WHAT EXISTING COMPANIES THAT HAVE SHARES MUST DO NOT LATER THAN 31ST JUNE, 2021 REGARDING THEIR UNISSUED AUTHORIZED SHARE CAPITAL IN ACCORDANCE WITH THE NEW COMPANIES REGULATION, 2021
There are different types of companies, private or public companies which may be limited by shares or by guarantee. However, for the purpose of this writeup, we will discuss about companies limited by shares and the requirement to issue their authorized share capital which are unissued on or before 31st June, 2021 based on the Companies Regulation, 2021 that came into force in January, 2021.
What is share?
A share is a unit of ownership given by a company to individuals or corporate bodies. In other words, being a shareholder means that one owns a part of the company’s capital but cannot be held personally liable for the company’s debts. Companies divide capital into shares as a means of raising capital. Shares can also be referred to as stocks. When an individual buys shares in a company, they become one of its owners.
Share is the bedrock of every company where it decides to be limited by share. In this case, without shares, such company cannot be incorporated in Nigeria. The number of shares a company decides to have must be clearly stated in the Memorandum of Association of the company at the time of incorporation.
Before now, section 99 of the Companies and Allied Matters Act, Cap C20 LFN, 2004 makes provision for authorized share capital as follows:
Authorized minimum share capital
- Where, after the commencement of this Act, a memorandum delivered to the Commission undersection 35 of this Act states that the association to be registered is to be registered with shares, the amount of the share capital stated in the memorandum to be registered shall not be less than the authorised minimum share capital and not less than 25% of that capital shall be taken by the subscribers of the memorandum.
- No company having a share capital shall, after the commencement of this Act, be registered with an authorised share capital less than the authorized minimum share capital.
- Where, at the commencement of this Act, the authorised share capital of an existing company is less than the authorised minimum share capital, the company shall, not later than 30 days after the appointed day, increase the share capital to an amount not less than the authorised minimum share capital of which not less than 25 per cent shall be issue.
- Subject to subsection (3) of this section and to section 103 of this Act, where a company is registered with shares, its issued capital shall not at any time be less than 25 per centof the authorised share capital.
Subsection (4) above, clearly states that the issued share of a company shall not be less that 25 percent that is to say, a company can decide to issue 25 percent of its share capital and reserve the other 75 percent for future purpose.
The authorized share capital as stated in the above section is the number of shares (stock units) that a company can issue as stated in its memorandum of association or its articles of incorporation. Authorized share capital refers to the maximum number of shares a company is legally allowed to issue or offer based on its corporate charter.
However, this authorized share capital is often not fully used by the company in order to leave room for future issuance of additional shares in case the company needs to raise capital quickly. Another reason to keep shares in the company treasury is to retain a controlling interest in the business. In other words, the company may issue half of its authorized share capital to be subscribed to by the shareholders and leave half that it may issue on a future date. For example, if company ABC has authorized share of 1,000,000.00 (One Million), it can issue 250,000.00 (Two Hundred and Fifty Thousand) shares and leave the remaining 750,000.00 (Seven Hundred and Fifty Thousand) shares unsubscribed. The company can on a future date issue the remaining unsubscribed shares or part of it.
Based on Section 124 of the Companies and Allied Matters Act, 2020, the system of authorized share capital is no longer applicable as it has been replaced with minimum issued share capital.
Section 124 provides as follows:
(1) Where, after the commencement of this Act, a memorandum delivered to the Commission under section 36 states that the association to be registered is to be registered with shares, the amount of the share capital stated in the memorandum to be registered shall not be less than the minimum issued share capital.
(2) No company having a share capital shall, after the commencement of this Act, be registered with a share capital less than the minimum issued share capital.
(3) Where, at the commencement of this Act, the issued share capital of an existing company is less than the minimum issued share capital, the company shall, not later than six months after the commencement of this Act, issue shares to an amount not less than the minimum issued share capital.
(4) Subject to subsection (3), where a company is registered with shares, its issued capital shall not at any time be less than the minimum issued share capital.
(5) Where a company to which subsections (3) and (4) apply fails to comply with the applicable subsection, the company is –
(a) liable to such fine as the Commission may prescribe by regulation; and
(b) in addition, liable to a daily default fine as the Commission shall specify by regulation for every day during which the default continues.
From the above section, the new rule now is that all shares of a company have to be issued and subscribed to at the incorporation of a company. There is no more provision for future subscription of shares except the said company intends to alter same which must be done with the approval of the shareholders of the company.
The Companies Regulation, 2021 was enacted to ensure proper understanding of the Companies and Allied Matters Act, 2020 and the process of complying with it. Rule 13 of the Companies Regulation, 2021 provides thus:
- Where, at the commencement of the Act, a company has unissued shares in its capital, the company shall not later than 30th June, 2021 fully issue such shares.
- Notice of issue delivered to the Commission for registration shall be exempted from payment of filing fees.
- Where a company to which this regulation applies fails to comply with this regulation, the company and every officer of the company shall be liable to a daily default penalty as prescribed by the Commission.
Consequently, all existing companies having authorized share capital that have not been subscribed to should do so not later than 30th June, 2021. The existing company can decide to reduce the share capital to the minimum issued share capital as the case may be. Notice of this, should be filed with the Commission and such notice is exempted from filing fees. However, any company that fails to comply shall be liable to a daily default penalty and daily default fee for private companies is N500.00 (Five Hundred Naira only) while Public Company is N1,000.00 (One Thousand Naira only).
It should be noted that the approval and consent of shareholders must be sought for and had first, before the company or its directors can issue or reduce the unissued shares. In this regard, companies are to schedule meetings of members to deliberate on the issue so they know the way forward.
Blessing Ese-Freedom
Associate at Law
Corporate/Commercial Department
Solape Adesuyi and Associates
