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Risks In Stock Investments By Chiedu N. Alexandra
The Nigerian stock market has become the toast of local investors because of the huge returns recorded in stocks in the past two years. Generally, the investing public now scramble to patronise public offer of shares while many more buy stocks at the floor of the Nigerian Stock Exchange (NSE). This year alone, over half a dozen companies has already gone to the public market to shop for funds and a good number of these companies have been oversubscribed because many Nigerians believe the investments are generally risk free. But are these enormous investments truly safe and risk free?
The lessons from Monday 19 October 1987 generally referred to, as “Black Monday” when stock prices mysteriously crashed around the world is still fresh. Even 20 years after the said crash, opinions are still divided as to the causes. Many analysts and experts can barely hazard possible causes as insider trading, overvaluation of stocks, liquidity, globalisation and programme trading. Programme trading is the use of computers to engage in large portfolio trading. Whatever the causes of the crash, the lessons is that unless companies are managed according to law, monies invested in stocks could vanish in one moment.
The laws that regulate companies are the Companies and Allied Matters Act (CAMA) 1990 and Securities and Exchange Commission Act 1979. While CAMA regulates the registration and operation of all types of companies, the Securities and Exchange Commission Act sets the guideline for the operation of public companies particularly with regards to offer of shares and debentures by public companies and all matters relating to mergers, acquisitions and combinations.
CAMA tries to protect innocent members of the public against acts by a company in its corporate personality, through several provisions stipulating a wide range of information about a company’s affairs that must be disclosed to stakeholders and the penalties for not doing so. For instance, there are strict disclosure requirements about company’s directors, shareholders, shares, meetings, minute of meetings, financial statements and audit reports. The disclosure of material information is important to prevent undue advantage, misunderstanding and provide control and accountability and ensure that an incorporated company does not become an engine of fraud.
The provisions for disclosure and transparency ensure that top managers, directors and proximate persons who act in fiduciary capacity to the company do not abuse the position entrusted on them.
The Companies Act requires that all companies must maintain proper records of its members, minute books, register of shares, financial statements and audit in order to ensure full disclosure of all material information that may be economically significant to members, staff, creditors, investors, governments and the general public. As part of the general disclosure requirements, it is statutorily required that all trade catalogues, trade circulars and business letters of a company should bear names, particulars and nationality of the directors.
The burden of disclosure is heavier on directors and top managers who operate and run the company on day-to-day basis as trustees. Our experience in Nigeria has shown that the activities of directors and top managers generally determine the performance of the company.
Under sections 279, 281, 282 and 289, the directors of a company owe a duty of disclosure to all persons dealing with the company. They must act bonafide and in the best interest of the company. They must avoid conflict of interest and must not benefit from price-sensitive company information especially concerning the company’s shares. For instance, because the directors set out the general policies and guidelines for the company, their action and inaction affect the daily stock price of the company. By sections 94, 95, 97 and 98 of CAMA a person who becomes a director of a company is obliged to disclose to the company his interest in any shares or debentures of the company or of any other company in the same group and of the number and amount of the shares in which he has interest. Infact, it is desirable that a director must disclose all dealings concerning acquisition, disposal, transfer and contract concerning the shares of the company. This burden of disclosure extends to spouse and infant children and stepchildren who may be used as fronts and surrogates.
It is also not lawful for the directors or managers of a company that is preparing for a public offer to use company’s money or money from sources close to the directors to purchase the shares of the company on the floor of the Stock Exchange. Similarly, the power of directors to make a call-up of shares must be exercised in the best interest of the company. In Alexander V. Automatic Telephone Co. (1960) 2 CH 56, it was held that directors of a company in exercising their power of call must not exclude their own shares but must pay any balance required as at when due. The directors and managers of a company shall not offer financial assistance to their friends, family, nominees, surrogates and fronts to purchase the shares of the company either to reduce the capital of the company or to push up its price at the Stock Exchange. See TREVOR V. WHITWORTH (1887) 12 APP. CAS. 409. The directors of a company should not provide money to surrogates or nominees to purchase the stocks of the company. In SELANGOR UNITED RUBBER ESTATES V. CRADOCK NO. 3 (1968) 1 WLR 1555 it was held that it was an abuse of position for directors of a company to provide money in form of loan or grant to finance takeover and immediately repay such loan from the devoured company. This situation is similar to that of a company that provides large sums of monies to friends, family, nominees, surrogates and fronts to purchase shares of a company on the floor of the exchange with the motive of pushing up the price of its stock and offloading the same shares when the price appreciates. In KARAK RUBBER CO. V. BURDEN (NO. 2) (1972) 1 WLR 602 and WALLERSTEINER V. MOIR (1974) WLR 991 C.A. (1975) W.L.R 1093 H.L. it was held that it was wrong for a company to lend large sums of money to friendly companies to buy shares of a rival company so as to enhance the quoted price of its shares.
There are many other grey areas prone to manipulation by managers and directors in siphoning the monies of investors. Apart from those that have been developed under statutes and case law, there are other areas that are manipulated by directors and managers in Nigeria. For instance the sharp movement of stock prices before public offers leave the price frame as a mere façade artificially stimulated to find a comfortable benchmark from which to set a high offer price as discount. This practice has continued to go unchecked by the operators of the stock exchange. The most criminal however remains the often one year gestation time between the payment for shares during public offers and the issuance of certificates. Registrars of companies have continued to defy all the attempts by the CBN and SEC to ensure prompt delivery of share certificates. In the past eighteen months, Intercontinental Bank, UBA, Oceanic Bank, First Bank etc have concluded public offers but still held on to investors certificates thereby denying them benefits of reaping gains of the investments. In the case of First Bank Plc, an enormous investment reportedly put at about N500 billion has been stashed away for months and over 50% may be returned because of over subscription.
It is the contention of experts that investors whose excess monies are returned anytime more than three months after the conclusion of the public offer should rightly be paid interest on such monies at the prevailing rates otherwise they should seek redress in the law courts. It is unfortunate that SEC has allowed this abnormal condition to operate without punishing the companies. SEC must take full responsibility for the abuse of the public offer scheme by failing to ensure that companies who have been entrusted with investors’ funds must act promptly in delivering rights and fruits of such investments.
Investors are also advised to monitor and scrutinise companies in which they have invested funds since this is the only way to protect such investments. Under Sections 370, 371, 372, 373, 374 and 375, the Companies Act makes it mandatory for every company to complete and file an Annual Return at the Corporate Affairs Commission. The annual returns filed by a public company enables the Corporate Affairs Commission and the general public to have a view of the operations of the company and compare the statistics and data in the return with those contained in other documents of the company. The return is an important disclosure document, which is generally neglected by stakeholders. Section 633 of the Companies Act requires all companies to maintain proper statutory documents such as register of shareholders, directors, debenture holders, transfer of shares, debentures and charges, records of resolutions and instruments creating charges, index of members, minutes books of AGM, meetings of board, board committee and books of accounts like balance sheets, profit and loss accounts and dividends.
All these records are necessary disclosure materials from which stakeholders and interested members of the public could assess the performance of the company.
However, the most important instrument of disclosure and transparency is company meetings. Meetings are the strongest vehicles of corporate governance and disclosure. The Companies Act under section 213 makes it mandatory for every public and private company to hold an Annual General Meeting every year. The AGM is the forum for shareholder democracy, which must be exploited by all shareholders. By sections 219, 231 and 174 of the Act, every member is entitled to receive notice of AGM at least 21 days in advance and attend or be represented by a proxy and vote at the meeting. The Act also sets out the business to be transacted at the AGM; the most important being the presentation of financial statements; Directors and Auditors Reports. These documents should be kept and studied carefully by all stakeholders in order to determine the direction of the company. The collapse of corporate giants like Enron, Wellcome etc is attributed to mismanagement as much as negligence of stakeholders who should have sounded early warnings.
Shareholders should not just buy shares and go to sleep; rather they should monitor the performance of the company by ensuring full disclosure of all material information particularly as it concerns the managers and directors. The Executive Director of Nigeria Deposit Insurance Corporation (NDIC), Professor Peter Umoh recently revealed that the high ratio of directors non-performing loans contributed to the collapse of the following banks; Financial Merchant Bank, Republic Bank, United Commercial Bank, Credite Bank, Prime Merchant Bank, Group Merchant Bank, Nigeria Merchant Bank, Royal Merchant Bank, Alpha Merchant Bank, ABC Merchant Bank, Afex Bank etc. This shows that investors should closely scrutinise the activities of directors and top managers to prevent the fleecing of the company’s funds.
Apart from the basic disclosure requirements, there are other collateral disclosure duties imposed on directors and managers from conventional practice.
In the United States, the basis to determine what should or not be disclosed is the financial materiality of the information to be disclosed. In AFFILIATED UTE CITIZEN V. NORTHWAY 426. U.S. 438, 1976 it was held that evidence of any illegal conduct by any senior manager of a company is material information that should be disclosed to the general meeting since such recklessness can alter the investments of shareholders in the company. In RE FRANCHARD CORP 42 SEC 163 1964 the United States Securities and Exchange Commission held “material” where a company’s controlling shareholder withdraw substantial amount from the company’s funds without the authority of the board of directors. In practice, any activity of senior managers or board, which affects the financial standing of the company, is material information that should disclosed at the general meeting. In SEC V. KALVEX INC 425 F. SUPP 310 (S. D. N. Y 1995) the failure a senior manager of the company to disclose a kickback was held to be material. While in CORKE V. TELEPROMPTER CORP 33F. SUPP. 567 (SDNY 1971) the fact that the chairman and Chief Exchange Officer of a company has been found guilty of crime was held to be a material information that should be disclosed to stakeholders. Stakeholders should always insist on full disclosure of all material information concerning the affairs of the company that may affect the value of their shares.
It is clear that investments in stocks is not without risks and that the only guarantee for such investments is to ensure that companies are run according to law. While good macro-economic environment and political stability are necessary for security of stock prices, company directors and top managers must adhere to the Code of Best Practices for Public Companies in Nigeria as issued by SEC.
By Chiedu Nweke Law Office of Chiedu Nweke & co Investment Lawyers, 08033157725 1a Thomas Laniyan Street, Anthony, Lagos.
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