Post on 15-May-2023
A PAPER ON
THE CONTINUED EXISTENCE OF THECORPORATE DISCLOSURE REGIME:
A NECESSITY OR A BURDENOJEDIRAN IFEOLUWAGBEMINIYI, ESQ. ACIArb (UK), LLM (in view)
Abstract
This paper is designed to give an historical overview of the corporate
disclosure system. It also looks at the historical need for such a corporate
disclosure regime while also taking an insightful look into the current trend in
the need for a disclosure regime.
This paper also tries to elucidate on the various scholarly works on the
divergent views between the voluntary and mandatory disclosure systems
while also giving the reader the need for a mandatory disclosure regime, it
also showcases the flaw that is related to it.
The paper takes the reader into a detailed search of the Companies and Allied
Matters Act and the Investment and Securities Act with respect to instances
where disclosure must be made with copious statutory references. These
instances were categorized into the Disclosure at Incorporation, Continuous
Disclosure Requirement, Disclosure in Securities Issue and Disclosure in
Winding Up or liquidation.
This paper concludes by proposing suggestions on the need to not only have
the disclosure principles in place as a matter of law and policy, but also to
have virile administrative agencies that are fully empowered to administer
and enforce same without fear or favour.
Introduction
Disclosure has been defined as the act of releasing
all relevant information pertaining to a company that may
influence an investment decision.1 Corporate disclosure is
a form of documentation that may be of interest to the
public, as well as details about Routine Access Policy of
a company. Public policy discussions, typically favour
greater corporate disclosure as a way to reduce firms-
agency problems2.
Throughout the gamut of English Company Law, the
philosophy of disclosure holds sway. The disclosure
policy posits that disclosure of matters pertaining to
the operation and management of companies is the best
cure for the potential abuses of the corporate fund by
those in charge of it. This policy underscores the belief
that when those charged with the management of the funds
know that they must disclose the state of affairs in the
company, they will be more circumspect in the management
and running of the company.
History Need For a Disclosure Policy
1 http://www.investopedia.com/terms/d/disclosure.asp (last visited 11/3/2015)2 Benjamin E. Hermalin, Michael S. Weisbach, Article published online 17th January, 2012 in the Journal of the American Finance Association.
In the early evolution of joint stock companies, the
public discovered that investing in joint stock companies
will create a veritable instrument of wealth generation
for them other than sole ownership or partnership. This
craving was however exploited due to the absence of a
virile disclosure system. Promoters ripped-off many by
unwary investors by bringing unrealisable, grandiose and
imaginary schemes. They further invented the skill of
using prominent names as being part of their subscribers
whereas it was all a sham. Thus, the early promoters and
directors were able to siphon corporate funds and
disappear into thin air. There was the challenge of fraud
and dissipation of corporate funds and unaccountability
of those charged with the management of the pool funds.
This was thus addressed by the insistence on a
regulatory system that places greater emphasis on
disclosure. President Roosevelt’s policy, which
championed full disclosure as the preferable remedy to
the malaise of American financial markets at the time can
best be understood by Louis Brandeis3’s famous maxim:
“Publicity is justly commended as a remedy for social and
industrial diseases. Sunlight is said to be the best of
disinfectants.” In other words, sunlight is the best
disinfectant; disclosure is the best antidote for fraud.
To make investing as fair as possible for everyone,
3 US Supreme Court Justice
companies must disclose both good and bad
information. Companies are not the only entities that are
subject to strict disclosure regulations. By law,
brokerage firms and analysts must also disclose any sort
of information that they have that relates to investment
decisions.4
The disclosure regime began in the English Companies
Trading Act 1844 which provides status for the
registration of companies which is anchored on the
disclosure need. The disclosure system was therefore
hinged on two stages. In the first stage, the prospective
incorporator will file the names and addresses of the
subscribers and also the object of the business at the
office of the Registrar of Companies. All these facts
will be disclosed in the public registry. Upon filing,
the company acquires a provincial registration.
In the second stage, the incorporators are then made
to execute a Deed of Settlement (which has close
resemblance with the modern Memorandum and Articles of
Association5). This Deed of Settlement was segregated into
two parts: one dealing with the statutory forms i.e. the
external affairs while the second one deals with the
4 http://www.investopedia.com/terms/d/disclosure.asp (last visited 11/3/2015)5 See section 27(6) and 34(4) Companies and Allied Matters Act, C 20 LFN 2004 where the Act provide that the memorandum and articles of association must be stamped as a deed just as the Deed of Settlement must also be executed as a deed.
internal management of the organisation. In the deed, the
amount of capital and the division of that capital is
stated. It also indicates the number of shares that is
taken and those available for the public. While the 1844
Act provides for a minimum of 25 members and the minimum
of ¾ shares to be taken, the 1856 Act and the current
Companies and Allied Matters Act, 1990 provides for ¼
shares to be taken6 and the minimum of two members as
subscribers7
Disclosure need further underscores the fact that
investors demand a compensation for a perceived level of
risk. This result to an increase in cost of capital of
such economic unit, this is known as “Capital Need
Hypothesis”8. Choi suggest that a prime motive for
disclosure is to raise capital at the lowest cost9 while
Cooke posits that a number of explanations can be
advanced for this hypothesis. He observed that to raise
capital from the market, the companies must increase
their voluntary disclosure and increase their compliance
with mandatory disclosure.10 The greater extent of
disclosure may do well in escalating the investors'
6 See section 99(1) Companies and Allied Matters Act, C 20 LFN 20047 See section 18 Companies and Allied Matters Act, C 20 LFN 20048 http://articlesng.com/analysis-financial-statements-investment-decision/ 9 Choi, F. D. (1973). Financial disclosure in relation to a firm's capitalcosts. Accounting and Business Research, 3 (12),10 Cooke, T. E. (1991). An assessment of voluntary disclosure in the annualreports of Japanese corporations.The International Journal of Accounting, 26 (3)
confidence and also enhancing the efficiency of capital
markets11
Where a company decides to be publicly quoted, it is
understood that the underpinning notion of such entity is
that the public fund will be available to run the
company. There is therefore the need for the company to
render account to the public.12 According to Professor
Akanki, “the virtue of publicity as a remedy against
fraud was strongly argued and its philosophy transcends
the entire gamut on Nigerian statutory law on
companies.”13 The fundamental principles behind the
creation of these standards in the Nigerian statutory law
on companies have been the guiding lights of all material
and legislation: creating a level-playing field for all
stakeholders by providing regular, detailed, and
standardised information about the state of an
institution14.
11 Caruana, J. (2003) The importance of transparency and market discipline approaches in theNew Capital Accord. Paper presented at the Keynote speech at the MarketDiscipline Conference, Federal Reserve Bank of Chicago and BIS culled fromNajm-Ul-Sehar et al, Determinants of Voluntary Disclosure in Annual Report: A Case Study ofPakistan, Management and Administrative Sciences Review. ISSN: 2308-1368 Volume: 2, Issue: 2, Pages: 181-195 © 2013 Academy of Business &Scientific Research12 Joseph E.O. Abugu “Company Securities: Law and Practice” [University of Lagos Press 2005] p. 17213 Akanki E.O. “The History of Company Law”, Vol. 11 Nigeria Journal of Contemporary Law, Lagos Nigeria, p.77 at 105
14 . Ramesh Ramanathan- Coporate disclosure and financial statements: A brief history
published in 2009 by Live Mint & the Wall Street Journal
Voluntary Disclosure and Mandatory Disclosure Principles
Disclosure principles have however been divided into
either the voluntary disclosure regime or the mandatory
disclosure regime.
Voluntary disclosure in its simplest form can be
understood as corporate managers having sufficient
incentives to voluntarily disclose all or virtually all
information material to investors if the benefits of
disclosure exceed the related costs. These incentives are
strongest with respect to new issues. In theory,
voluntary disclosure by issuers of new securities also is
likely because of the competition among issuers for
investors' funds15.
The likelihood that fuller disclosure will reduce a
firm's cost of capital and the ability of some investors
to negotiate for information they consider material. With
respect to periodic reporting to shareholders,
theoretically information will also be forthcoming from
firms because financial analysts generally will be more
interested in firms that disclose as opposed to those
that do not, and analyst interest should result in higher
securities prices.
Mandatory Corporate Disclosure System implies that
the business firms must disseminate certain information
15 W. Beaver, Financial Reporting: An Accounting Revolution 13 (1981)
when issuing new securities and when making annual and
periodic reports to shareholders as required by
respective Securities Statute of any jurisdiction16.
DIVERGENT SCHOLARLY VIEWS ON MANDATORY OR VOLUNTARY
DISCLOSURE SYSTEM
There are divergent opinions amongst scholars on the
better disclosure principle to be applied; whether a
voluntary disclosure regime or a mandatory and compulsory
disclosure regime. The desirability of either a voluntary
disclosure system or a mandatory disclosure system has
been a knotty issue and a subject of longstanding debate
amongst corporate law scholars and economists.
Voluntary as the name implies means the companies
will make the requisite disclosures without any threat of
sanction from the regulatory agencies while mandatory
posits that the companies have no choice, they must as a
matter of compulsion disclose the relevant information to
the regulatory agencies under threat of sanction or
penalty.
Professor Louis Loss and Joel Seligman are major
proponents of the mandatory disclosure regime17. In this
regime, companies are obligated to provide certain
16Joel Seligman “The Historical Need for a Mandatory corporate Disclosure System” (1983) Vol. 9 the Journal of Corporation Law; Loss & Seligman, “Securities Regulation” (1989) Boston & Toronto, Little, Brown & Co. at page 117ibid
information, on a continuous basis, for the effective
evaluation of their securities in the market.
This regime has however suffered some attacks from
the critics, among which are Professors Stigler, Boston
and Kripke. Professors Stigler and Benston had argued
that few benefits to investors could be drawn from the
mandatory disclosure regime in America and that the costs
these laws imposed on corporations were unwarranted18.
Kripke contended that a mandatory disclosure system is
unnecessary because corporations have sufficient
incentives to disclose information to investors without
incurring costs required to comply with extensive
disclosure requirements. Kripke further reasoned that
because of competition for capital, a company that seeks
to raise funds must furnish sufficient information to
enable investors make intelligent investment decisions,
for insufficient information will lead to either higher
costs of capital or a complete lack of access to the
capital market. In addition, companies will continue to
make periodic disclosures to investors to attract market
professional on whom many investors rely.
Failure to do so will cause a loss of confidence in
the company, thus leading to lower prices; conversely,
increased disclosure will produce higher stock prices. In
18 Benston, The Value of the SEC’s Accounting Disclosure Requirements, 44 ACCT. REV. 515 (1969); Stigler, George “Public Regulation of the SecuritiesMarkets, 37 J. Bus. 117 (1964)
following this reasoning, corporate managers have a
personal incentive to ensure that their corporations
disclose; because management compensation often includes
stock in one form or another, managers want higher stock
prices in order to increase their personal wealth19.
A much cited article, Jensen & Meckling20, for
example, argued that the separation of ownership and
control characteristics of most large public corporations
helped explain "why accounting reports would be provided
voluntarily to creditors and stockholders, and why
auditors would be engaged by management to testify to the
accuracy and correctness of such reports21." It is also
observed that if the corporations voluntarily disclose
their material information, it will not be difficult for
investors to purchase their shares nor for financial
advisers to advise their clients to invest in such
company. The investing public will generally be cautious
of investing in a company that has not been divesting
information about its financial standing until prior to
their public issue.
The proponents of the mandatory disclosure system
have however argued that because managers’ compensation
is tied to higher stock prices, they have significant
19 Abugu, Supra note 12 at 20420 Jensen & Meckling, Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure, 3 J. OF FIN. ECON. 305 (1976),21 Id. at 306.
motives to delay or conceal disclosure of adverse
information. Also, it is not true that disclosure
decisions are based solely on financial considerations
such as stock market prices or the cost of capital.
Instead, companies have traditionally resisted additional
disclosure requirements because of a fear that the
increased information will give their competitors
otherwise unavailable data. Some firms would therefore
be willing to pay the financial price of non-disclosure
rather than weaken their competitive position.
On the other hand, some scholars opine that unless a
mandatory disclosure system is adopted the problem of
swindlers who as one state legislator in the United
States of America once posited that some securities
swindlers were so barefaced that they "would sell
building lots in the blue sky",22 (this led to enactment
of blue sky laws in USA) impose an affirmative obligation
on issuers of corporate equity to disclose certain
information about their operations. Mandatory disclosure
ensures equal access to a minimal level of information.
Mandatory disclosure refers to those aspects and
information which must be published as a consequence of
the existence of some legal or statutory stipulations,
capital markets, stock-exchange commissions or accounting
22 Proposed Federal "Blue Sky" Law: Hearings on H.R. 188 Before the Comm. on the Judiciary, 66th Cong., 1st Sess. 7-10 (1919).
authorities’ regulations. The aim of mandatory disclosure
is to satisfy the users’ informational needs, ensuring
the production quality control through the laws and
standards’ observance. In Nigeria, the governmental
agencies responsible for regulating the disclosure
systems are the Corporate Affairs Commission (CAC)23 and
the Securities Exchange Commission (SEC)24.
The aim of the mandatory disclosure system includes:
foster investor confidence;
provide investors with material information;
improve the quality and timeliness of disclosure to
investors;
contribute to the maintenance of fair and orderly
markets;
reduce the costs of capital raising; and reduce fraud
in the public offering, inhibit trading, voting, and
tendering of securities.
CAC regulations require publicly owned companies to
disclose certain types of business and financial data on
a regular basis to the CAC and to the companies’
shareholders. The CAC and SEC also requires disclosure of
relevant business and financial information to potential
investors when new securities, such as stocks and bonds,
23 Established under the Companies and Allied Matters Act 199024 Established under the Investment and Securities Act 2007
are issued to the public, although exceptions are made
for small issues and private placements.
In support of disclosure rules, European commentators
traditionally have pointed out a relationship between
financial disclosure rules and the direct control of
managements performance by shareholders25. The argument is
certainly plausible that financial statements provide
data which are useful to evaluate the corporation's and,
therefore, management's success. But the direct
monitoring effect should not be overestimated26. Financial
statements do not include all the information necessary
to assess how management has run the corporation.
Moreover, it is difficult for individual shareholders to
determine the contribution of management or even specific
corporate officers to overall corporate performance by
examining figures on financial statements27. Mandatory
financial disclosure rules may play a more prominent role
in enhancing two control devices which indirectly operate25 It is also universally recognized in the European literature thatdisclosure is conditio sine qua non for the exercise of shareholders'participation rights. See Beste, Aus Geschichte und Gegenwart derPublizit8it im Aktnenwesen, in Gedenkschrift zur 150. Wiederkehr desGrundungsjahres der Friedrich-Wilhelm Universitat zu Berlin 174, 175-76(1960); J. Kraske, Die Publizit, tspflicht der Grossunternehmung 76 (1962)26 Weiss, Disclosure and Corporate Accountability, 34 Bus. Law. 575, 576 (1979) at 59027 The limits of financial statements in connection with the monitoring ofmanagement are also generally acknowledged by the U.S. accountingliterature. See, e.g., S. Davidson, C. Stickney & R. Weil, FinancialAccounting 226 (1982); G. Welsch, C. Zlatkovieh & J. White, IntermediateAccounting 1010-11 (1976); cf. Financial Accounting Standards Board,Objectives of Financial Reporting and Elements of Financial Statements ofBusiness Enterprises 43-44 (1973) (hereinafter cited as FinancialAccounting Standards Board]
in the interest of shareholders.28In the first case, the
capital market improves the performance of managers
because low stock prices threaten managers' often
substantial personal interests in the corporation's stock
and the corporation's ability to raise new capital29. In
the second case, the market for corporate control
stimulates better performance because low stock prices
encourage outsiders to seek control. In the belief that
they can run the corporation more efficiently, outsiders
attempt to acquire the corporation and to replace the
incompetent managers30. Financial disclosure regulation
enhances the effectiveness of both of these indirect
disciplinary mechanisms. In that they lead to more
accurate stock prices31 [106], the requirements
28 Meier-Schatz: Objectives of Financial Disclosure Regulation (1986)Journal of International Law Volume 8 Issue 3 Published as Journal ofComparative Business and Capital Market Law at page 929 Werner, Management, Stock Market and Corporate Reform: Berle and Means Reconsidered, 77 Colum. L. Rev. 388, 402-05 (1977). S30 The market for corporate control was first described in the seminalarticle of Professor Manne, Mergers and the Market for Corporate Control,73 3. Pol. Econ. 110 (1965). In recent years, it has been a core issue inthe debate on corporate law theory. See, e.g., Easterbrook & Fischel, TheProper Role of a Target's Management in Responding to a Tender Offer, 94Harv. L. Rev. 1161, 1165-68 (1981); Easterbrook & Fischel, CorporateControl Transactions, 91 Yale L. J. 698, 705-08 (1982); Gilson, AStructural Approach to Corporations: The Case Against Defensive Tactics inTender Offers, 33 Stan. L. Rev. 819, 841-45 (1981). Skeptics do notquestion that it may have some effectiveness as an accountability mechanismbut doubt that it has sufficient disciplinary power. See, e.g., Buxbaum,supra note 50, at 525-37; Coffee, Regulating the Market for CorporateControl: A Critical Assessment of the Tender Offer's Role in CorporateGovernance, 84 Colum. L. Rev. 1145, 1199-1200 (1984); Meier-Schatz.Managermacht und Marktkontrolle, 149 ZHR 76, 95-108 (1985) (European view)31 Supra note 28 at page 10
concomitantly improve the function of stock prices as a
monitoring instrument32.
A Nigerian scholar, Professor Joseph Abugu, viewing
this tussle from a Nigerian perspective in his ingenuity
observed thus:
“A mandatory disclosure system thus functions most
effectively under a company-based registration
system. Compliance by issuer companies is more
readily enforced if the issuer is registered and
reports periodically to the SEC33. A mandatory
disclosure system which comes into play only when
securities are being issued has serious short
comings…”34
Levels of Disclosure Regime Under the Companies and
Allied Matters Act
There are four levels of disclosure that were created
and same will be dealt with in this extensively in this
article with copious reference to the Companies and
Allied Matters Act, C 20, LFN 2004.
DISCLOSURE AT INCORPORATION
32 Anderson, Conflicts of Interest: Efficiency, Fairness and Corporate Structure, 25 UCLA L. Rev. 738, 790 (1978)33 Securities and Exchange Commission34Abugu, Supra note 12 at 205
Disclosure at incorporation covers the relevant
disclosures that must be made by the promoters of the
company at the point of its incorporation.
By the provisions of section 20 of CAMA, the promoters
must disclose that the individual joining in the
formation of the company is not less than eighteen years
(though this will not affect the formation of the company
if there are two other adults as subscribers), he is not
of unsound mind, he is not an undischarged bankrupt, he
is not guilty of the offence of fraud, it is not a body
corporate in liquidation and not an alien (subject to the
Act).
By the provisions of section 27 of CAMA, the company must
state in its memorandum the following
The name of the company
The registered office address of the company in
Nigeria
The nature of the business or businesses which the
company is authorised to carry on, or, if the company
is not formed for the purpose of carrying on
business, the nature of the object(s) for which it is
established.
The restriction, if any, on the powers of the company
Whether the company is a private or public company
The limitation of the liability of the members
The company’s share capital and the division into
shares of a fixed amount
Where a subscriber holds the whole or any part of the
shares subscribed by him in trust for any other
person, that fact must be disclosed and the name of
the beneficiary stated.
The memorandum of a company limited by guarantee must
also state that the the income and property of the
company shall be applied solely towards the promotion
of its objects, and that no portion thereof shall be
paid or transferred directly or indirectly to the
members of the company except as permitted by or
under the Act; and
each member undertakes to contribute to the assets
of the company in the event of its being wound up
while he is a member or within one year after he
ceases to be a member, for payment of the debts and
liabilities of the company, and of the cost of
winding up, such amount as may be required not
exceeding a specified amount and the total of which
shall not be less than 10,000.
By virtue of section 34 and the First Schedule to the
Act, the subscribers must disclose amongst others their
names, addresses and descriptions.
Section 62 (3) CAMA provides that any transaction between
a promoter and a company may be rescinded by the company
unless, after full disclosure of all material facts known
to the promoter, such transaction shall have been entered
or ratified on behalf of the company…”
A promoter because he is in a fiduciary relationship with
the company has a duty to disclose all material facts
that arise as a result of his dealings with the company,
on behalf of the company. This disclosure principle is
put in place so as to protect the company from being
defrauded by the promoters. A promoter should disclose
all profits he makes when selling a property to the
company. This disclosure should be made to all the
shareholders at a general meeting, disclosure to the
company’s independent board of Directors i.e the board of
directors who do not have any interest whatsoever in the
sale or the profit made35. In Erlanger v New Sombero
Phosphate co36 a promoter made disclosure to a company’s
board of directors as per his interest in a property sale
to the company and profit made. However, there were five
members of the board of directors, two were abroad, two
were associated with the promoter and the fifth was a
mayor of London who had little or no time. The disclosure
was held not to be a full disclosure to an independent
board of directors. As a result of this the company was
able to rescind the contract.
35 Professor Nicholas Bourne lecture notes, Cavendish Publishing, pg 12136 (1878) 3 App Cas 1218
In the case of profit made by promoters, a promoter
should disclose actual and collateral profit that he is
making from the deal. In Gluckstein v Barnes37. The court
held that the promoter who is Gluckstein should repay the
secret profit made.
CONTINUOUS DISCLOSURE REQUIREMENT
This posits that the company must not only disclose
before its incorporation but must continue to disclose
salient facts during its pendency.
Some of these requirements include filing notice of
change of the location of the register of members38,
filing annual returns39, filing notice for change of
directors, filing allotment of shares, disclosure of
Directors’ Interest40
Section 93 CAMA:
“if a company carries on business without having at least two members
and does so for at least six months, every director or officer of the
company during the time that it so carries on business after those six
months who knows that it is carrying on business with only one or no
member shall be liable jointly and severally with the company for the
debts of the company contracted during that period”.
37 [1900] AC 24038 Section 84 (2) CAMA39 Section 370 – 378 CAMA40 Section 275 CAMA
The director or officer of a company operating with less
than two members should disclose to the relevant
stakeholders so as to put them on notice. And where
possible, the implication of calling an ordered meeting
of stakeholders and other officers of the company to
rectify the reduction in the numbers of members of the
company. This is for the protection of investors or
people who want to deal with them innocently or
uninformed under the presumption that there is regularity
in the number of members.
Section 94 CAMA: Disclosure of Beneficial Interest in
shares. By virtue of this section, a public company may
by notice in writing require any member of the company to
disclose or indicate in writing the capacity in which he
holds the shares.
Section 95 CAMA: disclosure of substantial interest in
shares.
Every shareholder of a company should disclose his
substantial interest in which he holds in every company.
Section 272 CAMA: this provision of the law states that,
it shall not be lawful for the company to make to any
director of the company any payment by way of
compensation for loss of office or as consideration for
or in connection with his retirement from office unless
particulars with respect to the proposed payment and
amount have been disclosed to members of the company and
the proposal is approved.
Where a director loses office, he may nevertheless be
rewarded with a golden handshake sum. But the principle
of the golden handshake sum clearly requires full
disclosure to members of the company and their approval
also. Where payments are made without full disclosure to
the members of the company, such unlawful payment as it
is called will be held on trust for the company or the
assenting shareholders.
Section 275 CAMA also provides that the particulars of
directors including the number of shares held by them
should be disclosed in the Register of Directors.
DISCLOSURE IN SECURITIES ISSUES
There is no fundamental law with respect to private
companies on what they should disclose but public
companies must make requisite disclosures in their
prospectus.
It is important to note that the Disclosure regime is not
only enthroned in the provisions of the Companies and
Allied Matters Act, 1990 but it has also been codified in
the Investment and Securities Act, 2007. This, in the
view of the writers of this paper, is because the
disclosure system under CAMA has been effective and
efficient in protecting the public. These statutory
provisions are with strict penalty in cases of default.
Section 54 of the ISA41 provides that all the securities
of a public company and all securities or investments of
a collective investment scheme should be registered with
SEC42.
Section 64 of the ISA provides that a listed public
company should within 20 working days prior to the
beginning of the quarter disclose to SEC its quarterly
earnings forecast.
Sections 85-87 of the ISA provides for both civil
liability and criminal liability in respect of
misstatements or misrepresentations in prospectus and
statements in lieu of prospectus.
Section 99 of the ISA provides for the content of
contract notes that should be given by a securities
dealer.
Section 100 of the ISA provides that a securities dealer,
underwriter, investments adviser should disclose any form
of interest in writing he or she has in the securities
they are dealing with.
41 Investment and Securities Act, 200742 Securities and Exchange Commission
Section 105-116 of the ISA deals with prohibitions of
trading in securities, prohibition of dealing in
securities by insiders, prohibition of securities markets
manipulations, prohibition of making false or misleading
statements, prohibition of fraudulently inducing persons
to deal in securities, prohibition of dissemination of
illegal information, and effects of contravention which
is criminal liability on the part of the person who
contravenes.
DISCLOSURE IN FINANCIAL STATEMENTS
Where there is separation of ownership from
management, the owners of the fund will want to know the
financial status of the company as well as the potential
investors. In other words, the owners will seek to know
how judiciously these resources have been used. This is
the stewardship of disclosure in financial statements.
This function is discharged by the presentation of a
report of the activities to owners by the management.
Such reports are usually conveyed by means of financial
statements.
To protect investors from dishonest or incompetent
people who form companies in which the investors are
likely to lose their money, disclosure of such things as
the company’s past financial record and the benefits of
being a director, is required in the document of the
company on the strength of which the public is invited to
subscribe for shares or debentures of the company.
Provision is also made for a company’s accounts and the
balance sheet and profit and loss account to be audited
every year by auditors appointed by shareholders and for
the balance sheet and the profit and loss account and
certain other documents to be circulated to every
shareholder and debenture holder.43
Disclosures in financial statement determine the
level of transparency of corporate bodies. In Nigeria
corporate terrain, the prior response of international
investors has been adduced to lack of transparency not
only of government, but also of private economic
sectors44. This perception has been accentuated especially
in the banking industry, but the increases in the value
of distress especially in situations where such banks may
have been given a clear bill of health by auditors. This
was prevalent in Nigeria sometime ago and it affected
seemingly virile banks like Intercontinental Bank and
Oceanic Bank and other companies like Cadbury Nigeria
Plc, amongst others. This created huge apathy towards
investing in the public since some financial statements
do not reflect the true state of affairs of the company.
43 G. Morse, Charlesworth’s Company Law” (13th edition, ELBS/Stevens) page 544 “The quality of Corporate Financial Disclosure in Banking Industry inNigeria” grossarchive.com/upload/1411972389.htm
Section 345 CAMA mandates that in respect of each year,
the directors shall at a date not later than 18 months
after incorporation of the company and subsequently once
at least in a year, lay before the company in general
meeting copies of the financial statements of the company
made up to a date not exceeding nine months previous to
the date of the meeting. CAMA further provides a penalty
in Section 346 on any company if in a year any of the
requirements of section 345 (1) or (3) is not complied
with by any company, every person who immediately before
the end of that period was a director of the company
shall in respect of each of those subsections which is
not so complied with, be guilty of an offence and liable
to a daily default more fine of N50 in the case of a
small company, a company limited by guarantee or an
unlimited company, and N500 in the case of any other
company. (The extent at which this serves as a veritable
deterrent is left to be imagined and reviewed.)
The provision of section 331 of CAMA stipulates the
procedure that limited liability companies should adhere
to while preparing their financial statement.
Section 334 (1) makes it mandatory for directors in a
company to prepare the company’s financial statement for
the year.
Section 334 (2) CAMA strictly spells out the
prerequisites that must be included in a financial
statement. They include:
“(2) Subject to subsection (3) of this section, the financial statements
required under subsection (1) of this section shall include -
(a) statement of the accounting policies;
(b) the balance sheet as at the last day of the year;
(c) a profit and loss account or, in the case of a company not
trading for profit, an income and expenditure account for the year;
(d) notes on the accounts;
(e) the auditors' reports;
(f) the directors' report;
(g) a statement of the source and application of fund;
(h) a value added statement for the year;
(i) a five-year financial summary; and
(j) in the case of a holding company, the group financial
statements.
(3) The financial statements of a private company need not include
the matters stated in paragraphs (a), (g), (h) and (i) of subsection (2) of
this section.
(4) The directors shall at their first meeting after the incorporation
of the company, determine to what date in each year financial
statements shall be made up, and they shall give notice of the date to the
Commission within fourteen days of the determination.
(5) In the case of a holding company, the directors ensure that,
except where in their opinion there are reasons against it, the year of
each of its subsidiaries coincide with the year of the company.”
It is further important to note that the Commission gives
extra burden on the company while preparing and
completing the company’s financial statements. This is
found in section 343 (1) (2) (3) and (4) CAMA. One of
these burdens includes the requirement of signing the
balance sheet by two directors and a penalty for default.
Section 354 (1) CAMA provides to the effect that a
company must publish a full individual or group financial
statement and same must be laid before the company in
general meeting and delivered to the Corporate Affairs
Commission (the Commission).
Section 336 (1) CAMA provides that
“if at the end of a year, a company has subsidiaries, the directors shall,
as well as preparing individual accounts for that year, also prepare
group financial statements being accounts or statements which deal
with the state of affairs and profit or loss of the company and the
subsidiaries.”
The directors of group holding companies should at the
end of every year disclose the profit and loss status of
their companies so that their members will know the true
situation of things. Failures to disclose this, the
courts will not hesitate to lift the veil of
incorporation of such companies where the members or
shareholders are seeking redress from the courts.
Every company is mandated to further disclosure its
financial status through its annual returns. The
provisions of Section 370 CAMA provides that
“Every company shall, once at least in every year, make and deliver to
the Commission an annual return in the form, and containing the
matters specified in sections 371, 372 or 373 of this Act as may be
applicable:
Provided that a company need not make a return under this section
either in the year of its incorporation or, if it is not required by section
213 of this Act to hold an annual general meeting during the following
year, in that year.”
Through the disclosure of the company’s finances in the
annual returns, an investing public will have an insight
into the financial status of the company and aid her in
making informed analysis of her investment.
The procedure on the appointment (removal) of
auditors and the regulation of the job of an auditor in a
company is another aspect of financial disclosure. Every
company is under obligation to appoint auditors who will
audit the financial statements of the company in line
with the standards of the Institute of Chartered
Accountants Act 1968 and section 358 of CAMA.
Section 357 provides that
“Every company shall at each annual general meeting appoint an
auditor or auditors to audit the financial statements of the company,
and to hold office from the conclusion of that, until the conclusion of
the next, annual general meeting.”
Under section 359, the auditors are obligated to make
a report to the members of the company on the accounts
examined by them and on every balance sheet and profit
and loss account, and on all group financial statements
copies of which are to be laid before the company in a
general meeting during the auditor’s tenure of office.
Furthermore, section 345(2) CAMA also makes it
compulsory that the auditor’s report be read before the
company in general meeting and must be open to the
inspection of any member of the company.
Section 369 CAMA further provides that a penalty to
any officer of a company who gives false statements to
auditors.
The principle of disclosure is also extended to notes
to financial statements45 while section 340 CAMA provides
for disclosure of loans made in favour of the directors
45 Section 339 CAMA
of a company and the persons connected to those
directors. In addition, section 341 CAMA also provides
for disclosure of loans to officers of the company and
statements of amounts outstanding on those loans. This is
designed to prevent the situation whereby Directors,
officers of the company or their cronies will feed
lavishly and stupendously on the corporate funds. As
stated above, that was the situation before the advent of
the principle of disclosure under the 1944 Act.
Notwithstanding these provisions, there are still
instances where some Directors or officers of the company
(most especially banks) spend the investors and
depositors fund or give out loans to their cronies with
little or no security. This underscores the need for
adequate enforcement.
The provisions of sections 344 and 347 of CAMA are
also instructive in the requirements of disclosure of the
company’s financial statements.
It is important that the financial statements
accurately represent the underlying economic activities
of the organization. Where there is a discontinuity
between the activities of an organisation, the
credibility of such a statement indices doubt and
uncertainty in the minds of the various users of the
statement. This creates an information asymmetry between
information available to management and the information
available to the investing public.
Financial disclosure is useful for investors to make
informed investment decisions and for financial analysis
of the company by the company’s financial analysts so as
to make informed future projections and give financial
advice.
Despite the above provisions however, there has still
been a constant clamour for stricter financial disclosure
principles. The need for an appropriate financial
disclosure system was underscored in the scandal that
rocked Cadbury Nigeria Plc46 and the crumbling of some
banks such as the Intercontinental Bank Plc and Oceanic
Bank Plc.
DISCLOSURE IN WINDING UP OR LIQUIDATION
Section 506 (1) CAMA deals with responsibility for
fraudulent trading.
“if in the course of the winding up of a company, it appears that any
business of the company has been carried on in a reckless manner or
with intent to defraud creditors of the company or creditors or any
other person for any fraudulent purpose, the court on the application of
the official receiver or the liquidator or any creditor or contributory of
46 See the report from The Citizen News on October 22, 2013 regarding the Cadbury scandal.
the company, may if it thinks proper to do, declare that any persons
who were knowingly parties to the carrying on of the business in
manner aforesaid shall be personally responsible without any limitation
of liability for all or any of the debts or liabilities of the company as the
court may direct.
From the above provision, if a member, director or
creditor had knowledge of fraudulent trading by the
company, such a knowing party should disclose to the
members of the company, at a general meeting, or to the
board of directors or to corporate affairs commission.
This would go a long way in detecting the fraud, stopping
the fraud and protecting the creditors of the company.
Where there was no disclosure of such fact, the court
will not fail to uphold these statutory provisions.
Functions of Disclosure Rules for the General Public
The question of what function financial disclosure
rules serve for individuals outside the investor oriented
information system, in particular the general public, has
been extensively discussed in European literature. The
commentators allege three functions.
First, financial disclosure requirements supply the
public with relevant data about the corporation
(information function)47.
Secondly, they enhance the public's knowledge of, and
consequently its confidence in, the corporate sector
(confidence function)48. Finally, the dissemination of
financial data enables the public to evaluate
corporations' performances and to monitor management
behaviour (control function)49. The arguments supporting
the significance of the first two functions, information
and confidence, clearly are persuasive.
Disclosure regulation ensures the dissemination to
the public of financial information that is probably
otherwise unavailable. Moreover, it allows the
representatives of the public opinion, most notably the
mass media, to promote discussion of the data and to
debate its issuers' performances50. A better informed
public would be less suspicious of individual
enterprises, especially large enterprises, and the entire47 R. Huhs, Die Funktion der Wffentlichen Rechnungslegung 163-67 (1973); H.Kronstein & C. Claussen, supra note 7, at 22; R. Ott, supra note 113, at92-98; Rittner, Die handeisrechtlide Publizitlit ausserhalb derAktiengesellschaft, Gutachten Jur den, 46 DJT 141-42 (1964) G. Scherrer,Die Ausweitung der Rechnungslegungspublizit-t auf alle Grossunternehmen162-76 (1968); Schilling, Publizitt, Aktienrechtsreform undUnternehnensrecht, 46 DB 1497, 1498 (1962); R. Tschfdni, Funktionswandeldes Gesellschaftsrechts 196 (1978).48 Huhs, supra note 37, at 170-7149 Huhs, supra note 37, at 167-6950 The mediation and transformation of corporate data by the mass media and other representatives of public opinion is widely noted. Rittner, Reclunigslegungs-Publi:itt fir Grossunternehinen, 99 note 141, at 141
corporate sector. More confidence may be placed,
therefore, in the economy as a whole.
Doubts persist as to the third of the alleged
functions, namely that financial disclosure regulation
would enable the general public to control corporate and
managerial activity. Disclosure, by its very nature, is
not a direct but an indirect monitoring technique. Its
effectiveness depends upon the existence of a reliable
feedback mechanism. Such a responsive structure is
institutionally implemented in information systems
addressing investors, shareholders, and capital markets.
One must seriously question, however, whether public
opinion, even when set forth by the media and special
interest groups, effectively influences corporations and
managers. These doubts are particularly significant
because financial disclosure pertains to the economic
performance of the corporation, which is not usually the
area where the social pressure of public opinion is
likely to be generated51. A second reservation exists
concerning the inherent limitations of financial
statements for evaluating corporate management. Their
monitoring effects as to management's performance are
seriously limited. Furthermore, one should recall that
financial disclosure regulation is ill-suited for51 It is clear that the mechanism of politicizing corporations is not the same for economic, as opposed to social, performance. See Stevenson, The Corporation as a Political Institution. 8 Hofstra L. Rev. 39, 45-51 (1979).
deterring disloyal and unlawful managerial behaviour. The
public is thus in no better position than shareholders in
the detection and prevention of ineffective and
questionable practices of management through the reading
of financial statements52.
From the above, we can safely conclude that mandatory
disclosure system has some objectives which go a long way
in protecting the interest of the investing public. These
objectives include but not limited to the following:
Protection of investors
Promotion of efficiency
Promotion of Corporate Governance
Promotion of management monitoring
Broader Public Policy Objectives
CONCLUSION
It is our view that the disclosure principle was an apt
innovation which has it was needed in the advent of
company law is also very much needed at this modern
epoch. It has been able to protect investors, reduce
fraudulent practises amongst promoters of the company,
promotion of efficiency in the running of the companies
52 It is still widely held that financial disclosure requirements deter questionable practices in the interest of the general public. See. e.g.. R. Huhs. supra note 37 at 169
and the promotion of corporate governance and security
market efficiency.
However, despite the machinery of the disclosure regime,
there have still been instances where companies through
its officials have siphoned corporate funds to the
detriment of the investing public. This has been usually
achieved with connivance with the financial department
through formulating false misrepresentation to the public
of the financial status of the company. This has the
ability of creating investment apathy in the public and
where the public refuses to invest in corporate bodies,
the death of big corporations is knocking at the door.
It is our opinion that the provisions of CAMA and ISA
which we have been able to expound and outline above
should be strictly adhered to by the companies and the
Corporate Affairs Commission and the Securities Exchange
Commission should be empowered to enforce compliance. We
also suggest that some of the defaults should be made
more stringent so as to be a deterrent for other
companies or there officers.