The Public Company Structure

All company listed in the Nigerian stock exchange and whose shares are traded publicly possesses a unique structure. As a shareholder, you are an important member of the company and a stakeholder, and it is important you understand the general structure of companies as this will help you appreciate where you fit in and where certain issues are tackled. This is not about the nitty-gritty of the internal structure of a particular company as these details will vary between companies. Within the law, however, certain operational framework is prescribed and applies to all public companies.

Body of Shareholders
Firstly, there is the body of shareholders of which you are a member. The members meet in general or extraordinary meetings as may be summoned when important issues requiring member resolutions arise. It is within such forum too that they appoint some of their members as directors in the company, with a chairman.

A Board of Directors Overseas the Company
Since all shareholders cannot practically participate actively in running the company, the law requires them to appoint a board of directors to oversea the running of the company on their behalf and a chairman to head the board. The Board articulates the policy direction of the company, appoints and overseas the activities of the Management, recommends dividend payment and takes important decisions that shape the fortunes of the business. The board will have a secretary, usually designated the company secretary.

Management of the Company
Executing its mandates does not confer on the board a responsibility or prerogative to meddle in the day-to-day administration of the company. That is the purview of the Company Management, headed by the Managing Director (MD). The MD is a director too, but a staff, leading a team of other employees to carry out the functions of operating the business and earnings returns for the shareholders.

The Company Registrar Manages the Register of Members
The membership of a company could be extensive, with people from all over the nation or across the globe. It would be utter confusion if there is no means of keeping track. That is the function of the Registrar of the company, who maintains a register of members. Such register is updated each time a share changes hands. Considering that, for some companies, lots of shares are bought and sold everyday, it becomes easy to appreciate the enormity of this responsibility. As a shareholder, you may find need to see the registrar, for instance if you lose a share certificate (he will re-issue when you meet necessary conditions) or sign a share transfer form irregularly.

The External Auditor is Your Third Eye
Companies have a statutory obligation to appoint an External Auditor. The external auditor must review the books and present a report to the members on the financial statements presented to them at the annual general meeting. Usually, the directors recommend an auditor, but the seal of approval must be issued by the members in the general meeting.

Between these important organs, the smooth operation of the company you invested in is expected to be achieved. No doubt that if any of these parties is unable to discharge their responsibility with adequate impact, the fortunes of the company may be affected.

As an investor, the term 'capital structure' matters because it has implications, firstly for the operational health of the business you invest in, and secondly, for the returns you receive as an investor.

Long-term Funding Sources
Capital structure of a company refers to the mix or combination of various forms of funding for the operation of the business. Principally, they consist of long-term funding options of equity, debt and preferred stock. It is therefore simply the way a company finances its operation.

The Gearing Ratio is Important
The relationship between debt and equity in the capital structure of a company is referred to as gearing. A company with a high proportion of debt is said to be highly geared. This is also called high leverage, and the company, a highly levered or geared company. The debt/equity ratio, which is leverage, is computed by dividing total liabilities (or more strictly, interest-bearing long-term debt) by the total shareholders' equity. Each company is believed to have an optimum capital structure, at which point its cost of capital is lowest. It is part of the responsibility of management to seek to operate at close to that optimum structure.

The Equity Component
Taking a closer look at the components of the capital structure, equity represents ownership interest. It is the value of issued and paid-up capital of the business and represents the capital contribution of shareholders, inclusive of their retained earnings. Equity holders share in the profit of the business by way of dividends which include bonus issues. They however have no fixed or guaranteed returns and so, place no fixed reward obligation on the company. Their interest is residual but could be very rewarding if the company performs profitably, since there is no limit to the returns they could potentially earn. No company board and management can continue to enjoy the support and understanding of shareholders over a long period if reasonable returns cannot be generated for the shareholders.

Long-term Debt Holders
Debt holders - debenture or bonds - on the other hand, have no ownership claim, but are creditors entitled to principal repayment and a fixed claim of interest on their capital. This fixed obligation could become a burden to the company when it is unable to generate good earnings to meet the obligations. The reverse is also true: good earnings, fixed charges and the residue goes to owner shareholders. Preference shares are a hybrid, with features that lie somewhere in between. They have a fixed rate of dividend and their claim has precedence over the right of ordinary shareholders to dividend. If they are cumulative, it means that their dividend must be paid and will be carried forward as a debt if current earnings cannot accommodate payment. For regular shareholders and non-cumulative preference shares, if dividend cannot be paid in a given financial year, there is no such carry-forward.

It All Counts
As an investor, it matters when you evaluate companies for possible investment (say buying its shares), to review the capital structure to assess the degree of leverage, among other features. A highly geared company (too much debt) represents a higher risk profile and should show a returns potential that justifies it, to prove attractive. The commitment to interest payments, which are due whether or not earnings are generated, has seen several companies end up with the receiver. If a company is already immersed in undue debt exposure, its ability to raise further borrowing will be constrained. These have implications for its future performance and survival. That doesn't say precisely that you will go looking only for unlevered companies. No, it only says you need to understand the capital structure of that company and its likey implications, and along with other factors, decide if you find the investment attractive.

One of the key formats of business registration in Nigeria is full incorporation, which is the registration of the business as a corporate body. The corporate body or 'body corporate' as it is called, is a unique legal entity, much like a person, though a business. Such entity is technically a juristic person, recognised in law, as different from the promoters or owners of the business. A body corporate, say, Dynamic Camtech Limited, can sue and be sued in its name, own assets, execute contracts and enjoy a few other rights available to natural persons. It similarly has corresponding obligations.

The Idea of Incorporation
Two major variants of the corporate body are the public limited company ('plc') and the private limited company ('ltd'). As the name shows, the plc is a public company, simply meaning that its shares are opening traded (there are requirements for attaining that status). The other is a restricted private ownership business, which means you cannot freely join the company. However, what is of the most interest here is that both forms of business enjoy 'limited liability'. That means that when you are an owner in a business under any of the two categories, you personally enjoy limited liability, a very important legal concept in business ownership.

So, what is limited liability?

There, in the eastern part of Nigeria, dominated by business people as you well know, the idea of 'limited' has always been respected, even revered. Strangely, it once assumed this notion of a reflection of the financial status of a business person. When you became 'limited', you had arrived, as you would be commanding container shipments of goods at regular intervals. The protective ingredient of that concept was missed out and many usually thought they didn't qualify to register a limited liability company, if the were not yet super-rich. Well, incorporation as a limited liability company, whether public or private, is a unique company form that separates the person of the business from that of the owners. Following from that, it confers limited liability on the owners' individual persons by limiting their potential liability or, if you like, maximum obligation, to the business to the amount of the share capital they have contributed to the business. That includes any called up share capital: if share payment has been called up, the shareholder has a liability to contribute his part.

Elaborating on this, limited liability says that if you have paid up your share contribution, that ends your potential liability to the business. You cannot be compelled, for instance, to use personal resources to meet the obligations of the business. If the business fails and cannot find enough resources to settle its indebtedness to other parties, nobody can, under the law, descend on your personal possessions to meet the obligations of the business or otherwise require you to personally pay them. When you join a limited liability business, you are, ab initio, drawing a line between you and the business. You are defining how much exposure or commitment you want to take. Parties who do business with the company are expected to know that they are dealing with the company, not you. They won't be banking on your personal assets as a security for exposures they take against the business. An exception is if you have personally guaranteed a debt. Wonderful protection, you see. That is why companies that have such status are required to clearly indicate so in their names, for other parties to beware. Public limited companies use 'public limited company' or 'plc'. Private ones use 'limited' or 'ltd'. In the US, 'inc' and 'LLC' are the tags to watch for, just as GmbH, in Germany, should warn you that it is a 'company with limited liability'.

Limited Liability for Shareholder
The import of all this is that when you buy shares and become a shareholder and part-owner of a company, you also enjoy limited liability. That is the case for all shares of public quoted companies you buy from the stock exchange. It means that your 'potential loss' to the business, in the worst case, is the amount you invest in buying the shares. Should the business fail, for instance, shareholders will not be required to raise money to pay its creditors or have their personal assets seized to repay debts. It easily gives a limited scope to the risk you have taken. To appreciate the value of this legal concept, just imagine for one minute what would have been the case if, as a shareholder who is nowhere near where the business is run or in any way involved in the day-to-day operations of the company, you are suddenly called up to pay debts you didn't know how they were incurred. With limited liability, you pay for shares and that's it. That's the highest loss you can incur for the business.

So, if you ever worried about investing in a business that you won't know how it is run and feared that this could land you in unexpected financial trouble, don't let that stop you from buying company shares. The law protects you by limiting the potential liability to you. Besides the fact that most public companies are well-run and closely regulated, there is a line between your personal possessions and the business itself.

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