Directors: Appointment, Status, Duties and Removal

A company is an artificial person. It cannot think, sign or decide, so it acts through people, and the most important of these are its directors. The law therefore asks four questions about them. Who may be a director, and how is one appointed? What are the directors allowed to do, and what do they owe the company? How can a director be removed?

And what can members do when directors abuse their position? The syllabus answers each one with sections of the Companies and Allied Matters Act (CAMA), and examiners ask for them as lists, so this topic gives every list in full.

This topic covers the number and appointment of directors, independent directors, disqualification, multiple directorships, remuneration, the status of directors, vacation of office, removal, board proceedings, the duties of directors, how those duties are enforced, and the rule in Foss v Harbottle with the protection of the minority. The company secretary, the accounting records and the financial statements are in the next topic.

The number and appointment of directors

The minimum number

Section 271 of CAMA requires every company, not being a small company (this includes a single member company), to have at least two directors. If the number falls below two in a company that is not small, the company must appoint new directors within a month, or stop carrying on business until it does.

A director or member of such a company who knows that it carries on business after the number has been below two for more than 60 days is liable for all the debts and liabilities that the company incurs during that period (section 271(3)).

How directors are appointed

• First directors. The subscribers of the memorandum decide in writing the number and names of the first directors. Alternatively the directors may be named in the articles.
• Later directors. The general meeting may re-elect or reject directors and appoint new ones.
• Casual vacancies. The board may appoint a director to fill a vacancy caused by death, resignation, retirement or removal. The next general meeting may approve the appointment. If it does not, the person ceases to be a director at once.
• Adding to the board. The board may add to the number of directors, but not beyond the maximum set by the articles.
• Changing the size of the board. The general meeting may increase or reduce the number of directors and decide the order in which they retire. Removing a director does not invalidate his earlier acts.
• When all directors and shareholders have died. A personal representative may apply to the Federal High Court for an order to convene a meeting of the personal representatives of the shareholders, to appoint new directors. If they do not act, the creditors of the company may meet and appoint directors.
• Life appointment. A director may be appointed for life, but is removable under section 288.

Qualification and age

No shareholding qualification is required of a director unless the articles provide for it. May 2023 asked exactly this: a shareholding qualification is required when the articles stipulate it.

A person may be appointed a director of a public company even if he is 70 years or more. But special notice is required of the resolution, and the notice to the company and by the company to its members must state his age.

A person of 70 or over must disclose his age to the general meeting when he is appointed or proposed, on pain of a penalty fixed by the CAC.

Persons not duly appointed

The act of a person who has not been duly appointed as a director does not bind the company, and he is personally liable for it. But the company is bound if it held him out as a director.

Independent directors

A public company must have at least one-third of its directors independent (section 275(1), as amended by the Business Facilitation (Miscellaneous Provisions) Act 2023). A person who nominates directors who will form a majority of the board must also nominate the minimum one-third who will be independent (section 275(2)).

Section 275(3) defines an independent director as a person who meets the general qualifications and who, with his relatives, in the two years before appointment:

1. was not an employee of the company;
2. did not make payments to, or receive payments from, the company of more than ₦20,000,000, or own more than 30% of an entity that did, or act as partner, director or officer of a partnership or company that did;
3. did not own, directly or indirectly, more than 30% of the shares of any type or class of the company; and
4. was not engaged, directly or indirectly, as the auditor of the company.

Managing director and chairman

The board may appoint one of its members as Managing Director (MD) and Chief Executive Officer (CEO), and may delegate any of its powers to him or to a committee. One person may not be MD/CEO and Chairman at the same time.

The Nigerian Code of Corporate Governance 2018 (Principle 2.7) and the Securities and Exchange Commission (SEC) Code of 2011 (Principle 5.1(b)) require the roles in listed public companies to be held by different people, so that power is not concentrated and the board keeps its checks and balances.

Persons disqualified from being directors

Section 283 of CAMA, with sections 279, 280 and 284, disqualifies:

1. an infant, that is, a person under 18;
2. a person of unsound mind;
3. a person removed under section 288 on grounds of fraud, dishonesty or unethical conduct;
4. an insolvent person, that is, one who has become bankrupt or has made an arrangement or composition with his creditors;
5. a person convicted by a High Court of fraud in connection with the promotion, formation or management of a company, or in the course of winding up, for a total period or for not more than 10 years; and
6. a corporation, other than its accredited representative on the board for a given term.

Multiple directorships (section 307, as amended in 2023)

A person may be a director of more than one company, provided he performs all his fiduciary duties. He must not use the property, opportunity or information of one company for the benefit of another or for his own benefit. As a general rule no person may be a director of more than five public companies.

A person who held more than five had to resign from the excess not later than the next annual general meeting, and not beyond two years after 8 February 2023. Breach brings a daily penalty set by the CAC and a refund of earnings from the excess directorships. A person proposed as a director of a public company must disclose his other directorships to the meeting at which he is appointed. May 2016 and November 2022 tested the numbers.

Remuneration of directors

• As a general rule, directors who are not employees are not entitled to remuneration. A company is not bound to pay it.
• Under section 293, the company may fix remuneration in general meeting, or the articles may fix it. Once fixed, only the general meeting may alter it, by special resolution.
• Once the company has agreed to pay, the remuneration is payable out of the company’s funds, that is, out of profits and capital (section 293(4)).
• In Re Consolidated Nickel Mines (1940) the court held that a resolution by directors who were entitled to remuneration, saying that they would give up future pay, did not bind them. But it would bind them if the company was party to the agreement.
• The Managing Director and other executive directors are appointed for their skills under a director service contract, and are entitled to pay, including stock options, bonuses and profit participation. Section 294 allows the MD’s pay to be a salary, commission, a share of profits, or a combination, as the directors decide.

The legal status of directors

Section 309(1) says directors are trustees of the company’s money, properties and powers. They must account for all the money they control, refund any money improperly paid away, and exercise their powers honestly, in the interest of the company and all the shareholders, and not in their own or sectional interests.

Under section 309(2), directors are also agents of the company when they act within the scope of their authority and the company’s powers. As agents with power to bind the company in matters of management, they are fiduciaries, persons in a position of trust, particularly in financial matters.

This gives three statuses in one: trustee of the assets, agent of the company, and fiduciary. A director is not an agent of the individual shareholders, and he is not the owner of the company’s property.

Vacation of office

Under section 284, a director must vacate office if he:

1. fails to hold his qualification shares when the articles require them;
2. becomes bankrupt or makes an arrangement or composition with his creditors;
3. is found guilty of fraud or of an offence under sections 280 and 281;
4. becomes of unsound mind;
5. resigns by written notice to the company; or
6. is removed by the company under section 288 before the end of his term.

November 2015 asked for four of these circumstances (8 marks).

Removal of directors

A company may remove a director by ordinary resolution under section 288, before the end of his term, despite anything in the articles or in any agreement between the company and the director. Two conditions apply: proper notice must be given to him, and he must be given a fair hearing.

• The director may make written representations of reasonable length, which the company circulates to the members, unless they arrive too late.
• If they arrive too late, or the company fails to circulate them, they may be read at the meeting, without prejudice to his right to be heard orally.
• The company need not circulate or read the representations if the court, on the application of the company or a member, finds that the right is being abused to gain needless publicity or to defame.

The syllabus calls removal under section 288 the usual way to deal with directors in breach of duty, but it may be hard to use in a company the directors control.

Proceedings of directors (section 289)

• The directors regulate their own meetings. The first board meeting must be held within six months of incorporation.
• Unless the articles say otherwise, matters are decided by a simple majority, and the chairman has a casting vote if the votes are equal. Each director has one vote.
• Any director may requisition a board meeting, and the secretary must summon it, with 14 days’ notice to all directors unless the articles provide otherwise.
• The directors elect a chairman and fix his term. If the chairman is not present five minutes after the start, the directors choose one of themselves.
• The board may delegate powers to the MD or to committees, even a committee of one, who must follow the board’s regulations. A committee elects its own chairman and decides matters by the same vote.
• Under section 289(8), a written resolution signed by all the directors entitled to notice of a meeting is as valid as one passed at a meeting. This brings in the unanimity rule.

The duties of directors

As fiduciaries, directors owe the company the following duties. Learn the numbered list with its section numbers, because the examiners accept any correct four or five.

Points on the duties

• An executive director may have extra duties and benefits from his contract of employment.
• The fact that the company cannot or will not do a particular business is no excuse for a director to breach his duties (section 306(4)). In Canadian Aero Service v O’Malley (1973) the directors negotiated a large survey contract that their company could not perform, then resigned, formed their own company and performed it. They had to account to the former company for the profit.
• The duty not to misuse the company’s information and opportunities continues after resignation (section 306(5)).
• There are other duties of disclosure: of property interests, age, and interest in a contract or proposed contract with the company.

The consequences of breach

May 2015 asked for the remedies for breach of a director’s fiduciary duty, and November 2014 asked for three sanctions with explanations. From the syllabus, a director in breach can be:

1. removed from office under section 288, or forced to resign;
2. made to account to the company for any secret profit or personal benefit, and to refund money improperly paid away;
3. made to restore property or repay money by the court in misfeasance proceedings during winding up (section 674(1));
4. sued by the company, or by members on its behalf in the cases allowed by section 343;
5. the subject of an investigation by the CAC on application by members; and
6. liable to the other consequences described below, including personal liability for the debts incurred where the company trades with fewer than two directors.

Enforcing the duties of directors

The general rule is that the company enforces the directors’ duties, because the company is the proper plaintiff when a wrong is done to it. But the wrongdoers are the people in control of the company, so this is hard. The usual step is to remove them under section 288(1) by ordinary resolution with special notice. If their hold on the company makes this impossible, shareholders have four remedies:

1. Winding up on the just and equitable ground. They may petition for winding up on the ground that it is just and equitable. The court will order it if it agrees (section 571(f)).
2. Relief against oppression. They may ask the court for relief on the ground that the company’s affairs are being conducted illegally, oppressively, or in a way that is unfairly prejudicial to or unfairly discriminatory against a member or members (sections 353 and 354). In Ogunade v Mobile Films (1976) the court said the oppression or fraud must be harsh, burdensome and wrong, and a consistent course of conduct over a period. Negligence, lack of business ability or inefficiency is not enough.
3. Misfeasance proceedings. The official receiver, liquidator, creditor or contributory may bring misfeasance proceedings in a winding up, to make a director repay money or restore property that he has misapplied or wrongfully kept (section 674(1)).
4. Investigation by the CAC. Members may ask the CAC to investigate the company’s affairs (sections 357, 358 and 359 to 363), with evidence that they have good reason to ask for it.

The procedure for actions by and against a company is in sections 341 to 351 and 364 and 365.

Majority rule and minority protection: the rule in Foss v Harbottle

The rule

Foss v Harbottle (1843) held that when a wrong is done to a company, the company, and not its individual shareholders, is the proper plaintiff. It also held that where something has been done irregularly which the company could regularise, there is no point in a lawsuit, because the majority can simply do regularly what was done irregularly. For this reason the rule is also called the internal management rule.

In that case two shareholders sued on behalf of the other shareholders to challenge the promoters and directors, who had sold property at an undisclosed profit. The claim failed.

The reason for the rule is practical. If every shareholder could sue for wrongs to the company, there would be many expensive, time-wasting and blackmailing suits that would hinder the company’s business. Section 341 of CAMA now enacts the rule: where an irregularity occurs or a wrong is done to the company, only the company can sue to remedy it, and only the company can ratify the irregular conduct.

The exceptions: section 343

The rule would let the majority abuse the minority, so section 343 allows a member, without prejudice to his other rights, to sue for an injunction or declaration to restrain a company from the following. The syllabus says these are better seen as ways of protecting the member’s own personal rights.

Foss v Harbottle and the other remedies

In addition to these personal actions, the minority has the remedies in the enforcement section: relief for oppression, winding up on the just and equitable ground, misfeasance proceedings and an investigation by the CAC.

Working through the rules

Is the board valid?

A public company has 9 directors. One-third must be independent, so at least 3 must be independent. If it has 10 directors, one-third is 3.33, so at least 4 are needed in practice. The same company has the same person as MD and Chairman: that is not permitted.

A private company that is not small with only one director: the number is below the minimum of two, so it must appoint another director within a month. If it trades for more than 60 days like that, the director and members who know are liable for all debts incurred during the period.

The removal timeline

A company proposes to remove a director by ordinary resolution at a meeting. It gives him notice of the intention, and he sends in a written defence. The company circulates it. If it arrives too late, it is read at the meeting. He may also speak. A simple majority of the votes cast then removes him, even if his service contract says he cannot be removed for five years. The removal does not invalidate his earlier acts.

Comparing the two ways of dealing with wrongdoing directors

Worked problems

Problem 1: Joe the pharmacist

1. The duties. A director must act in utmost good faith, in the best interests of the company, with care and skill, for a proper purpose, without conflict of interest, and without secret profit or bribes.
2. The theft and the competing pharmacy. Stealing the company’s property breaches his duty as trustee of its property (section 309(1)) and is a crime. Selling the drugs in his own pharmacy is a personal profit made from the company’s property, so he must account for it (section 306).
3. The bribes. A director must not accept a bribe, gift or commission from outsiders in a transaction involving the company. He must account for them.
4. Remedies. The company may remove him by ordinary resolution under section 288 after notice and a fair hearing, make him account for and refund the profits, recover its property, and report the theft to the police.

Problem 2: the directors who took the contract

1. The rule. A director must not make a secret profit or use the company’s information or opportunity for himself. The inability or unwillingness of the company to do the business is no excuse (section 306(4)), and the duty continues after resignation (section 306(5)).
2. The case. In Canadian Aero Service v O’Malley the directors did the same and had to account to the former company for the profit.
3. The application. The contract was negotiated while they were ABC’s directors. Resigning did not free them.
4. Advice. ABC may sue the two directors, and Two Ltd where appropriate, to account for the profit made on the contract.

Problem 3: a member who wants to sue

1. The rule. Under Foss v Harbottle and section 341, the wrong was done to the company, so the company is the proper plaintiff.
2. The exceptions. Section 343(d) allows a member to sue where there is fraud on the company and the directors fail to act. Section 343(f) applies where directors profit from their breach of duty.
3. Other routes. He may seek relief for oppression under sections 353 and 354, petition for winding up on the just and equitable ground, or ask the CAC to investigate.
4. Advice. He can sue under section 343, because the directors who controlled the company would not sue themselves.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Saying every company needs two directors. A small company need not.
• Saying directors are agents of the shareholders. They are agents of the company, trustees of its property, and fiduciaries.
• Saying removal needs a special resolution. Removal under section 288 is by ordinary resolution. Altering fixed remuneration needs a special resolution.
• Forgetting the fair hearing and the director’s right to make representations.
• Saying a director is entitled to a salary. Non-executive directors are not, unless the company or articles fix it.
• Saying the same person can be MD and Chairman.
• Saying the limit is any number of directorships. It is five public companies.
• Ignoring section 306(4) and (5): neither the company’s inability to do business nor resignation ends the duty.
• Applying Foss v Harbottle without the section 343 exceptions, or giving the exceptions without saying that the company is the proper plaintiff in the first place.

Quick revision

• Directors: at least two (not small); one-third independent in a public company; first by subscribers or articles; later by general meeting; casual vacancies by board, confirmed at the next meeting.
• Disqualified: under 18, unsound mind, removed for fraud, insolvent, convicted of company fraud (up to 10 years), corporation.
• Status: trustee, agent and fiduciary (s.309). Duties: ss.305, 306, 308.
• Vacate: no qualification shares, bankruptcy, fraud offence, unsound mind, resignation, removal.
• Removal: s.288, ordinary resolution, notice, fair hearing. Board: first meeting within 6 months, 14 days’ notice, casting vote, unanimous written resolution.
• Foss v Harbottle: company is proper plaintiff (s.341). Seven exceptions in s.343, and the remedies of oppression, winding up, misfeasance and CAC investigation.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

Spotted a mistake? Tell us and we will check it.