CORPORATE STRUCTURES IN NIGERIA LEGAL SYSTEM
Corporate structure refers to the framework that defines the organization, management, and ownership of business. It encompasses how a company is organized, the roles of its various components, and the legal implications of its structure. Understanding corporate structure is crucial as it influences operational efficiency, governance, and compliance with legal requirements.
Corporate structure refers to the way a business is organized through the creation of departments or units and managed by capable individuals to enable it to achieve its strategic goals and objectives. This structure governs the affairs of the company. Depending on a company’s goals and the industry in which it operates, its structure can differ significantly between companies. Each of the departments usually performs a specialized function while constantly collaborating with each other to achieve corporate goals.
Departments in a company may include Human Resources, IT, Legal and Compliance, Operations, Administration, Regulatory Affairs, Accounting and Finance, Marketing, Quality Assurance, Business Development, Production, Research and Development (R&D). Some products-based or project-based companies may divide up business units by addressing a single product or project as a department.
2.1 Why is Corporate Structure Important?
i. A well-defined corporate structure is of utmost importance to any company. The structure of a company is like the pillars of a building and must be strong and efficient to pave the way for successful operations.
ii. It helps delineate the roles, responsibilities, and duties of every unit or department in the company. Friction, delays, and miscommunication between departments can lead to significant business losses and setbacks.
iii. Partners and vendors would want to ascertain and be sure that the company they are dealing with has the basic departments with qualified and experience personnel to handle and execute the job or render the required service. This helps to boost the business goodwill and patronage of the company.
For example, client who needs legal services would want to be sure that a prospective law firm has the unit and competent lawyers in these units to handle the brief. This brief, may, in most cases is tied to the business growth, survival or otherwise of the client. Also, a sponsor of pharmaceutical research who wants to conduct a clinical trial would want to be sure that a partnering contract research organization (CRO) has the requisite departments with qualified, experienced, and competent personnel to handle or oversee a clinical trial on their behalf.
iv. Corporate structure can make or break a company and is the deciding factor for its success or failure. Putting an organizational structure in place can be very beneficial to a company. The structure will not only define a company's hierarchy but also allows the company to lay out the pay structure for its employees. By putting the organizational structure in place, the firm can decide salary grades and ranges for each position.
v. Having a defined structure also makes operations more efficient and much more effective. By separating employees and functions into different departments, the company can perform different operations at once seamlessly.
vi. A clear structure informs employees on how best to get their jobs done. Employees must take on more initiative and bring creative problem solving to the table. This can also help set expectations for how employees can track their own growth within a company and emphasize a certain set of skills as well as for potential employees to gauge if such a company would be a good fit with their own interests and work styles.
2.2 Corporate Hierarchical Structure
A well-defined corporate hierarchy is vital to avoid any clashes and maintain absolute control. Lord Denning in Bolton (Engineering) Co. Ltd v. Graham & Sons said that a company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also had hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are Directors and managers who represent the directing mind and will of the company, and control what the company does.
The corporate structure of a business is important because it determines the ownership, control, and authority of the organization. The structure is represented by three groups, namely:
i. Shareholders;
ii. Directors; and
iii. Officers/employees.
Ownership of the company belongs to the shareholders. Control and management of the affairs of the company is exercised by the board of directors on behalf of the shareholders, while authority over the day-to-day operations is vested in the officers or employees.
2.2.1 Shareholders
Shareholders have shared ownership, represented by holding shares of common stock. Most business corporations are established with the goal of providing a return for its shareholders in the form of profits. Shareholders have the right to share in the profits of the business but are not personally liable for the company's debts. This concept is known as limited liability and is one of the main advantages of the corporation as a form of doing business.
If you decide to invest in a few shares of your favorite fintech or pharmaceutical company, does that give you the right as a shareholder to show up at corporate headquarters and start making decisions? Generally, not. Instead, shareholders elect a board of directors who oversee the management of the company.
2.2.2 Board of Directors
Shareholders of the company usually appoints directors who are people of reputation and experience in addition to the first directors as contained in the Memorandum and Articles of Association. They might be other business leaders from other industry, retired legal, medical, or financial professionals, or other influential people. They can provide an unbiased, objective perspective on issues brought to the board. Section 868 defines a director as including any person occupying the position of director by whatever name called.
Section 269(1) provides that directors of a company registered under the Act are person duly appointed by the company to direct and manage the business of the company. This does not however mean that a person who is merely a director is bound to give continuous attention to the affairs of the company.
Where a person not duly appointed a director act as such, his acts do not bind the company, but where the company describes a person as a director, there is, in favour of any person dealing with the company, a rebuttable presumption that all persons who are described as directors, have been duly appointed.
In the exercise of these general statutory provision which enjoins directors to consider the interest of the company as paramount. A company’s management is therefore, in the first place left in the hands of the directors.
a. Status of Directors.
Except for executive directors, directors are the managing partners of the company. They are not employed by the company and are therefore not as such employees of the company, nor are they servants or members of staff of the company, but they are officers for the purpose of making a company vicariously liable for their negligence while engaged in the business of the company. Directors are trustees of the company’s moneys, properties, and their powers and as such must account for all the moneys over which they exercise control and shall refund any moneys improperly paid away and shall exercise their powers honestly in the interest of the company and all shareholders, and not in their own or sectional interest. Directors may not be trustees in strict legal sense, but they are in the position of trustees.
Since a director is not an employee of the company, he is not entitled to the privileges granted to employees, for example, in respect of pension, participating in profit sharing, loans for staff housing and such other schemes. He will not be entitled to preferential payment or other entitlements in a winding-up as in the case of employee.
b. Duties of Directors
i. Duty to act in the best interest of the company
ii. Duty not to fetter discretion
iii. Duty to avoid conflict of interest and making of secret profit
iv. Duty of care and skill
v. Duty to give notice in certain situations
c. Minimum and Maximum numbers of Directors.
Section 271 provides that every company registered on or after the commencement of this Act, must have not less than two directors. Any company whose directors falls below two must, within one month of such fall, appoint one or more new directors. If a company fails to appoint directors to make up the statutory minimum within the time limit, it cannot thereafter carry-on business after the number of directors has fallen below two for more than sixty days, every director or member who is aware of that fact is liable for all the liabilities and debts incurred by the company during the period when it so carried on business.
d. Removal of Directors
The Companies and Allied Matters Act allows shareholders in an annual general meeting (“AGM”) or extra-ordinary meeting (“EGM”) to remove any director subject to the certain procedures and graduated notices. As a preliminary step, section 288 requires a company whether private limited by shares or public limited liability or limited by guarantee or unlimited company to remove any director through ordinary resolution. It is important to carefully lock-in the steps otherwise the removal is invalid in law and, will be successfully challenged in Court.
The director to be removed must be given 21 days special notice of the company’s intention to remove him and he may make representation in writing and except where the director to be removed sends in its written representation in the nick of time, the company must circulate the written representation to members in accordance with section 288 (2) & (3). Provided that where the representation is not circulated as required because it was received too late, the director to be removed may request that the representation be read at the meeting.
The representation by the director to be removed need not be circulated or read out if an aggrieved party can show the Court that circulating or reading it out is aimed at needlessly publication of defamatory matters. The said 21 (twenty-one) days’ notice will be sent to all members and directors through their registered address. The date of dispatch of the notice is included in computing number of days by virtue of section 241.It is important to annex any written representation by the director to be removed. A registered address includes a physical or electronic address in accordance with section 244(6).
Section 242 provides that any notice of meeting should specify place, date and time of the meeting, and the general nature of the business to be transacted in sufficient detail to enable those to whom it is given to decide whether to attend or not. If it is an AGM, a statement that the purpose is to transact the ordinary business of an annual general meeting is deemed to be a sufficient specification that the business includes removal of any director by virtue of section 242(2). According to section 240(2), a private company may hold its general meeting electronically provided that such meetings are conducted in accordance with the articles of the company.
The following persons are entitled to receive notice of an AGM or EGM:
• Every member.
• Every person upon whom the ownership of a share devolves by reason of his being a legal representative, receiver, or a trustee in bankruptcy of a member.
• Every director of the company.
• Every auditor for the time being of the company; and
• The secretary, and Commission in the case of public companies – Section 243.
A copy of the proposed resolution may be circulated. That it was not circulated does not invalidate the meeting or consequent removal of any directors. There is no form of a notice required under CAMA. Essentially, the content is most important than the form. Notice of removal of any director should be filed with the Corporate Affairs Commission within 14 days otherwise a default fee or penalty will apply.
e. Types of Directors
i. Non-Executive Directors
ii. Executive Directors
iii. Shadow Directors
iv. Alternate Directors
v. Assignee Director
i. Non-Executive Directors
These are directors who are appointed directly under sections 247, 248, and 249 of the Companies and Allied Matters Act. They are not employees of the company as they do not have contracts of employment and do not earn salaries. The remuneration paid to them are fees or allowances fixed at the AGM by resolution and earn it only when and if they attend meetings of the board of directors. Their appointments, duties, powers, and removal are provided for in CAMA. They are not usually required to report for duty at the office and their functions being of part-time nature, they could be engaged in some other endeavors which could be full or part-time - Longe v. FBN
These directors attend board meetings and carry out any specific duty assigned to them. They can be regarded as part-time directors. They are not employees of the company or employed by the company. They do not form part of the company’s staff. They are not entitled to and neither do they enjoy rights and privileges available to the employee of the company. their powers are usually restricted by the articles. The company is not bound to pay them any remuneration, but they may be paid all their travelling, hotel and other expenses properly incurred by them in attending and returning from the meetings of the company.
ii. Executive Directors
An executive director is an employee of the company and devotes his or her whole time and attention to the work of the company, the employer to the exclusion of any other paid jobs. He is employed by the company to attend to the daily running and management of the company. he has a contract of service with the company and earn salaries. His or her appointment, powers, duties, rights, discipline, and tenure are regulated by the articles of association of the company as well as contract of service. Unlike a non-executive director, he does not retire by rotation and his remuneration is determined by the board of directors.
iii. Independent Director
An independent director is a non-executive director who is not a substantial shareholder of the company, that is one whose shareholding, directly or indirectly, does not exceed 0.1% of the company's paid up capital; is not a representative of a shareholder that has the ability to control or significantly influence management; has not been employed by the company or the group of which It currently forms part, or has not served in any executive capacity in the company or group for the preceding three financial years; is not a member of the immediate family of an individual who is, or has been in any of the past three financial years, employed by the company or the group in an executive capacity; is not a professional advisor to the company or the group, other than in a capacity of a director; is not a significant supplier to or customer of the company; has no significant contractual relationship with the company and is free from any business or other relationship which could materially interfere with his or her capacity to act in independent manner; and is not a partner or an executive of the company’s statutory audit firm, internal audit firm, legal or other consulting firm that have material association with the company and has not been a partner or an executive of any such firm for three financial years preceding his or her appointment.
An independent director should be free of any relationship with the company or its management that may impair, the director’s ability to make independent judgments. These directors constitute the board of directors. The board of directors is responsible for the formation, overseeing, directing and implementation of business strategy and representing the company to the shareholders and public. The board should be of a sufficient size relative to the scale and complexity of the company’s operations and be composed in such a way as to ensure diversity of experience without compromising independence, compatibility, integrity, and availability of members to attend meetings.
The code of corporate governance provides that the responsibility of the board shall include:
i. Coordinate the affairs of the company in lawful and efficient manner in such a way as to ensure that the company is constantly improving its value creation as much as possible.
ii. Board members should be informed and act ethically and in good faith, with due diligence and care, in the best interests of the company and shareholders.
iii. Review and guide corporate strategy, objective setting, major plans of actions, risk policy, capital plans, and annual budgets.
iv. Select, compensate, monitor, and replace key executives and oversee succession planning.
v. Align key executive and board remuneration with the longer interests of the company and its shareholders.
vi. Ensure a formal and transparent board member nomination and election process.
vii. Ensure the integrity of the company’s accounting and financial reporting systems, including their independent audit.
viii. Ensure appropriate systems of internal control are established.
ix. Oversee the process of disclosure and communication.
x. Ensuring that the value being created is shared among the shareholders and employees with due regard to the interest of the other stakeholders of the company.
The key point here is oversight; the board is not expected to operate the business. Rather, oversee operations, approve major plans, and monitor financial performance.
The board generally performs the following functions:
a. Select, evaluate, fix the compensation for, and, when necessary, replace the company's chief executive officer
b. Oversee the business operations to evaluate whether the business is being properly managed
c. Review and approve major corporate plans, financial objectives, annual budgets, and strategies
d. Review the adequacy of financial accounting, auditing, and other systems to comply with applicable law.
The board does not have total and absolute control of the company, some important decisions affecting the company requires shareholder vote. The law specifies the matters that must be acted upon by the shareholders, including amendments to the memorandum or articles of association, the election of directors, the sale of all or substantially part of the company's assets, and the merger or consolidation of the company.
f. Composition of the Board
The board of directors is composed in such a way as to ensure diversity of experience without compromising compatibility, integrity suitability and independence. Accordingly:
i. The board should comprise of a mix of executive and non-executive directors headed by a chairman. The number of the board shall not be less than 5 and not more than 15. While the Non-executive directors should be in the majority.
ii. The members should be individually with upright personal character and relevant core competencies, preferably with a record of tangible achievements, knowledge of board matters, a sense of accountability, integrity, commitment to the task of corporate governance and institution building while also having an entrepreneurial bias.
iii. The board should be independent of management and the position of chairman and chief executive officer must be separated.
iv. The chairman should be a non-executive director while the chief executive officer/managing director should be the head of the management team.
v. To safeguard the independence of the board, not more than two members of the same family should sit on the board of a public company at the same time.
g. Chairman of the Board of Directors
The board of directors elects the Chairman of the board who is responsible for running the board effectively. The position of the Chairman and Chief Executive Officer should be clearly separated and held by different persons. A combination of the two posts in an individual represents an undue concentration of power. In the exceptional circumstances where the two positions are held by the same person, there should be a strong non-executive, independent director as a vice-chairman of the board.
The primary responsibility of the chairman of the board is to ensure effective operation of the board, and, as much as possible, maintain a distance from the day-to-day operations of the company which should be the primary responsibility of the chief executive officer and the management team.
2.2.3 Management Team
After the board of directors comes the management team. The management team is responsible for the everyday functioning of the company and maintaining its top and bottom line. In most cases, the management consists of the heads of department.
Chief Executive Officer (CEO)
CEO is the head of the management team and reports directly to the Board of Directors. He is responsible for the company’s operations and management. His role includes maintaining proper balance and cooperation between different departments and units.
2.2.4 Steps to Establish a Corporate Structure
a. Draft your company's Articles and Memorandum of Association.
b. Specify the shareholders.
c. Create the board of directors.
d. Create relevant departments
e. Create the management team with heads of department as members.
f. Employ corporate officers and assign titles.
3.0 Conclusion
The law specifies how a company should be structured and administered. The organs or units to be created by the company is dependent on the industry and the nature of business. The structure is aimed at making the company achieve its goal in an efficiency manner. A structured company makes the officers entrusted with the management and administration of the affairs of the company more accountable, responsible, and more sensitive to the interests of shareholders and the public. A structured company enjoys more business goodwill and patronage.
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