HOW TO MANAGE THE UNINTENDED CONSEQUENCES OF THE GUIDELINES ISSUED BY THE CAC ON HOLDING OF AGMS OF PLCS USING PROXIES

A. Introduction

The declaration of Coronavirus (COVID-19) by the World Health Organization (WHO) as a pandemic ⁽¹⁾ is the first confirmation that it is a global health challenge with devastating consequences, if not managed carefully and promptly. The Director General of WHO, Dr. Tedros Adhanom Ghebreyesus, said at a media briefing that “This is not just a public health crisis, it is a crisis that will touch every sector.” He advised that “…every sector and every individual must be involved in the fights.”

Each country planned its 2020 budget without any reference to the likely negative effects of COVID-19 on their projected revenues and the inevitable extra budgetary spending on health facilities to combat the disease. Realizing the consequences of inaction on the economy, each country has taken steps to curtail the spread of COVID-19. As at January 2020, it is doubtful if any company considered COVID-19 as part of the Top 10 Business Risks in 2020. No company expected that the disease could paralyze its business for such a long time. The major issue now is that nobody can say with certainty when COVID-19 would be completely defeated and both local and international business activities could resume.

An aspect of the business activities of the private sector adversely affected in all parts of the world by COVID-19 is the ability to hold Annual General Meetings “AGMs” of private and public companies. Since the financial year-end of majority of the companies globally is December, their AGMs are usually scheduled to hold between March and June in 2020. It is for this reason that some countries and regulatory authorities have issued guidelines on how to minimize the impacts of COVID-19 on corporate meetings earlier planned for the second quarter of 2020.

B. Response of the Regulatory Authorities in Nigeria to the Challenge

In Nigeria, the major regulatory authorities ⁽²⁾ to receive the audited financial statements to be approved by the shareholders issued guidelines on how the meetings are to be held during the period of COVID-19. They are conscious of the fact that in February and March 2020, some companies had published their notices of AGMs scheduled to hold between March and June 2020. These authorities released guidelines on how the AGMs could be held during this period.

On March 19, 2020, The Nigerian Stock Exchange (NSE) issued its Circular ⁽³⁾ on the conduct of AGMs and gave the following broad guidelines:

i) Companies are to adhere to the guidance document issued by the Nigeria Centre for Disease Control (NCDC) on safe mass gatherings in Nigeria, WHO, Lagos State and Federal Ministry of Health in the effort to tackle the virus

ii) Listed companies that have already scheduled their meetings are to adopt the safety procedures provided by the NCDC in preparation for the AGMs and the procedures should be adequately communicated to all invitees to the AGM

iii) Listed companies that wish to postpone their AGMs or are yet to schedule their AGMs should note that they are to hold one within nine (9) months from the end of its financial year-end or within such extended period as may be approved by the Corporate Affairs Commission; failing which, such Issuer shall file a report with the NSE within ten (10) business days of the end of the stipulated period explaining the reasons for the default; and make an announcement in that regard in at least two (2) national daily newspapers within five (5) business days of receiving NSE’s approval to make the announcement

iv) Issuers should note the legal obligation to ensure that not more than 15 months shall elapse between the date of one annual general meeting of a company and that of the next, or seek the permission of the Corporate Affairs Commission to extend the time within which an AGM may be held by a period not exceeding three (3) months

The purpose of the Circular of the NSE is a general reminder to all listed companies about the existing law, rules and regulations applicable to AGMs of Issuers, the available options and the precautions to be taken while considering each option. There is no part of the Circular amending existing laws / regulations or limiting the rights of the shareholders / companies. Consequently, there is no objection to this Circular issued as a reminder to Issuers to facilitate compliance.

The Securities and Exchange Commission (SEC) as the apex regulatory authority in the Capital Market in Nigeria also issued a Circular on March 24, 2020 titled “Circular To Capital Market Stakeholders On Covid-19” with the following advice on meetings:

“Public companies are advised to take appropriate precautionary measures as recommended by the Federal and State Governments as well as the Nigeria Centre for Disease Control (NCDC) to ensure the safety of shareholders and participants at Annual General Meetings/Extra-Ordinary General Meetings and other meetings which may be held during the prevalence of the pandemic.”

On March 31, 2020, SEC issued another Circular titled “Circular To All Regulated Entities and the Market” where it provided additional guidance to the Capital Market and on meetings as follows:

“Public companies who plan to conduct AGMs are required to ensure that the conduct of the meetings comply with the provisions of the Companies and Allied Matters Act, the Investments and Securities Act, the SEC Rules and Regulations, relevant government and health circulars and guidelines issued in this regard.”

Once again, SEC reminded public companies planning to hold AGMs of the need to comply with the existing laws, rules regulations and guidelines. No attempt was made in both Circulars to alter the existing laws or limit the rights of the shareholders. Therefore, no shareholder or company can challenge these guidelines.

The second Circular of SEC issued on March 31, 2020 could have expressly stated the implications on AGMs of the Address of President Buhari on March 29, 2020, (subsequently incorporated as COVID-19 Regulations 2020 ⁽⁴⁾ dated March 30, 2020) directing the cessation of all movements in Lagos and Ogun States and the FCT, for an initial period of 14 days with effect from 11 pm on Monday, March 30, 2020. With that Presidential directives restricting movement of persons, it was no longer possible for any public company to hold its AGM during the period of the restriction in Lagos and Ogun States and the FCT, with effect from March 31, 2020. It is also a fact that other state governments issued similar restrictions within their states. Since about 70% of the AGMs of public companies in Nigeria are held in these three (3) locations and representatives of SEC attend these AGMs as Observers, SEC could have advised the public companies in its second Circular of the impossibility of such companies going ahead with the AGMs in these areas until the expiry of the restriction order.

C. CAC GUIDELINES ON HOLDING OF ANNUAL GENERAL MEETINGS (AGM) OF PUBLIC COMPANIES USING PROXIES

On March 26, 2020, the Corporate Affairs Commission (CAC) in a bid to assist public companies hold their AGMs as planned in the first half of 2020, issued the Circular titled “GUIDELINES ON HOLDING OF ANNUAL GENERAL MEETINGS (AGM) OF PUBLIC COMPANIES USING PROXIES” (Guidelines).The details of the Circular are reproduced below:

“In view of the COVID-19 pandemic, companies can hold their Annual General Meetings by taking advantage of S.230 CAMA on the use of proxies.  The following should guide the companies on the procedure and conduct of the AGM:

1. The approval of the Corporate Affairs Commission (CAC) shall be obtained before such a meeting is held. The application can be submitted to the Head Office in Abuja or any of the branch offices in any of the States.  
2. CAC shall send representative(s) as observer(s) to the meeting.  
3. The meeting shall only discuss the Ordinary Business of an AGM as provided in S.214 CAMA.  
4. Notice of meeting and proxy form shall be sent to EVERY member in accordance with the requirements of CAMA. Companies will be required to provide the CAC with the evidence of postage or delivery of such notices after the meeting.  
5. All the members shall be advised in the notice that in view of the COVID-19 pandemic, attendance shall only be by proxy with names and particulars of the proposed proxies listed for them to select therefrom. The invitation shall be issued at the companies’ expense as well as the stamp duties which shall be prepaid by the company.  The proxies need not be members of the company.  
6. The company shall be guided by the provisions of its Articles or CAMA as regards to a quorum. However, for the purpose of determining quorum, each duly completed proxy form shall be counted as one.”

The Circular demonstrated that CAC identified the restriction on mass gatherings of not more than 25 persons as the major problem that would make it difficult for public companies with thousands of shareholders to hold their planned AGMs in the first half of 2020. Consequently, CAC took the decision to eliminate the bottleneck created by the restriction on mass gathering by considering what would assist the public companies to hold their AGMs and the measures they should put in place to protect the interest of the shareholders, who would not be able to attend the meeting physically.

It is necessary to consider the highlights of the contentious areas of the Guidelines and their effects on the existing provisions of the Companies and Allied Matters Act (CAMA) and the rights of the shareholders.

i) “Companies can hold their Annual General Meetings by taking advantage of S.230 CAMA on the use of proxies”

Section 230 of CAMA gives every member of a company both a right to appoint a proxy and a discretion to appoint or not to appoint a proxy.  Section 230 does not confer any right on a company to appoint proxy. It is therefore not clear how companies can take advantage of that section to hold AGMs. It is doubtful if the defense provided in section 230 (4), which is just to allow an officer of a company avoid imposition of fine for the offence committed by issuing at company’s expense, invitations to appoint as proxy a person or one of a number of persons specified in the invitations to only some of the members entitled to be sent notice of the meeting and to vote by proxy at the meeting, would give a company such an advantage.

ii) “The approval of the Corporate Affairs Commission (CAC) shall be obtained before such a meeting is held.”

As at now, there is no provision in CAMA to the effect that a public company must obtain the approval of the CAC before it can hold its AGM. CAC is only notified and invited to the AGMs of public companies. It is a fact that under section 213 (1) (b) of CAMA, CAC has the power to extend the time within which the second and subsequent AGMs can be held by a period not exceeding three (3) months. It appears that this is the only instance where we have something close to the prior approval of the AGM of a company by CAC.

iii) “The meeting shall only discuss the Ordinary Business of an AGM as provided in S.214 CAMA.”  

It is obvious that one of the conditions to be attached to the approval to be granted by CAC for a public company to hold its AGM is that it must only discuss the Ordinary Business of an AGM as provided in section 214 of CAMA. The items allowed to be discussed under Ordinary Business are: declaration of dividend, the presentation of the financial statements and the reports of the directors and auditors; the election of directors in place of those retiring; the appointment, and the fixing of the remuneration of the auditors and the appointment of the members of the audit committee. The Guidelines would assist public companies to pay dividend to shareholders and the country would get withholding tax from such dividend thereby reflating the economy (a win-win situation for the shareholders, country and the companies) in this difficult period.

Therefore, a public company holding its AGM based on the Guidelines cannot discuss any Special Business (fixing of the remuneration of directors; seeking the approval of shareholders for general mandate to enter into recurrent transactions with related parties; seek the approval of shareholders to increase share capital, etc. CAC probably excluded the consideration of items under Special Business since they could be contentious, and it would be necessary to give all the shareholders the opportunity to express their views on these items before decisions are taken by the company. Since shareholders cannot attend such AGMs during this period, CAC probably felt that the items should be considered at the appropriate time after COVID-19 when all shareholders would have the opportunity to attend.

However, section 214 of CAMA gives a company the right to transact both ordinary business and special business at its AGM, without any restriction. Consequently, it appears that CAC unintentionally attempted to limit the rights of public companies and their shareholders on what can be discussed at AGMs without considering the effect on the business sustainability of some of these public companies.

The questions are: how can a listed company that procures goods and services from related parties to produce all or most of its finished products or those necessary for its day to day operations, but cannot obtain the approval of the shareholders at AGMs held under the Guidelines in 2020 (since this item is a special business) continue with its business after the AGM? Since such a listed company is expected by the NSE Rules ⁽⁵⁾ to obtain approval of the shareholders annually to continue the transactions with related parties, can the public company continue with such transactions with related parties after the AGM until when an Extraordinary General Meeting (EGM) would be held later to approve such transactions? Would this limitation not adversely affect the existence and financial stability of such public company during this period? This is an unintended consequence of the Guidelines.

By its name, AGM is held once in a year and it is to provide the opportunity for the members of the company to discuss and take strategic decisions that would facilitate the progress of the company. Based on the limitation on the scope of the items to be discussed, it would be necessary for such public companies not able to consider the items under special business to convene another meeting (EGM) solely for the purpose of concluding the unfinished business of the normal AGM for the year. This is another unexpected consequence of the Guidelines as the company would be compelled to incur additional but avoidable expenses to organize the second AGM now to be called EGM.

Apart from the above, there are challenges with the limited items under ordinary business that public companies can transact under the Guidelines. Some of the challenges are:

• How are the shareholders’ representatives on the audit committee to be elected since it must be done by show of hands, and not by poll? A public company would only be fortunate to resolve this challenge if there are only three (3) nominees to represent the shareholders on the audit committee vying for election / re-election.
• How can 25 persons to be allowed to the venue of an AGM based on the restriction on mass gatherings elect the members of the audit committee under this arrangement?
• How can a person appointed to represent 25 shareholders vote by show of hand when it is time to elect the members of the audit committee? Would he raise his hand(s) 25 times?
• If a person is appointed to represent 25 shareholders with divergent views on a resolution, how would such a person speak for and against the same resolution during the meeting? These are some of the limitations of holding AGMs using proxies.

iv) “All the members shall be advised in the notice that in view of the COVID-19 pandemic, attendance shall only be by proxy with names and particulars of the proposed proxies listed for them to select therefrom.”

As earlier stated, it is doubtful if section 230 (4) of CAMA can be relied upon to compel shareholders to appoint proxy from the list of proxies compiled and communicated by the company. This is because section 230 (1) of CAMA provides that a member of a company “…shall be entitled to appoint another person (whether a member or not) as his proxy…” This shows that a shareholder has unlimited power to decide who should represent him or her at an AGM. Consequently, neither a company nor the CAC has a right to limit, modify or suspend the right of a shareholder to attend AGM as indicated in the Guidelines.

More fundamental is the right conferred on every shareholder by section 227 of CAMA which provides that every member shall have a right to attend any general meeting of the company. CAMA states that a member has the right of attendance without any limitation. Consequently, this aspect of the Guidelines is at variance with the right conferred on every member by CAMA to attend AGM and can be challenged in court by an aggrieved shareholder. It is a fact that a regulation cannot override the provision of a law. It is the public company that would be the main target of any case that could be instituted by the shareholders to challenge AGMs held under the Guidelines. Such a company would be compelled to incur costs to defend the suit and possibly organize another AGM, if the court sets aside the decisions taken at such AGM because the company prevented shareholders from attending the meeting. This is another unintended consequence.  

As at now, there is no law in Nigeria compelling shareholders to just watch proceedings of AGMs without the opportunity to participate as implied in the Guidelines. This is because the essence of a meeting is to listen to others and be heard.

v) Right of CAC to issue the guidelines

With due respect, CAC has no power under CAMA to issue the Guidelines impliedly altering the provisions of the law on how an AGM should be held; issues to be discussed; rights of shareholders or to compel shareholders to appoint proxies.

What CAC issued was referred to as “Guidelines” and not “Regulations” provided for by CAMA. Even if the Guidelines were to be referred to as “Regulations” and issued by the Minister under S.16 of CAMA, such regulations could not have amended the provisions of CAMA the way they have done. This is because regulations cannot modify a law as held in the case of Obi Ezeude & Beloxxi Industries Limited V Hon. Commissioner for Special Duties and Intergovernmental Affairs of Ogun State & 5 Ors ⁽⁶⁾, which was decided by the High Court of Ogun State on December 17, 2019.

Another reason why the provisions of the Guidelines cannot override the rights conferred on the shareholders by CAMA is because the section only empowers the Minister to make regulations under Part A dealing with Companies:

• prescribing the forms and returns and other information
• prescribing the procedure for obtaining any information
• requiring returns to be made within the period specified
• prescribing any fees payable

It appears that the Guidelines were not issued to address any of the above four (4) specified areas stated in section 16 of CAMA.

It should be noted that the presidential directive with effect from March 30, 2020 restricting the movement of persons in Lagos and Ogun States and the FCT for 14 days has at least suspended the application of the Guidelines, during the period of the restriction in these areas. Any meeting held in the three (3) areas within this period can be easily challenged on the basis that those who attended contravened the restriction imposed by the President of the Federal Republic of Nigeria and should be punished. The decisions reached at such a meeting could also be set aside as those who attended would not be able to assert that the meeting was held because they would be compelled to disclose their contravention of the restriction on movement issued by the government.

D) How to manage the unintended consequences of the Guidelines

It is fact that a special situation requires innovative steps which should comply with the existing provisions of the laws and regulations. Therefore, it is necessary for all stakeholders to consider the most compliant and efficient option in determine when and how to hold the AGM of a public company during the period of COVID-19. The following options are recommended for consideration by public companies:

i. For those that have scheduled their AGMs and published their details, they should postpone their AGMs until after COVID-19 is brought under control. Afterall, all companies have an interval of fifteen months between the last AGM held in 2019 and the AGM to be held in 2020. Most of the companies with December as financial year-end that held their AGMs between March and June 2019, have between June and September 2020 to hold their AGMs, without the need for the approval of the CAC for an extension for a period of three (3) months as provided in section 213 of CAMA. Such companies are only required to inform the regulatory authorities of the decision to postpone their AGMs to a later date in the third quarter or a date to be communicated later, and publish the postponement in two national newspapers

In any case, why are public companies in a hurry to hold AGMs when they still have up to a minimum of June 2020 to hold AGMs as of right, and up to September 2020, after obtaining an extension for a period of three (3) from CAC?

The Capital Markets Authority in Kenya recently requested listed companies set to hold AGMs between March and May 2020 to postpone them as a result of the restriction on mass gatherings for fear of COVID-19 infections ⁽⁷⁾.

ii. For any public company yet to fix a date or communicate same to stakeholders, it is better to wait until a time that there is clarity on the level of success achieved in the fight against COVID-19 and there is no restriction on movement in the state where such AGM is to be held

iii. The government should enact a law on COVID-19 covering various sectors and authorizing a company to decide how shareholders are to participate in company meetings. Switzerland adopted the approach when it issued the Ordinance titled “Ordinance on Measures to Combat the Coronavirus COVID-19” of March 13, 2020. The Ordinance is for a maximum period of six (6) months from March 13, 2020. Article 6 of the Ordinance provides that “In the case of company meetings, the organizer may, regardless of the probable number of participants and without complying with the period of notice for convening meeting, order the participants to exercise their rights exclusively:

• In writing or online; or
• Through an independent proxy appointed by the organizer”

Consequently, the companies in Switzerland are protected by law and have a legal defense to any case that could be instituted by the shareholders to challenge company meetings (including AGMs) held during this period. The United Kingdom promulgated the Coronavirus Act 2020 to address the challenges created by COVID-19. The current Emergency Economic Stimulus Bill 2020 at the National Assembly should include similar provisions to Article 6 of the Ordinance issued by Switzerland in order to allow companies to hold their AGMs during this period without the risk of litigation by shareholders determined to challenge the validity of such AGMs. This is because another law (not guidelines) would have been passed to modify the applicable provisions in CAMA on AGMs. When this is done, public companies can then hold their AGMs during this period without the risk of litigation.

iv. For public companies desirous of going ahead with their AGMs under the Guidelines, after the expiry of the restriction order released by the federal and state governments, they could consider using their offices for the AGMs and comply with safety directives, instead of booking bigger and expensive venues. If the cost is not too high, they could get a Television station to cover the AGM live at a discounted rate, with shareholders given the opportunity to dial-in to express their views. The option of streaming the AGMs proceedings live should be combined with facilities to enable shareholders communicate their views during the meeting in order to give the shareholders the opportunity to participate.

v. In addition, shareholders should take advantage of the right given to them to ask questions in writing prior to the AGMs by sending such questions to the company secretary at the registered office, at least a week before the meeting. The Chairman of the Board should endeavor to respond to all the questions received from the shareholders.

E) Conclusion

It is expected that the adoption of any of these options would protect the interest of the company, preserve the right of the shareholders to attend AGMs and reduce the risk of litigation with the associated avoidable expenses.

Footnotes

1. March 11, 2020
2. The Securities and Exchange Commission; Corporate Affairs Commission and The Nigerian Stock Exchange
3. Circular to Issuers on the Conduct of 2020 Annual General Meetings of Companies Listed on the Exchange
4. COVID-19 Regulations, 2020 made pursuant to The Quarantine Act, (CAP Q2 LFN 2004)
5. Chapter 20 of the RuleBook of The Nigerian Stock Exchange: Rules Governing Transactions with Related Parties or Interested Persons
6. Suit No. AB/509/2018
7. Acting Chief Executive of Capital Markets Authority in Kenya, Wyckliffe Shamiah, said that “Listed companies and licensed persons including collective investment schemes are advised to defer the meetings to a later date while ensuring all affected stakeholders are notified in good time.”

Bode Ayeku, FCIS

President / Chairman of Council

Institute of Chartered Secretaries & Administrators of Nigeria