Oct 25, 2023 | In Blog

Prohibited Transactions in Shares

by Prince Acquaye

INTRODUCTION

The Companies Act, 2019 (Act 992) (the “Companies Act”) prohibits companies from undertaking certain transactions with regards to its shares which may reduce the capital of the company. This is in accordance with the capital maintenance rule which seeks to preserve the capital of a company for the business activities of the company.

PROHIBITED TRANSACTIONS IN SHARES

Other than the exceptions listed under paragraph 3, a company is not permitted by the Companies Act to :

a.
alter the number of its shares or the amount remaining payable on those shares;

b.
release a shareholder or former shareholder from a liability on the shares;

c.
provide financial assistance, directly or indirectly, for the subscription or purchase of the shares of the company or the shares of its holding company; or

d.
acquire, by way of purchase or otherwise, any of its issued shares or any shares of its holding company.

EXCEPTIONS

Altering the number of shares or the amount remaining payable on those shares.

a.
A company may increase its number of shares by creating new shares, or reduce the number of shares by cancelling unissued shares or consolidating existing shares, whether issued or unissued .
b.
A company may extinguish or reduce the unpaid liability on the shares of the company subject to a special resolution that has been confirmed by the High Court .

Releasing a shareholder or a former shareholder from a liability on the shares.

a.
A shareholder or former shareholder may be released from a liability on his/her shares through forfeiture of the shares or the company exercising lien on those shares , which would result in the shareholder losing the shares altogether.

Providing financial assistance, directly or indirectly, for the subscription or purchase of the shares of the company or the shares of its holding company.

a.
A company can pay commission or brokerage fee to a person in consideration of that person subscribing or agreeing to subscribe or procuring or agreeing to procure subscription of any shares in the company. This fee should not exceed 10% of the value at which the shares are issued or a lesser rate provided in a company’s constitution.

b.
Where lending money is part of the ordinary course of business of the company, the company can lend money, notwithstanding that this money may be used for the subscription or purchase of shares in the (lending) company or its holding company.

c.
A company can also provide money, pursuant to a scheme already in force, for the purchase or subscription of shares to be held for the benefit of persons who are genuinely in the employment of the company or an associated company (e.g. ESOPs). This also includes a director who holds a salaried employment (executive director) in the company or any associated company.

d.
The company can advance loans to persons who are genuinely in the employment of the company, other than directors, purposely for those persons to purchase or subscribe for shares for themselves beneficially and not as nominal shareholders for the company or any other person.

e.
Where a company pays lawful dividends on shares, a shareholder may use the dividend received to discharge a liability on the shares held by him or to repay money borrowed to subscribe or purchase shares.

f.
A public company with shares on the Stock Exchange or in respect of which an application has been made to trade on the Stock Exchange can make payment and give indemnities or warranties to a person for arranging, underwriting, placing or selling securities in the company or any other similar transaction

Acquiring, by way of purchase or otherwise, any of its issued shares or any shares of its holding company.

a.
A company can voluntarily acquire its own shares in order to convert to a company limited by guarantee .
b.
A company can buy back its share that are issued with an option to be reacquired by the company (redeemable preference shares) or convert existing shares, whether issued or not issued, to redeemable preference shares subject to the following conditions:

there should be no unpaid liability on the shares ;

it should be funded from the Share Deals Account or with the proceeds from shares issued solely for the purpose of redemption not more than 12 months before the redemption;

and Where the shareholder has served notice on a company to redeem the shares, the company shall do so within 28 days of the service of the notice.

c.
A company can purchase up to 15% of its own the total issued shares (excluding redeemable preference shares). However, the purchase must be done with funds from the Share Deals Account or transfers to the Share Deals Account from retained earnings .

d.
A company can also acquire its own shares where a shareholder voluntarily transfers his shares to the company or to nominees for the company .

e.
The Companies Act also makes provision for a company to acquire its own shares through a buy-out arrangement with a member. Where a member is against the decision of the company to amend the constitution to vary or dispense with the business of the company, or to approve a major transaction, an arrangement, compromise, merger or division of the company or to vary the rights of a class, the member may require the company to buy him out .

f.
A subsidiary company can acquire the shares of its holding company where the subsidiary holds the shares as a personal representative or trustee of its holding company. The subsidiary or its holding company should not be beneficially interested in the shares otherwise than as a security for a transaction entered into by the subsidiary or the holding company in the ordinary course of a business, which includes lending money .

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1. Section 58 of Act 992
2. Section 59
3. Section 78(1)
4. Section 61
5. Section 105, Second and Third schedule of Act 992
6. Section 58(3)
7. Section 61(2)
8. This is an account created to provide funds for the company to redeem or purchase its shares. It consists of transfers from the retained earnings and consideration received on the re-issue of shares that the company has reacquired.
9. Section 62
10. Section 63
11. Section 61
12. Section 220
13. Section 67

by Prince Acquaye

Managing Partner | Corporate & Allied Attorneys

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