The economic objectives of the government are, among other things, curb inflation, stabilise the exchange rate, improve the balance of trade, and drive economic growth through the private sector. Full or partial ownership of businesses by foreign investors is permitted. Investors can import capital and freely repatriate both the capital and the returns on investment upon satisfaction of exchange control requirements.
There are specific ownership restrictions and/or licenses which will be required in regulated sectors such as Banking, Broadcasting, Insurance, Mining, Telecommunications, Aviation, Oil and Gas, etc.
In an earlier article, we gave an overview of Nigeria as a country. You can read up the article: Doing Business in Nigeria: An Overview
2.0 Business Vehicle
Business can be carried on in Nigeria through any of the following vehicles:
(i) Sole proprietorship or sole trader;
(ii) Partnership; and
(iii) Incorporated company.
2.1 Sole Proprietorship
The sole proprietorship form of doing business is typically used by an individual intending to do business on his account. In general, this form of business is open to anyone in Nigeria wishing to engage in any kind of lawful business activity. The statutory requirements for this form of business are very limited, the major one being the requirement for registration of a business name, where a name other than the true name of the sole proprietor is to be used as the trade name.
Every sole trader having a place of business in Nigeria is required to register under Part B of the Companies and Allied Matters Act (CAMA), Cap C20, Laws of the Federation of Nigeria (LFN), 2004, if the business is carried on under a name that is not the true name of the proprietor. Details of the names and addresses of the proprietor registered under CAMA are available on request to the public at the Corporate Affairs Commission (CAC) on payment of a prescribed fee.
In most parts of Nigeria, the laws governing partnerships are based on the English Partnership Act, 1890 applicable to general partnerships. Section 1 of the Act defines a partnership as “the relationship which subsists between persons carrying on a business in common with a view to profit.” Lagos State is the only exception where limited partnerships and limited liability partnerships can be registered, in addition to general partnerships.
The rights and duties of partners are generally governed by the English Partnership Act, 1890, and the provisions of the specific partnership laws of some States (largely States within the former Western Region and Lagos) that have enacted their own laws in that regard. The provisions of the Act or Laws are, however, subject to any contrary agreement by the partners. The surname and initials of all the partners must be disclosed on the firm’s letterhead and trade circulars.
In a general partnership, the partners are the joint owners of the partnership property and are personally liable (both jointly and severally) for the debts and obligations of the firm. The liability of each partner is unlimited. The transfer of a partnership interest is permitted if agreed between the partners. Each partner is an agent of the other and may enter into contracts, undertake obligations and dispose of the partnership property in the ordinary course of business on behalf of the partnership.
In a limited partnership, there must be at least one general partner who will have unlimited liability with respect to all the debts and obligations of the firm. The limited partners contribute capital or property to the business but have no liability for the debts or obligations of the business beyond their actual contributions thereto. This is much like the limited liability of shareholders in a limited liability company. All limited partnerships have to be registered at the Limited Partnership Registry of Lagos State, which became operational with the appointment of a Registrar of Limited Partnerships by the Lagos State Government in June 2002.
In a limited liability partnership, all the partners are legally capable of limiting their liability in the event of the winding up of the partnership. Unlike a limited partnership, there is no requirement for the limited liability partnership to have a general partner. However, to ensure the protection of members of the public, all the partners are required to take out indemnity bonds and maintain professional liability insurance. The limited liability partnership was introduced in Lagos State in 2009 by the Partnership (Amendment) Law of Lagos State.
A corporation may be a partner with other corporations or with individuals. The maximum number of partners in every partnership is twenty (20), except partnerships of legal practitioners or accountants. A partnership is terminated on the death or resignation of a partner, to the extent of the liability of the deceased or resigning partner, or on the admission of a new partner. However, in practice, the partnership continues with the new partner becoming subject to the same or any newly agreed terms and conditions of the partnership. Non-resident foreigners may not be able to use a partnership as a vehicle for running a business in Nigeria.
2.3 Incorporated Companies
In Nigeria, the word “company” is used to describe a company incorporated with limited or unlimited liability and registered under CAMA. Subject to certain exceptions, CAMA provides that no foreign company shall carry on business in Nigeria unless it is incorporated in Nigeria as a separate entity. Foreign companies have a choice to set up wholly owned or partially owned subsidiaries or affiliates in Nigeria.
CAMA generally regulates the affairs of companies in Nigeria and has ample provisions dealing with such matters as formation, shareholding, directorships, borrowing, bookkeeping, auditing, management, meetings of the board of directors and shareholders, administration and liquidation.
There are three primary types of incorporated companies – an unlimited liability company, a company limited by guarantee and a company limited by shares. An unlimited liability company has no limit on the liability of its members and, therefore, has little attraction for investors. A company limited by guarantee limits its members’ liability to a number of their respective guarantees. This type of company is generally incorporated as a not-for-profit organisation for charitable purposes. By far the most common type of company is a company limited by shares. The liability of the members of such a company is limited to the amount, if any, unpaid on the shares
respectively held by them.
A limited liability company may be either privately or publicly owned. A private company must have a minimum of two (2), and a maximum of fifty (50), members, excluding present and ex-employees. Furthermore, the right of a private company to transfer its shares is restricted and the company is prohibited from inviting the public to subscribe to any of its shares or debentures.
Private companies limited by shares are the most common form of business organisation utilised by foreign investors in Nigeria.
A public company must also have a minimum of two (2) members but there is no restriction on the maximum number of members or their right to transfer shares freely. The public may be invited to subscribe to its capital and the shares may be traded on the Stock Exchange. A public company becomes publicly quoted when it is listed on the Stock Exchange.
Incorporation of companies is generally handled by lawyers, although this may also be undertaken by accountants and chartered secretaries. The documents required to be filed with the CAC include the following:
- Memorandum of Association;
- Articles of Association;
- Statement of Share Capital;
- Declaration of Compliance with CAMA;
- Notice of Situation of the Registered Office of the Company;
- Return of Allotment of Shares; and
- Particulars of First Directors.
Stamp duty is payable on the authorised share capital at the rate of 0.75% of the authorised share capital. Filing fees are also applicable.
The Memorandum of Association of a private limited liability company must contain the following:
- The name of the company with the word “Limited” or “Ltd.” as the last word, if it is a company limited by shares. The name must have the prior approval of CAC and must not conflict with that of any other company;
- The location of the registered office, which must be situated in Nigeria (specification of a State in Nigeria will be sufficient for this purpose);
- The objects or businesses of the company and the restrictions, if any, on its powers;
- The amount of the authorised share capital (or the par value of the authorised capital), the number of shares into which it is to be divided and the nominal or par value of each share. There is a minimum capital requirement of ₦10,000 and ₦500,000 for private and public companies, respectively;
- A statement confirming whether the company is a private or public company; and
- A statement on whether the liability of members is limited (either by shares or guarantee) or unlimited.
There is no restriction under CAMA on the number of classes into which shares may be divided or on the rights or privileges of any particular class of shares. The usual classes of shares are ordinary and preference shares. CAMA, however, stipulates that each share shall carry one vote and entitle the shareholder to attend and vote at general meetings of the company.
The memorandum and articles of association must be printed, signed by the subscribers and duly witnessed by at least one person. It is also required to be stamped as a deed. Alteration of the memorandum and articles of association is subject to approval by a special resolution of the company. Reduction of capital is also allowed subject to a special resolution of the company and sanction of the court.
Every company limited by shares is required to issue at least 25% of its share capital among the subscribers or shareholders at all times. The Registrar General of the CAC issues a Certificate of Incorporation to a company if satisfied that the conditions for incorporation have been fulfilled.
2.4.1 Foreign Enterprises
Any Nigerian company with foreign participation is required to register as a foreign enterprise with the Nigerian Investment Promotion Commission (NIPC) established under the NIPC Act, No. 16 of 1995 (now Cap N117, LFN, 2004). The NIPC facilitates liaison by investors with other government agencies for the purpose of obtaining of their start-up approvals.
The NIPC now houses the One Stop Investment Centre (OSIC) through which new investors can process all their start-up statutory registrations and approvals, especially company incorporation, tax registration and expatriate quota. Further to its mandate for investment promotion, the NIPC currently administers the Industrial Development (Income Tax Relief) Act, Cap 17, LFN, 2004, under which eligible investors can obtain pioneer status and enjoy income tax holiday for three (3) years, in the first instance, which can be renewed for additional one (1) or two (2) years.
2.4.2 Expatriate Employment
Where foreigners will be engaged in the actual running of a company’s operations, an application will have to be made to the FMI for the grant of expatriate quota approval. In addition, companies operating in the Nigerian oil and gas industry are required under the Nigerian Oil and Gas Industry Content Development Act, 2010 to obtain prior approval of their expatriate quota requirement from the Nigerian Content Development and Monitoring Board, before applying to the FMI.
The Nigeria Immigration Service (NIS) issues temporary work permits (TWPs) for expatriates intending to work in Nigeria on a short-term basis, to enable them to undertake work of a temporary nature, such as plant installation and commissioning. A TWP visa is typically granted for less than three (3) months in the first instance. However, it may be extended (while in-country) to a maximum duration of 365 days, subject to the approval of the NIS and payment of the associated statutory fees.
A public company wishing to raise funds from the public must generally prepare a prospectus. CAMA defines a prospectus as “any prospectus, notice, circular, advertisement, or other invitation, offering to the public for subscription or purchase of any shares or debentures of a company.” Every prospectus issued by or on behalf of a company or company promoter must include certain information unless the company obtains a certificate of exemption from the Nigerian Stock Exchange.
2.4.4 Publication of Name
In addition to stating a company’s name in its memorandum and articles of association, there is the additional requirement to display the name of the company conspicuously outside its office or place of business. A company’s name must also be engraved in legible characters on its common seal and must appear in all notices, advertisements and other publications, bills of exchange, invoices, receipts and similar documents. In addition, all trade circulars and business letters in which the company’s name appears must bear the incorporation number of the company, and the forenames (initials) and surnames of the directors (together with their nationality, in the case of non-Nigerians).
2.4.5 Statutory Report and Meeting
Public companies are required to hold a general meeting of the company (otherwise called “statutory meeting”) within six (6) months from the date of incorporation or the end of the financial year, as appropriate. A statutory report is presented at this meeting setting out certain significant facts about the company, such as capital structure, formation, expenses, and the names and addresses of the directors.
2.5 Members, Shareholders and Types of Shares
For companies limited by shares, the terms ‘‘shareholder’’ and ‘‘member’’ are synonymous to all intents and purposes. A company must maintain a Register of Members showing names and addresses of all shareholders, the number of shares and other particulars. Transfer of ownership of shares is not accomplished by simple delivery of a share certificate. The company secretary must enter a notation of the transfer in the Register of Members and this entry is conclusive evidence of the legal ownership of the shares and of membership.
Upon transfer, the old share certificate (of the transferor) is cancelled and a new one is issued to the transferee. Transfer of shares in publicly quoted companies is subject to the requirements of the Nigerian Stock Exchange and the Securities and Exchange Commission. Besides redeemable preference shares, a Nigerian company may not, except as authorised by CAMA and the Securities and Exchange Commission Rules and Regulations, purchase its own shares or those of its parent company, notwithstanding anything to the contrary in its memorandum and articles of association.
Furthermore, a company may not, in any way, give financial assistance to anyone to enable such person to purchase its shares or the shares of its parent company. However, the company may provide money to trustees under an organised employee share purchase plan, and the company may lend money to bona fide employees and salaried directors through the trust to enable them to purchase such shares. Other exceptions are listed in CAMA.
2.5.1 Share Premiums and Discounts
When a company issues shares at a premium, the premium must be transferred to a share premium account that may be used only for the following limited purposes, namely, to:
- pay up unissued shares of the company to be issued to members of the company as fully paid bonus shares;
- write-off pre-operational expenses of the company;
- write off the expenses of, or the commission paid, or discount allowed on, any issue of shares; or
- provide for any premium payable on the redemption of redeemable preference shares.
The account may not be used for payment of cash dividends and can be extinguished only by a reduction of capital. A company may issue shares at a discount only with the permission of the court.
2.5.2 Ordinary Shares
Ordinary shares carry a right to a share in the profits of a company after shareholders with preference rights have been satisfied. Similarly, after all the creditors and preferred stockholders have been satisfied on liquidation, the remaining assets are distributable to the holders of ordinary shares.
2.5.3 Preference Shares
Preference shares may be issued in several classes, such as cumulative or noncumulative as to dividend, participating or non-participating as to surplus profits, preferential as to income or capital, or convertible or non-convertible as to ordinary shares. Redeemable preference shares may be redeemed only if they are fully paid-up and must be redeemed only out of accumulated earnings or out of the proceeds of a new issue of shares.
2.5.4 Deferred Ordinary Shares
The claims of the holders of deferred ordinary shares rank after preference shares and ordinary shares. Such shares may, however, be entitled to a larger portion of distributable profits than the ordinary shares after a certain amount of dividend has been paid on the ordinary shares. In practice, deferred ordinary shares are hardly ever created or issued.
2.5.5 Debentures and Bonds
The term “bond” is not used in CAMA. The closest term to it used in CAMA is “debentures”, which denotes instruments issued by a company acknowledging a loan or other indebtedness and providing for payment of a specified sum by a given date at a specified rate of interest. A debenture, if secured, would typically create a charge, either fixed or floating, on the company’s assets. The charge may be contained in the main body of the debenture or in a separate trust deed. Provision may be made for the redemption of debentures by means of an invested sinking fund, annual drawings or by purchase in the open market.