Selling Shares in a Nigerian Company: Key Considerations for Nigerian Shareholders

A recurring issue we encounter when advising shareholders in Nigerian companies is the position of individuals who have held shares for 10, 15 or even 20 years without ever receiving a dividend. Some invested their own money; others acquired shares through employment, business arrangements or personal relationships with a company's founders. Years later, they remain shareholders, but have received no financial return and have no obvious way to exit their investment. In reality, a shareholder's financial return does not have to depend exclusively on dividends. With the right legal and commercial advice, a shareholding that has remained illiquid for years may present an opportunity to realise value.

In this Insight, we draw on our experience advising shareholders on shareholding and exit-related matters to highlight some the key legal and commercial considerations for shareholders seeking to sell their shares in a Nigerian private company.

1. Are You the Beneficial Owner of the Shares?

In Nigeria, it is not uncommon for founders of private companies to register shares in the names of friends, family members, business associates or other nominees. The person whose name appears in the company's records may, in some cases, hold the shares on behalf of the founder or another person under an arrangement between the parties. These arrangements can become contentious when a shareholder seeks to sell. In a recent matter handled by Balogun Harold, a founder/promoter objected to a proposed sale on the basis that the selling shareholder was merely a nominee and that the parties had understood that the shares were held on the founder's behalf, notwithstanding that the selling shareholder's name appeared in the records of the Corporate Affairs Commission (CAC).

The key lesson is that, the name appearing in the company's records may not, on its own, resolve every question concerning beneficial ownership. The parties' agreements, the circumstances in which the shares were acquired and the evidence of the underlying arrangement may also be relevant. Before seeking to sell, a shareholder should establish whether they own the shares beneficially or hold them under a nominee arrangement. Founders and investors should equally ensure that such arrangements are properly documented to minimise the risk of future disputes.

2. Have You Paid for Your Shares?

It is also important to establish whether the consideration for the shares has been fully paid or provided. In our experience advising on private company shareholders, the circumstances in which shares were issued or transferred can become a source of disagreement, particularly where the parties did not properly document the transaction or retain evidence of the consideration provided.

In the case we handled, the founder/promoter argued that shares were issued to the disputing shareholder simply to comply with the corporate rule requiring a minimum of two shareholders in a company.

Therefore, a shareholder seeking to sell needs to establish the basis on which the shares were acquired and ensure that the relevant payment or non-cash consideration is properly evidenced. Depending on the transaction, this may include subscription agreements, payment records, transfer instruments and relevant corporate documents.

Even shareholders who have no immediate intention to sell should review their records to ensure that the consideration required to support their ownership position has been provided and can be demonstrated. Resolving uncertainty over the acquisition of shares before a dispute or proposed sale arises can help avoid complications later.

3. What Does the Shareholders’ Agreement Say?

A key step in assessing the legal mechanics of an exit is to review the shareholders’ agreement, assuming one exists. Shareholders’ agreements commonly contain restrictions on the sale or transfer of shares, which may affect both the choice of buyer and the process for completing a sale. For instance, a shareholder wishing to exit may be required to offer their shares to the other shareholders before selling to an external investor. In other cases, the agreement may provide for a right of first refusal, tag-along rights or other contractual mechanisms governing a proposed transfer.

The agreement should therefore be reviewed professionally to establish the available exit options and the procedures that must be followed. Attempting to sell without complying with applicable contractual restrictions often delays a sale transaction or expose the shareholder to a dispute.

4. What Are Your Shares Worth?

Unlike shares traded on a stock exchange, shares in private companies may have no readily observable market price. A shareholder seeking to sell must therefore consider what a prospective buyer might reasonably be willing to pay.

Relevant factors may include the company’s financial performance, assets, liabilities, prospects and the rights attached to the shares. The size of the shareholding may also affect its attractiveness. A minority interest that confers limited influence over management or dividend policy may be valued differently from a controlling stake.

The price a shareholder hopes to receive and the price a buyer is willing to pay may differ considerably. An informed assessment of value can help establish realistic expectations and provide a basis for negotiations.

It is also important to distinguish the value of the company from the value of an individual shareholding. A company may have substantial assets or commercial prospects, but that does not necessarily mean a minority shareholder can readily realise a proportionate amount. The practical value of the investment will depend, in part, on the rights attached to the shares, the company’s circumstances and the availability of a willing buyer.

5. How Do You Find a Buyer?

Even where a shareholder is legally entitled to sell, finding a willing buyer may be difficult. Existing shareholders may have no interest in acquiring additional shares, while external investors may be reluctant to invest in a private company without sufficient information about its financial position, ownership structure and prospects.

An M&A lawyer can play an important role in identifying potential buyers. Through professional networks, relationships with investors and knowledge of relevant industries, the lawyer can identify strategic investors, private equity firms, family offices and other shareholders who may be interested in acquiring the shares.

The process may involve confidential approaches to selected buyers, an assessment of expressions of interest and support through negotiations and completion. For shareholders who do not wish to disclose publicly their intention to sell, a targeted and confidential sale process may be particularly valuable.

Key Takeaways

A shareholder's financial return does not have to depend exclusively on dividends. Subject to the company's constitutional documents, applicable law and any restrictions affecting the shares, a shareholder may be able to realise value by selling some or all of their interest to another person.

The share sale process requires more than finding a willing buyer. Shareholders must establish their ownership, confirm the basis on which their shares were acquired, understand the applicable transfer restrictions and determine a realistic price. With the right legal and commercial advice, a shareholding that has remained illiquid for years may present an opportunity to realise value.

Balogun Harold advises shareholders, founders, investors and businesses on shareholder rights, share transfers and mergers and acquisitions.