from decisions on the matter. A members' meeting should be convened with full disclosure; the breach of pre-emptive rights may be ratifiable by disinterested members, but the discount is a statutory illegality and cannot be ratified.
Filings. Where the register is corrected by court order, the secretary must file the correction with the Corporate Affairs Commission and issue amended share certificates. The return of allotment already filed should not be withdrawn, but a corrective filing and a board paper explaining the position are prudent.
Policy. Adopt written procedures for share issues - valuation, members' approval, pre-emptive offers, receipt of subscription monies - and a separate procedure for transmissions, with time limits for board decisions and written reasons for any refusal.