Governance & Policy

CAMA 2020: What benefits for startups and MSMEs?

September 16, 2020 · 5 min read
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The new Companies and Allied Matters Act, 2020 (“CAMA 2020” or “Act”) sustains the gains made by the Federal Competition and Consumer Protection Act, 2018 and the Finance Act, 2020 towards improving ease of doing business in Nigeria. Some of the amendments and fresh provisions are geared towards further liberalisation of Nigeria’s business environment.

Just like the Finance Act, 2020, efforts have been made to reduce the regulatory burden on small businesses by eliminating administrative bottlenecks. The CAMA 2020, incorporates innovative business rescue and recovery provisions to support and protect insolvent companies. No doubt the Act has altered the corporate, economic, and business landscape in Nigeria. This article focuses on implications of the Act for startups and small businesses generally.

Single Member Companies

Under the CAMA 2020, it is now possible for one person to form and incorporate a private company. Before now, sole membership of a company was impossible, leaving founders to look for family members or associates to subscribe to at least one share or to register as a “business name” or “sole proprietorship” which does not offer the legal protections and benefits associated with limited liability companies.

This new provision enabling sole membership of a company gives more flexibility and control to founders who may wish to immediately set up the corporate structure for their idea by incorporating a limited liability company before introducing partners and investors later.

Restriction on share transfer

The Act also incorporates novel provisions on the transfer of shareholding and sale of a private company’s assets. Unlike the CAMA 2004 which made it compulsory for private companies to restrict the transfer of shares by their Articles of Association (“Articles”), under the CAMA 2020, private companies are now at liberty to determine whether or not to incorporate restrictive provisions on share transfer by their Articles. These provisions are however necessary to prevent the acquisition of company shares by third parties who may not have the best interest of the company at heart.

The CAMA 2020 provides that subject to the Articles, a company is prohibited from selling assets having the value of more than 50% of the company’s assets without the consent of all its shareholders. It provides further that a shareholder in a private company cannot sell their shares to a non-shareholder, without first offering the shares to existing shareholders.

Also, a member, or a group of members acting together, cannot agree to sell more than 50% of their shareholding of a company to a non-member unless the non-member has offered to buy the interests of other existing members on the same terms. These provisions incorporate the right of first refusal “ROFR” and co-sale or tag-along rights which investors take into consideration before purchasing equity in a company.

Usually, investors insist on an ROFR or co-sale clause on shares held by the founders or management team of the company. The inclusion of the ROFR in the Act validates the common practice of including the provision in shareholder and founder agreements.

The threshold for small companies

Another significant benefit for small businesses under the CAMA 2020 is the increase in the threshold for qualification as a small company. Under the old CAMA, a small company is one with a yearly turnover not exceeding ₦2 million and a net asset value not exceeding ₦1 million, otherwise it is recognised as a large company.

This has been substantially increased under CAMA 2020 to an annual turnover of not more than ₦120 million, and net asset value of not more than ₦60 million. The implication of the increase is that much more businesses may now take advantage of the regulatory and financial privileges enjoyed by small companies.

Small companies are exempted under the new act from the mandatory appointment of a company secretary and auditors. The new privileges under the Act are in addition to the tax incentives already enjoyed under the Finance Act, 2020 which exempts companies with annual gross turnover of ₦25 million or less from Companies Income Tax.

Limited liability partnership

Equally worthy of note is the introduction of limited liability partnerships (LLP) as a new corporate structure. Before CAMA 2020, partnerships did not enjoy limited liability status except those registered under the Partnership Law of Lagos State. Under the old regime, partners were liable for the liabilities incurred by the partnership.

The CAMA 2020 now recognises a registered LLP as an independent and distinct legal entity from the partners. An LLP is a perfect corporate structure for business ventures between individuals or corporate bodies that would not require equity capital raising. Where the intention is to raise equity finance, it is best to register a limited liability company, and ensure strict compliance with all corporate governance requirements.

Electronic signatures/virtual meetings

Photo credit: Kelly Sikkema on Unsplash

Photo credit: Kelly Sikkema on Unsplash

The CAMA 2020 also makes an attempt to key into advances in technology. It now recognises the authentication of documents by the electronic signature of a director, secretary, or other authorised officers of the company. The Act also endorses the electronic transfer of shares by digital instruments of transfer. Private companies may also hold their general meetings electronically, however, this must be permitted by the Articles of the company.

In addition to personal notice, a notice of meetings may also be sent by email. With these introductions, business operations conducted remotely and electronically endorsed documents will be fully recognised by the Corporate Affairs Commission (CAC). These provisions are geared towards easing business processes and eliminating technicalities associated with strict application of the old CAMA.

Business rescue/recovery

The Act introduces innovative business rescue and recovery provisions which give some assurance and comfort to founders and investors. Voluntary arrangement, administration, and netting are procedures aimed at rescuing insolvent and distressed companies from eventual dissolution. Where a company is under administration or being wound up by a liquidator, the directors may make proposals to the creditors for a negotiated arrangement towards satisfaction of the debt.

Unlike the onerous situation under the old CAMA where administrators overtook the operations without attempts at resuscitating the company, the Act imposes a duty on administrators to perform their functions to rescue the company and retain its undertakings as a going concern where it is practical to do so. More than ever, these provisions are bound to boost investor confidence and expand Nigeria’s business worldview to align with international best practice.

Conclusion

Surely, Nigerian startups are major beneficiaries of the CAMA 2020 as the Act is poised to eliminate bottlenecks associated with the old regime concerning micro, small and medium enterprises (MSMEs). To take advantage of these introductions, startups are encouraged to regularise their documentation to align with the new Act, explore new frontiers for business advancements, and build operations that maximise their opportunities.

Contributors
Anthonia Udeh
Anthonia Udeh

A Senior Associate at Tope Adebayo LLP, Anthonia is an astute legal practitioner with remarkable analytical mind whose practice areas focus on Tax Advisory, Employment and Labour Law and Corporate Investment and Restructuring.

📧: a.udeh@topeadebayollp.com
📱: + 234 1 628 4627

 

Peter Okoyomoh
Peter Okoyomoh

Peter is an associate at Tope Adebayo LLP. His interests span across Environmental, Labour and Intellectual Property law

📧: p.okoyomoh@topeadebayollp.com
📱: + 234 1 628 4627

 

Tope Adebayo LLP

Tope Adebayo LLP

Author

Tope Adebayo LLP is a Nigerian Law Firm with its head office in Lagos State, registered as a Limited Liability Partnership under the Partnership Law to carry on the business of legal practice within Nigeria.

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