Eligibility

What type of company is typically used in group structures?

The most common type of company used in a group structure is the private company limited by shares. This guide therefore focuses on the management of private limited companies.

What is a "director"?

A director is any person appointed by the company to direct and manage the business of the company. A person who has not been formally appointed as a director will also be regarded as a director under the law, if they are a person on whose directions and instructions the directors of the company are accustomed to act, except where such person is merely acting in a professional capacity.

What are the different types of director?

All directors are subject to the same legal duties and responsibilities. However, under Nigerian law public companies are required to have at least three “independent directors”. An Independent Director is one who (or whose relatives) during the two years preceding their appointment:

• Was not an employee;
• Did not own directly or indirectly more than 30% of the shares in the company;
• Did not give to or receive payments from the company of more than NGN20,000,000;
• Did not own at least a 30% shareholding in a company that gave or received such payments - nor were they a partner, director or officer of such a company;
• Was not engaged directly or indirectly as an auditor of the company.

Directors may also appoint a director to the position of Chair with the responsibility of presiding over board and shareholder meetings. Unless the articles of association state otherwise, the Chair will have a casting vote in the case of equality of votes. The Board may also appoint a Managing Director to preside over the daily affairs of the company on behalf of the board and the shareholders.  

Directors may be executive (usually employees who have an executive role) or non-executive (usually not employees). They may also be appointed to represent a particular shareholder (a nominee director) on the Board.

How are directors appointed?

Directors are required to consent to their appointment. The initial directors are be appointed in writing by the subscribers of the memorandum of association of the company or they can be named in the articles of association of the company. Subsequently, directors can be appointed by a vote at annual general meetings of the shareholders. Where a vacancy exists on the board because of death, resignation, retirement or removal, the board of directors may appoint a new director to fill such vacancy until the next annual general meeting, when such an appointment may be approved by the shareholders. If the appointment is not so approved, that person immediately ceases to be a director.

Details of the appointment must be filed at the Corporate Affairs Commission within 14 days of the appointment taking place. 

How are directors removed?

Notwithstanding anything in a company’s articles or any agreement between a director and the company, a director can be removed by a simple majority vote of the shareholders, subject to certain procedural requirements which must be strictly followed. A director may also resign at any time.

When a director leaves office, notice must be filed at the Corporate Affairs Commission within 14 days.

Typical management structure

Boards of Nigerian companies are single-tier structures made up of all the company's directors who individually have the same duties and obligations to the company.  The directors are also collectively responsible for the management and operations of the company and for ensuring that the company meets it statutory obligations. The board may appoint one or more of its members to the office of managing director and may delegate its powers to such managing director to manage the daily operations of the company. Directors may also appoint a director to the position of Chair with the responsibility of presiding over board and shareholder meetings.

How are decisions made by directors?

Directors are free to regulate their proceedings, and the manner in which directors can make decisions may be set out in the company's articles of association – whether by physical meeting, teleconference or a written resolution.  Other than single director companies and unless the company's articles stipulate otherwise, the minimum quorum for board meetings is two directors where there are not more than six directors. If there are more than six directors, then quorum is a third of the number of directors. 

Unless the articles stipulate otherwise, decisions at board meetings are made by a simple majority vote, and the chair will have a casting vote in the case of equality of votes.  When decisions are made in writing, however, the unanimous agreement of all directors is required.

In making decisions, directors must act in the best interests of the company and must have regard to the impact of the company’s operations on the environment, the interests of the company’s employees in general, as well as the interests of its shareholders.

Authority and powers

The business of a company is directed and managed by the board of directors who can exercise all powers of the company that are not required (by law or by the company’s articles) to be exercised by the members. Any collective act of the board of directors, or the act of a managing director in the usual way the business of the company, will generally be treated as the act of the company itself.

Where a company holds a person not duly appointed out to third parties as a director, and such person acts as such on behalf of the company, the company is bound by such person's acts.

Delegation

Generally, the board of directors may exercise its powers through committees consisting of directors or may delegate its powers to a managing director (or CEO) to manage the daily operations of the company. Such committee or managing director must conform to the terms of such delegation.

Where directors delegate their powers they must not delegate their power in such a way and manner as may amount to an abdication of their duty and overall responsibility for the company's operations and management.

What are the key general duties of directors?

A director stands in a fiduciary relationship towards a company and must observe the following duties:

• Good faith: Directors must observe good faith in any transaction in relation to the company and discharge their duties honestly.
• Best interest of the company: Directors must act in the way that they believe to be the best interest of the company, so as to further its business and promote its objectives. In doing so, the directors must have regard to the impact of the company's operations on the environment in the community it operates, the interest of the company’s employees and the interest of its shareholders. Directors are responsible for monitoring the risk management framework in place in the Company, to ensure business continuity.
• Care and skill: Each director must exercise a degree of care, diligence and skill which a reasonably prudent director would exercise in comparable circumstances. Directors must meet the minimum standard of skill and care expected of someone in their position, and they must also bring to bear their particular skills and experience. Therefore, the more qualified  or experienced a director is, the greater the statutory standard required of them.
• No collateral purpose: Directors must exercise their power for the specific purpose it was given and not for any collateral purpose. They must not restrict their discretion to vote in any particular way.
• No conflict of interest: Directors must not put themselves in a position where there is, or could be, a conflict between their personal interests and their duty the company.
• No secret profit: Directors must not make any secret profit or achieve any unnecessary benefit and must declare the nature and extent any interest in proposed transactions or arrangements with the company before the secret profits are made.
• Misuse of corporate information: Directors must not to misuse the company's information.
• Gifts: Directors must not accept bribes, gifts or commissions from any person in respect of any transaction involving their  company in order to introduce their company to deal with such a person.

What are directors' other key obligations?

Nigerian law requires directors to prepare and file annual returns, financial statements and other corporate information to the corporate affairs commission within the prescribed time limits.

Directors are also responsible for ensuring that the company complies with its other statutory and legal obligations, for example under environmental and health and safety laws, employment laws, consumer protection laws, competition laws and bribery/anti-corruption laws.

Transactions with the company

Directors must not put themselves in a position where there could be a conflict between their personal interests and their duty to the company. A director who is directly or indirectly, interested in a transaction or a proposed transaction with the company, must immediately notify the directors of such company in writing, specifying nature of their interest.

Generally, Nigerian company law regulates the circumstances under which directors or persons connected to them can enter into transactions with the company, e.g. the disposal or acquisition of substantial company property.  Unless exemptions apply, these transactions may only be entered into with prior shareholder approval.

Breach of general duties

Generally, only the company can bring an action to enforce a director’s duty or remedy its breach, as directors owe their duties to the company itself and not directly to the company’s shareholders or creditors. 

However, shareholders are permitted to sue directors for breach of duty on behalf of the company by way of a derivative action, under certain circumstances.  To do so, court approval to proceed with a derivative action must be sought by the shareholders.

A range of remedies in favour of the company are available against a director for breach of duty including suing for negligent performance, damages, recovery of misapplied property, accounting for profit made in breach of duty, restitution, injunction to prevent breach and rescission of a contract.

Liabilities on insolvency

Directors may be held personally liable for fraudulent or wrongful trading if the company is insolvent or nearing insolvency.

If, during the winding-up of a company, it appears that the business of the company has been carried on in a reckless manner, or for any fraudulent purpose, the directors who knowingly allowed it may be held personally responsible for the liabilities of the company, without any limitation of liability. In the case of fraud, the director commits an offence, and is liable on conviction to a fine or to imprisonment for a term of two years or both. Liability may however be avoided if the directors can show that they took every step they possibly could to minimise the potential loss to the company’s creditors.

Where a director makes a statutory declaration of solvency where they have no reasonable grounds for making the declaration, if convicted, the director will be liable to a fine in addition to imprisonment for a term of three months.

If the company has gone into insolvent liquidation and at some time before the commencement of the winding-up of the company, the directors knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, they may be held liable to make any necessary contribution to the company’s assets.

Other key risks

A director may be held personally liable for taxes and related penalties that are due by the company if the director has breached the tax obligations of the company.

A director may be held criminally responsible if:

• The director committed a crime or participated in the commission.
• If they committed a criminal offence within the company related to its activities, even if the director was not directly involved in the commission of the crime (e.g. under the Labour laws, Economic and Financial Crimes Commission Act, Money Laundering (Prohibition) Act, Investment and Securities Act).

A director may also be disqualified by the court from acting as a director or from taking part in the promotion, formation or management of a company.  A disqualification order can be made for a variety of reasons (e.g. conviction for criminal offences relating to the running of a company, or being found liable for fraudulent or wrongful trading).

How can directors be protected from liability?

• Indemnity: A company cannot indemnify a director from liability arising from the breach of any law in relation to the company. Such breaches may include negligence, default, or breach of trust. However, a company may indemnify a director in the form of an advance against legal costs incurred by the director in successfully defending legal proceedings. If the director is however not successful, the advance must be repaid to the company.
• Insurance: Directors' and officers' (D&O) insurance is available in Nigeria.  It typically provides cover for individual directors against claims made against them in their capacity as director (including defence costs) and company reimbursement when it has indemnified its directors. 
• Ratification: shareholders can ratify or confirm negligent actions taken by directors, or conduct which breach a director’s duty, except where the breach is an illegal or fraudulent. This does not, however, absolve a director from any liability to a third party.

What practical steps can directors take to avoid liability?

To avoid  liability, directors should:

• Ensure that the company’s articles provide for indemnification, that they have entered into an appropriate indemnification agreement with the company, and that there is sufficient D&O insurance in place.
• Perform their duties conscientiously, and act in the best interest of the company. They must also ensure that they are aware of, understand, and comply with the company’s governance and compliance structures.
• Keep informed about the affairs of the company ensure that they have access to up-to-date financial information. They shouldn’t hesitate to ask management questions to enable them to have a better understanding of the company’s business.
• Devote ample time to the company, attend board meetings regularly and prepared sufficiently for them. They must also ensure that the meetings are well documented. The minutes should include key information such as the factors the directors took into consideration when making such decisions. A director that disagrees with a majority vote must ensure that their dissent is formally and accurately recorded.
• Make full disclosures to the board and shareholders regarding conflicts of interest.
• Understand their fiduciary and legal duties to the company, undertake professional development as a director, and seek professional advice from lawyers, and other advisers when necessary.