Demutualisation of the NSE and arising issues: A call to duty

BY GODDEY ODIN

Legal Framework 

The provisions of the Companies and Allied Matters Act, 2020 (CAMA), the Demutualisation of the Nigerian Stock Exchange Act (NSE), 2018, and the Securities and Exchange Commission Rules and  Regulations, 2013, shall be duly referred to for the purposes of this article.

What is Demutualisation? 

Demutualisation is a process by which a private, member-owned company, such as a co-op, or a mutual life insurance company, legally changes its structure, in order to become a public traded company owned by shareholders. 

In demutualisation, the members give up their rights and receive shares in the company in return, which the (now former) members may then sell. Demutualisation happens most often when a stock exchange owned by its members goes public. As an aside, a mutual company should not be confused with a mutual fund. 

The Nigerian Exchange Group (NGX) is such an example of a demutualized company which announced the development in an update published on its website on Wednesday, March 10, 2021. 

Demutualisation allows the exchange to sell its shares to investors and be listed on the exchange for trading. 

This makes the Nigerian Stock Exchange (NSE) join the league of Johannesburg Stock Exchange and Nairobi Stock Exchange, which are already publicly listed companies. This has resulted in the creation of a new non-operating holding company, the Nigerian Exchange Group PLC (NGX Group) with  Mr. Oscar Onyema serving as its group chief executive officer (GCEO). The NSE will now proceed with its transition plan which will include the inauguration of boards, staff reallocation, operationalisation of business plans and budgets, technology systems transfer, and agreements, among the entities.

However, it has been observed that the Nigerian Exchange Group (NGX) (formerly Nigeria Stock Exchange (NSE) seems to be threading a path that may not be in consonance with the laws of the  Federal Republic of Nigeria, particularly the Investment and Securities Act, 2007, the Securities and Exchange Commission Rules and Regulations, 2013 and Companies and Allied Matters Act, 2020. In order to effectively and efficiently carry out the objectives of securities regulation as embedded in the  Investments and Securities Act (The Act), the Securities and Exchange Commission (The  Commission), has prescribed these Rules and Regulations i.e. the Securities and Exchange  Commission Rules and Regulations of 2013. These rules and regulations provide participants  (regulated persons) in the capital market with more precise notice of what is expected of them, what conduct will be sanctioned and also promotes fairness and equality of treatment among similarly situated persons.

A notice of annual general meeting and a notice of statutory meeting to be held on September 9, 2021, have been issued on August 16, 2021, in line with the required 21(Twenty-One) days length of notice before such meeting is made as provided by Section 241 of the CAMA. Also, looking at the content of the notice of annual general meeting, an important part of the agenda was included without regard to the SEC Rules and CAMA. It is worrisome that these laid down rules are not being complied with by a major regulatory body such as the erstwhile Council of the Nigerian Stock Exchange currently demutualized. Some of them as seen in the 8th agenda of the intended sixtieth AGM is replicated thus:

8. To consider and if thought fit, pass the following sub-joined resolutions as an ordinary resolution. 
9. i) “that further to members’ approval at the Extra-Ordinary General Meeting of 3, March 2020 for the establishment of an Employee Share Ownership Plan for the benefit of qualifying employees of Nigerian Exchange Group Plc and its Subsidiaries, that the Company be and is hereby authorized to issue and allot 200,419,900 ordinary shares of 50 kobo each out of the authorized share capital of Nigerian Exchange Group Plc for the operation of a Long Term Incentive  Plan consisting of a Deferred Bonus Plan (DBP) and an Employee Share Purchase Plan (ESPP), with effect from 1  January 2021, subject to obtaining requisite regulatory approvals. 
10. ii) That the Board of Directors be and is hereby authorized to establish and operate a DBP for the benefit of qualifying members of the Senior and Executive Management of Nigerian Exchange Group Plc and its Subsidiaries. The relevant details of the DBP and ESPP are contained in the Explanatory Notes attached to this notice. 

iii) That the Board of Directors be and is hereby authorized to establish an Employee Trust to oversee the administration  of the DBP and ESPP 

1. iv) That the Board of Directors and Management be and are hereby authorized to draft relevant rules and policies, take all such actions, execute and deliver all such documents as may be deemed necessary or appropriate for the effective administration of the DBP and ESPP and to give effect to the foregoing resolutions and to ensure compliance with extant  laws (tax laws, securities laws e.t.c. ) and regulations.” 

It is pertinent to note that the dilution of interest of existing shareholders of the company thereby decreases the value of the newly demutualized company as shares under the said Employee Share Purchase Scheme are not paid for. Section 1 of the Nigerian Stock Exchange Act which governs the NSE and consequently the NGX as a public company limited by shares must go in accordance with international best practices and standards for the development of the economy of Nigeria. This is also explicitly provided in the provisions of Schedule X of the SEC Rules.  

However, although the provisions of CAMA for 21 days Length of Notice (Sections 235 (2) and 241) and Rule 24 of the SEC Rules having been complied with, there is a lacuna as some persons entitled to receive the notice of meeting as provided in Section 243 of the CAMA have not received such  Notice and as provided by Section 245 (1) of the CAMA, failure to give such Notices of any meeting to a person entitled to receive it invalidates the meeting unless such failure is an accidental omission on the part of the person giving the notice. 

Also, if no such notice of meeting has been issued to all entitled persons according to the Act, it lends credence to the fact that proxy statements as shown in the Notice have not been received by same in contrast with Rule 593 (2) of the SEC Rules which provides that where proxies are solicited at the expense of the company on behalf of the board, proxy forms and materials must be sent to every member of the company entitled to notice of the meeting and to vote by proxy at the meeting. 

Furthermore and most importantly, where there is an increase in share capital in the process of conversion from a private company to a public company, the offer of 10% share capital on the said agenda that is being allotted to the senior and executive management of NGX PLC and its subsidiaries under the Deferred Bonus Plan (DBP) and the Employee Purchase Plan(ESPP) Schemes as provided by Section 142 of the CAMA, an offer of first instance should have been made to the existing shareholders as Pre-emptive rights with the exception being that some shareholders have previously rejected such an offer. 

In Section 5 (3) and (4) of the Nigerian Stock Exchange Act, if there is any assertion by any person to any right in the shares of the Exchange, then the Claims Review Panel can be set up by following the procedure set out in Section 6 of the NSE Act in order to review and determine such. Also, the rationale as to how management arrived at the number of shares and percentage for the Employee Share Purchase Scheme is not indicated neither was the basis of the creation or establishment of the  EPP Scheme indicated. 

In addition to the notice required to be given to those entitled to receive it in accordance with the provisions of CAMA, Section 246 of the CAMA provides that every public company shall, at least 21  days before any general meeting, advertise a notice of such meeting in at least two daily newspapers.  Therefore, if such provision has not been adhered to by the NGX, the meeting will be invalidated for such reason. 

It is pertinent to note that it is too early in the life of a newly publicly listed company to start issuing its shares for an Employee Share Purchase Scheme when the associated value in the company is yet to be properly recognised. Also, to issue shares of this magnitude (10%), sufficient consultation should have been held with major stakeholders of the company for more explanations in accordance with Rule 27  of the SEC Rules which provides that shareholders of public companies should play a key role in good corporate governance. In particular, Institutional shareholders and other shareholders with large holdings should seek to positively influence the standard of corporate governance in the companies in which they invest. They should demand compliance with the principles and provisions of this code.  They should seek explanations whenever they observe non-compliance with the code. This is in reiteration of the reason that such significant issuance of shares should not be considered in isolation of the contract that will guide the scheme and allotment of the said shares. 

Consultations with some stockbrokers who are shareholders in the company indicate that it is an extremely unpopular programme which begs the point that the entire arrangement is in the interest of shareholder or management and staff of the company who do not have significant stake or interest in the company to appropriate control. This creates an assumption and posers of illegal acts contrary to Rule 28 of the SEC Rules which provides for sustainability sake that companies should pay adequate attention to the interests of their stakeholders such as their employees, host community, the consumers and the general public. Public companies should demonstrate sensitivity to Nigeria’s social and cultural diversity and should as much as possible promote strategic national interests as well as national ethos and values without compromising global aspirations where applicable. Since the demutualisation of the NGX, and the subsequent ownership of the shares of NGX, the equity stake of the board in the company is not significant and the Board composition is not reflective of the interest of the shareholders as at today. 

In conclusion, NGX Plc’s plan to issue a 10% stake to its employees via the ESPP which may also be backdated to January 1, 2021 contrary to the date scheduled in the notice for the annual general meeting is an attempt to circumvent the laws against the rules provided by Securities and Exchange Commission, a major regulatory body of the company aside from the Corporate Affairs Commission. Nigeria Code of Corporate Governance enacted in 2018 has suggested that companies should recognise corruption as a major threat to business and to national development and therefore as a sustainability issue for businesses in Nigeria, companies, boards and individual directors must commit themselves to transparent dealings and to the establishment of a culture of integrity and zero tolerance to corrupt practices. Failure to comply with the provisions contained in the regulations already mentioned above will attract appropriate sanctions in accordance with the applicable laws and regulations.

Having examined the implications of the agenda on the notice of meeting by NGX Plc, there is a call to duty on the administrative proceedings committee of the Securities and Exchange  Commission saddled with the responsibility of making investigations into such allegations of companies, stockbrokers and other capital market operators as the NGX Plc in accordance with Rule 16 of the SEC Rules if the NGX is found wanting of the allegations. 

References

Bloomenthal, A. and Berry-Johnson, J. (2021): Corporate Finance & Accounting, Investopedia.  https://www.investopedia.com. 

Irenen, R. (2021): Exploring Initial Public Offering and Regulatory Framework in Nigeria, Aelex,  https://www.mondaq.com