What Is Illegal About Share Buybacks in Nigeria?

Abstract

It is no news that the Companies and Allied Matters Act (“CAMA”) restricts the ability of a company to purchase its own shares, while allowing only few instances when a company may acquire its own share. Worth noting is that several postulations have been put forward as the rationale for this apparent restriction. For one, the argument has been made in certain quarters that this restriction was important in order to prevent fraud as some unscrupulous “managers” of a company could create an artificial “bubble” or impression of buoyancy of the shares of a company and ultimately fuel dangerous speculative trading of share by repurchasing those shares with loans. Meanwhile, proponents of share buybacks have equally argued that there is a need for companies (quoted) to reduce their shares and create scarcity; revive the stock market and ensure that value is given to investors. Arguments have further been canvased that buy back of shares allows a company to return to shareholders, surplus cash that the company itself is unable to invest efficiently in profitable investment projects and also assists a company to bolster or stabilize the market price of its shares.

Although a number of writers have opined on the concept of share buybacks and rationale for share buybacks, there remains paucity of literature, if any at all, on whether share buyback is actually illegal in Nigeria. This paucity has however not helped the emergence of two schools of thoughts: first being that share buyback is illegal and the second being that there is nothing illegal about share buyback. It is equally worth noting that different interpretations have been provided to the statutory provision restricting the ability of a company to acquire its own share in Nigeria. It is in this wise that it becomes imperative to examine: (x) the common law position; (y) the concept of share buyback and its ambit under the Nigerian law; and (z) whether share buyback is actually illegal as argued in certain quarters.

Keywords: Share Buybacks, Redeemable preference shares, capital maintenance, illegality