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.