INVESTMENT STRATEGIES IN NIGERIA - AN APPRAISAL OF THE SHARE BUYBACK MECHANISM

UCL FACULTY OF LAWS
DISSERTATION COVERSHEET
Module Code: LAWSG_103_______
Course Name: CORPORATE FINANCE
Dissertation Title: THE INVESTMENT STRATEGIES IN NIGERIA: AN
APPRAISAL OF THE SHARE BUYBACK MECHANISM.
Candidate No. (This is NOT your student no): KJZK5
Word Count (includes all appendices & footnotes but not bibliography): 11,997
Name of your Tutor: DR ARAID REISBERG

ii
TABLE OF CONTENTS
Title Page…………………………………………………………………………….………. i
Table of Contents…………………………………………………………….……………… ii
INTRODUCTION……………………………………………………………………………1
CHAPTER ONE: Motivations for Share Buybacks…...……………………....…………. 4
CHAPTER TWO: NIGERIAN SHARE BUYBACK UNDER THE OLD
LEGISLATIVE REGIME
2.1 Share Buyback under the Common Law……………..………………..….………. 9
2.2 Share Buybacks under Nigerian Statue……..……………………..………………12
CHAPTER THREE: NIGERIAN SHARE BUYBACK UNDER THE NEW
LEGISLATIVE REGIME
3.1 Activities That Led To the Change in Legislation…………………………...…....16
3.2 Forms of Share Buybacks Permitted Under Sec Rules………………...................18
3.3 Authorisations Required Under the New Sec Rules………………….....………...21
3.4 Regulatory Restrictions Required Under the Rules………...……………..……...23
3.5 Financial Requirements Required Under the Sec Rules…………………...……..25
CHAPTER FOUR: LEGAL ISSUES ARISING FROM THE INTRODUCTION OF
SHARE BUYBACK IN NIGERIA
4.1 Share Buyback and Market Manipulation……………..……………………….....29
4.2 Share Buyback and Insider Trading…………………….………………...……….33
4.3 Share Buyback and Minority Protection………….……….……………..………..37
Conclusion………………………………………………………….……………...…………39
Bibliography……………………………………………………….…………...………...….40

1
INTRODUCTION
Prior to the stock market collapse of March 2008, the Nigerian Capital Market was in
a Bull Run with investors reaping high returns in terms of dividends, bonus shares and capital
gains.1
This Bull Run was driven by the consolidation of the Banking and Insurance sector,
improved public awareness about the operations and opportunities in the capital market and
speculative activities and foreign investors’ interest in the market. The regulators did not
supervise the market properly as banks engaged in different sharp practices in the bid to tap
into the newfound goldmine. The banks engaged in series of public offers after the
consolidation and investors in the bid to invest sapped the capital market of its resources. The
different actions, which would be discussed below, led to the monumental collapse of the
stock market in March 2008 as share prices fell consistently and the market shrunk
occasioning losses to investors.
The government in response to the pressure mounted by Independent Association of
Shareholders to introduce share buybacks (SBB) to stabilize the market, after efforts to
reconstruct the shares failed, gave a directive for the reform of the Securities and Exchange
Commission Rules (SEC Rules).2
The 2008 reforms now allow companies to repurchase a
percentage of their shares. The amended SEC rules by adopting the English Companies Act
2006 (CA) departed from the position in the Companies and Allied Matters Act (CAMA) and
the old SEC rules. The two statutes adopted the old common law prohibition set out in Trevor
v Whitworth.3
The case established a rule that prohibits limited companies from repurchasing
their own shares. The rule seeks to protect creditors in the event of the company becoming
insolvent.
1
D. Ekineh, The Share Buyback Policy (Paper presented by SEC at the 12th
Stockbrokers Annual Conference
and Investiture) p.2. available at www.stockmarketnigeria.com/forums/attachments/nigerian-stock-
exchange/675d1238119310-marketwatch-share-buyback.pdf accessed 10/07/09.
2
Rules made pursuant to the Investments and Securities Act 2007 (ISA).
3
(1887) 12 AC 409 (HL).

2
SBB enables companies to “mop up” excess shares as a means of strengthening their
shares, improving the integrity and viability of the stock market and the economy. In In the
Matter of George Raymond Pty Ltd,4
Byrne J noted that a buyback is a contractual agreement
for the sale and purchase of shares in which the shareholders agree to transfer the shares to the
company and the company agrees to pay them. The company incurs a debt in the amount
agreed to be paid for the shares.5
Where the company repurchases the shares from its
shareholders, the shares can either be cancelled, kept in treasury or escrow until the directors
decide to reissue the shares. In addition, the SBB must not be prejudicial to either the
creditors or the company.
The amended SEC rules follow the trend in the UK and Australia. Both countries’
statutes on SBB have been gradually relaxed ‘over the years to extend the range of financing
options available in the corporate sector and increase flexibility.’6
The statutory powers to
repurchase shares in these jurisdictions are subject to restrictions intended to prevent abuse
that would prejudice creditors or discriminate against groups of shareholders.7
These
restrictions include authorisation, disclosure and other regulatory restrictions aimed to protect
creditors and investors in the event of winding up and market abuse.
SBB raises different issues from financial assistance, maintenance of capital and
market abuse. However, this research shall critically examine the SBB mechanism under the
amended SEC rules with a view to determining the efficacy or otherwise of the rules in
comparison to other jurisdictions. In addition, the legal issues ranging from market abuse to
minority protection will also be considered.
This dissertation consists of four chapters. The first chapter shall examine the
motivations for repurchasing shares, highlighting the effectiveness and the short falls of the
4
(2001) 19 ACLC 553 (HC).
5
R Tomasic, S Bottomely and R. McQueen, Corporations Law in Australia (Annandale, 2002) p.471.
6
Eilis Ferran, Principles of Corporate Finance (Oxford, 2008) p.204.
7
Ibid., p.204.

3
arguments for repurchasing shares. The common law rule on buyback will be discussed in
Chapter Two. The chapter will focus on the rule in Trevor v Whitworth and the adoption of
the rule in Nigeria. The activities that led to the collapse of the Nigerian Capital Market and
the introduction of SBB will be considered in Chapter Three. The chapter will compare the
recent SEC amendments to the provisions in the CA. Chapter Four will show how officers can
use SBB to abuse the market and whether actions by shareholders for unfairly prejudicial
conduct will succeed.
In concluding this research, it will be indicative that the new rule, though a step in the
right direction is open to improvement to ensure it meets its objectives.

4
CHAPTER ONE
MOTIVATIONS FOR SHARE BUYBACKS
Different companies may have different commercial reasons for repurchasing their
own shares. SBB can be used to return surplus cash to investors or increasing earnings per
share. Where the market is not as active as it should be, the company enhances its liquidity by
buying back shares. The reasons for repurchasing shares differ from company to company but
some are listed below.
Return surplus cash to shareholders.
Where a company is unable to effectively invest in ‘profitable investment projects’,8
the company can return surplus cash to shareholders by repurchasing shares. The company by
using SBB improves the performance ratio used by analyst to determine the corporate
performance of the company.
Where a company has surplus cash, a cash return may also be achieved by a court-
approved reduction of capital or takeover by a new holding company using a scheme of
arrangement. These two alternative investment strategies are quite complicated and make
them unattractive to directors unless the procedure is part of a larger transaction like a
‘demerger of companies’.9
If the company decides to issue a new class of special redeemable
share, capital may be difficult to achieve and return of cash will be spread over a number of
years.
Another less cumbersome option that a company has other than a SBB is to pay a
special dividend. This requires a consolidation and sub-division of the share capital and has
the capacity of leaving the company with shares dominated in fractions making it
unnecessarily complicated for shareholders to understand.10
An advantage a shareholder has
8
Ferran, Principles of Corporate Finance, n.6 above, p.204.
9
R. Skelton, Share Buyback Practice Manual (London, 2008) p.1.1.
10
Ibid, p.1.2.

5
in buyback over a special dividend is that the shareholder has an option of either receiving
cash or not taking the SBB offer, thus enhancing the value of his existing investments.11
Increase in earning per share
Earning per share determines the corporate performance of a company and SBB
enhances this ratio. SBB enhances earnings where the benefit of reducing the shares
outweighs the negative impact on the company’s profits from loss in income generated from
the cash returned. A company can achieve this feat by financing the buyback with new debt.
This will occasion an increase in the company’s debt and reduce the assets of the companies.
Using a SBB to increase earnings per share may be prejudicial to creditors and the
shareholders because it reduces the available assets.
Some commentators have argued that earnings will not increase because the company
pays assets to finance the SBB and the size of the company will decline with a decrease in
outstanding shares.12
In 2006, the Royal Bank of Scotland repurchased shares worth £1
billion. After the repurchase, its share price increased by 2.7% on the day. However, the
increase was short-lived as taxpayers bailed out the company in 2008. This indicates that the
price increase may not be permanent especially if the company is in financial difficulties.
Stabilization of share price
Listed companies may use SBB as a tool to bolster or stabilize the price of their shares
especially when the shares suffer from liquidity. SBB will serve to enhance liquidity, by the
company being a purchaser and a seller, supporting a duly depressed share price.13
Where
SBB seeks to boost or stabilize the market, the activities may mislead investors about the
value of the shares, thus, creating a false market.14
Ferran believes the issue of manipulation is
11
Ibid, p.1.2.
12
J. Netter and M. Mitchell, ‘Stock – Repurchase Announcement and Insider Transactions after the October
1987 Stock Market Crash’ (1989) 18 Financial Management 84 p.85.
13
Richard Skelton, ‘Purchase and Holding of Own Shares’ (2003) Tolley’s Company Law Services Issue 72,
p6005/1.
14
General Pty Co ltd v Matheson’s Trustee (1888) 16 R 82 (Ct of Sess).

6
not a problem in the UK because of the regulations against manipulation.15
This will pose a
problem in Nigeria because of poor supervision.
Informal reduction of capital.
Companies use SBB to reduce their capital without the need for court approval and
other conditions imposed by the different statutes. Hence, SBB is preferred as a cheaper and
more flexible alternative. ‘Historically, the potential for creditors to be prejudiced by an
informal reduction of capital was a key objection to allowing companies to repurchase their
shares.’16
In Trevor v Whitworth17
the House of Lord relied on maintenance of capital
principle in concluding that SBB was unlawful. In the UK, ‘objections to SBB that are rooted
in this concern have receded.’18
The use of SBB to reduce capital may pose a problem in
Nigeria where maintenance of capital is still a strong principle applicable to all companies.
This is because authorised capital is still viewed as the ultimate protection for creditors and a
reduction in a manner contrary to CAMA is illegal.
Buybacks as a defence to a takeover.
Over the years, SBB has been given as a defence to a takeover. This is done by
reducing the number of shares available to the hostile bidder or by the controllers of the
company buying out dissident shareholders at a favourable price.19
There have been two
hypotheses on this issue.20
The first is the shareholder interest hypothesis which suggests that
SBB done as a defence to a takeover is done in the interest of the shareholders. Managers
forced with a hostile takeover bid focus on short term investments like a SBB, thereby
encouraging institutional shareholders to hold on to their shares rather than selling as is
15
Eilis Ferran, Company Law and Corporate Finance (Oxford, 1999) p.435
16
Ferran, Corporate Finance, n.6 above, p.206
17
(1887) 12 AC 409 (HL)
18
Ferran, Corporate Finance, n.6 above, p206.
19
ibid, p.207.
20
IM Ramsay and AS Lamba, ‘Share Buy-backs: An Empirical Investigation’, available at SSRN
http://ssrn.com/abstract=227930. p.5.

7
usually the case where there is a threat of a hostile takeover.21
This may not have an impact
on short-term investors but it allows the managers to make long-term investment decisions.22
The second is the management entrenchment hypothesis. It suggests that the managers
act solely on their own interest at the expense of the shareholders. The managers aim to
maintain their lucrative position by employing defensive tactics against the takeover, thus
making the company less appealing for the bidders.23
The company is made less lucrative by
increasing the leverage of the company and reducing the shares available to the bidder.24
This
may impede the efficient functioning of the market for corporate control and may not be in
the interest of the company especially if the company is going through financial difficulties.
To facilitate exit
Where a company’s articles of association restricts the transfer of shares or gives the
shareholders pre-emptive right to the company’s shares, SBB will be a useful tool for retiring
shareholders or the estate of deceased shareholders.25
Where the other shareholders are
unwilling or unable to pay for such shares, retiring shareholders are locked in the company
without any hope of exit and little prospect of receiving any dividends. In the worst possible
case, retiring shareholders may be forced to sell their shares to the members or directors at an
undervalued price.26
A retiring shareholder by selling to the company avoids any abuse that
may otherwise arise.
SBB can also be used to buy out a dissident shareholder. The court accepted this
argument in Re Dronfield Silkstone Coal Company.27
However, in Trevor v Whitworth, Lord
Macnaghten28
disagreed with this reasoning suggesting that it is healthy for the proper
functioning of any company to have shareholders that are critical of the actions of the
21
P Drucker, ‘Corporate Takeovers: What is to be done?’ (1986) 82 The Public Interest 3 at 13.
22
Ramsay, n.21 above, p.6.
23
Ibid, p.6.
24
Ibid, p.6.
25
Kinlan v Crimmin [2007] BCC 106
26
The Purchase by a Company of its Own Shares (Cmnd 7944, 1980) para 13.
27
(1881) 17 Ch D 76 (CA)
28
(1887) 12 AC 409 (HL), 435.

8
company. This will reduce the likelihood of minority actions against the company. It is
noteworthy that a dissident shareholder may be detrimental to the company and in such
situations SBB may be the only plausible option to avoid excessive litigation.
Another problem that may arise where a SBB is used for the exit of shareholders is
that the directors may abuse this power by favouring certain shareholders, either because of
the special relationship that exists between them or in a bid to get rid of the shareholders.
Information signalling
Where the management of a company believes that the company’s shares are
undervalued, SBB can be used to signal shareholders and investors. Analysts believe the
signals may be ambiguous.29
On the one hand, it may be an indication that the management
has no better use for the company’s funds, thus, they enter into a SBB. On the other hand, it
could also indicate that the shares are undervalued and a SBB at a significant premium is a
good means of passing the information to the shareholders.30
Studies have shown that where
such an information signalling is made, there is usually a positive return on the shares and the
share prices do not return to their pre-SBB date level.31
In addition to the above reasons, SBB can be used to provide marketability in shares,
assisting in the operation of Employee Share Scheme or reconstructing the company’s balance
sheet.32
29
Ramsay, n.21 above, p.7.
30
Ibid, p.8.
31
LY Dana, ‘Common Stock Repurchases: An Analysis of Returns to Bondholders and Shareholders’ (1981) 9
Journal of Financial Economics 113. T Vermaelen, ‘Common Stock Repurchases and Market Signalling: An
Empirical Study’ (1981) 19 Journal of Financial and Quantitative Analysis 163
32
Skelton, Share Buyback Practice Manual, n.11 above, p.1.1.

9
CHAPTER TWO
NIGERIAN SHARE BUYBACKS UNDER THE OLD LEGISLATIVE REGIME
In Nigeria CAMA restricts the acquisition by a company of its own shares.33
However, certain provisions in CAMA, like the CA allow Nigerian companies to repurchase
shares in very limited situations. The circumstances where a company is allowed to acquire its
own shares have been extended by the amendments made to SEC Rules in 2008. The new
rules seek to improve the financial management powers of the company’s managers to declare
SBB and decide on the type, timing and size of the SBB. This chapter will consider the old
common law position as adopted in Nigeria and its exceptions.
2.1 Share Buyback under the Common Law
The prohibition of SBB has been attributed to the decision in Trevor v Whitworth.34
Their Lordships were required to decide whether a company could repurchase its own shares
where the company’s articles provided that ‘any share may be purchased by the company
from any person willing to sell it and at such price…as the board thinks reasonable.’ Pursuant
to this provision, the company purchased shares from a shareholder that was financed by an
issue of promissory notes. The company went into insolvent liquidation after the transaction
and the shareholder brought an action for the balance payable on the shares. The court in
reversing the decision of the court of appeal disapproved the decision of the lower court in re
Dronfield Silkstone Coal Company,35
held that a company has no powers under the
Companies Act to repurchase shares and that any such repurchase was ultra vires and must
fail. The decision largely preceded on the technical basis that the purchase was ultra vires the
company as not being ‘in respect of or as incidental to any of the objects specified in the
33
CAMA, s 160.
34
(1887) 12 AC 409(HL).
35
(1881) 17 Ch D 76, CA.

10
memorandum of association.’36
The court decided that the practice was ‘undesirable and
unlawful for reasons beyond the technical findings of ultra vires.’37
Their Lordships decision was based on a number of reasons. First, if the company
were to retain the shares, it would amount to an indirect method of reducing capital38
contrary
to the maintenance of capital doctrine and unlawful for not being in the prescribed manner of
reducing capital. Second, their Lordships found that if the company’s intention were to retain
the acquired shares to be resold at a later period, it would amount to trafficking of shares
which is expressly prohibited by the Companies Act.39
Third, the court agreed with the decision of the Master of Rolls in re Dronfield
Silkstone Coal Company40
that it was inconsistent with the nature of a company for a
company to become a member of itself. Lord Watson stated that ‘It cannot be registered as a
shareholder to the effect of becoming debtor to itself for calls, or of being placed on the list of
contributors in its own liquidation.’41
Fourth, the court held that the restrictions on SBB were
made to protect the interest of creditors. This is because the company’s paid up capital was
seen as the only protection the creditors had. Lord Watson stated
‘it is accepted as an unavoidable fact that the company’s paid-up capital may be
diminished or lost in the course of the company’s trading…they (creditors) are entitled to
assume that no part of the capital which has been paid in the coffers of the company has
been subsequently paid out, except for legitimate reasons.’42
Finally, their Lordships held that the SBB would undermine corporate governance. Their
Lordships were of the view that ‘it would be contrary to the climate of proper corporate
36
Ben Pettet, Company Law (Essex, 2005) p.286.
37
George O’Mahoney, Share Buybacks in Australia: Emerging issues (DPhil thesis, University of Oxford 2007)
p.20.
38
(1887) 12 AC 409, 417 (HL)
39
Ibid, 416
40
(1881) 17 Ch D 76, CA
41
(1887) 12 AC 409, 424 (HL)
42
Ibid 423, 424.

11
management to give managers a means of buying out critics with the company’s capital.’43
Lord Macnaghten asked, ‘Is it possible to suggest anything more dangerous to the welfare of
companies and the security of their creditors than such a doctrine.’44
The most important basis
for the common law prohibition was the desire to protect both present and future creditors. A
SBB would lead to a diminution of the company’s issued and outstanding capital, which was
an unacceptable risk.45
‘This rationale has widely informed subsequent justifications of the SBB
prohibition.’46
The prohibition was however rejected in the US for being incompatible with
the country’s dynamic economy.47
The rule in Trevor v Whitworth was adopted in most
commonwealth jurisdictions. The Greene Committee endorsed the rule in the UK,48
but the
courts developed some exceptions.49
The Jenkins Committee50
acknowledged the usefulness
of the US practice concerning employee share scheme and unlocking investments in small
companies but thought that if such powers were to be given to English companies, stringent
safeguards would have to be introduced to protect creditors and shareholders.51
The
committee did not advocate for a total removal of the prohibition because it received no
evidence that British Companies needed such powers and because of the tax disadvantages
that would arise. By 1980, in the consultation document on The Purchase by a Company of its
Own Shares,52
Professor Gower recommended that companies should be allowed to issue
redeemable equity shares and repurchase their own shares. At the time of Gower’s review, the
43
O’Mahoney, n.38 above, p. 22.
44
(1887) 12 AC 409,(HL) 435.
45
O’Mahoney, n.38 above, p. 22.
46
Ibid, p. 22.
47
See Re Castle Braid Co. Ltd 145 Fed 224 (DC SDNY 1906), T Gardner, ‘Company Purchase of Own Shares
under the Companies Bill 1990 – A Sheep in Wolf’s Clothing’ (1992) 22 Victoria University Wellington Law
Review 159,159.
48
United Kingdom Company Law Amendment Committee: Report, (Cmd 2657, 1926).
49
Kirby v Wilkins (1929) 2 Ch 444 (CD).
50
United Kingdom Report of the Company Law Committee (Cmnd 1749, 1962) paras 167-9.
51
Ferran, Corporate Finance, n.6 above, p. 435.
52
Cmnd 7944 (1980).

12
mood was against treasury shares. The issue was revisited in 199853
and the 1985 Companies
Act was amended in 2003 to introduce the limited power of companies to keep their shares in
treasury subject to the pre-emptive right of the shareholders.
The rule was applied in Australian cases.54
However, it was not effective as companies
were able to evade the prohibition.55
These companies relied on legal loopholes to engage in
semi-buybacks. One commentator described this scheme as ‘byzantine tactics to circumvent
the rule.’56
In August Investments Pty Ltd v Poseidon Ltd, P had shares in S and S sought to
make a hostile takeover against P. A who was also a shareholder of P objected on the ground
that it would amount to an indirect acquisition by P. The court held that it did not amount to
any form of acquisition.57
Relying on the loophole opened by the decision, large companies
were able to purchase their own shares through their associates and subsidiaries. Frustrations
that resulted from the interpretation of the Poseidon case58
and the general dissatisfaction with
the maintenance doctrine led to the introduction of SBB in Australia.
In Nigeria, the 1968 Companies Act codified the common law rule and it is retained in
the 2004 CAMA. The CAMA provision had no impact on the Nigerian corporate law, as
companies never tried to evade the prohibition. The lack of initiative may account for the
dearth of commentaries in this area of law until SEC amendments in 2008.
2.2 Share buybacks under Nigerian statutes
In Nigeria SBB is regulated by CAMA and the SEC Rules. While CAMA is
applicable to both public and private companies, the provisions in SEC are applicable to only
public companies. There are two regimes of SBB in Nigeria – the pre-2008 regime which
53
DTI, ‘Share Buybacks: A Consultation Document’ (1998).
54
Union Trustee Company of Australia v Greater Melbourne Realty Co (1932) 47 CLR 49 (High Court of
Australia).
55
Belmont Finance v William Furniture Ltd(No 2) (1980) 1 All ER 392 (CA); Burton v Palmer (1980) 2
NSWLR 878; Re Meyer Investment Property Ltd (1983) 68 FLR 15.
56
D Partlett and G Burton, ‘The Repurchase Albatross and Corporation Law Theory’ (1988) 62 Australian Law
Journal 139, p.140.
57
(1971) 2 SASR 71 SC, Dyson v Hutton Pty Ltd (1935) 41 ALR 419 SC.
58
R Lyle, Share Buy-back (Sydney, 1993) pp.8-14.

13
relates to the CAMA provisions and the 2008 regime which is the new SEC rules. The pre-
2008 regimes will be discussed hereunder.
2.2.1 Share buybacks and CAMA.
Section 160 CAMA provides that a company may not purchase or acquire shares
issued by it. The section stems from the common law position that creditors should be
protected from incidents that are not in the company’s ordinary course of business.
The provision in CAMA is subject to the company’s articles of association and other
provisions in the Act. The effect is that where the articles permit a SBB, any repurchase made
by the company is valid. This is a departure from the rule in Trevor v Whitworth, that
permission in the articles does not affect the validity of the acquisition. The departure is
aimed to follow the general world trend.
Like the CA 2005, CAMA makes some exceptions59
to the common law provision.
The Act legalises a SBB that is made to settle a debt owed by the company. Where the
company has fractional shares which may affect the calculation of dividends, such shares are
to be bought back. Also exempted are shares purchased in fulfilment of the terms of non-
assignable agreements under which the company has an option or is obliged to purchase
shares owned by an officer or employee. The company was also permitted to repurchase
pursuant to a court order or to satisfy a dissenting shareholder.
CAMA provides additional restriction for the repurchase of shares. Where a company
is permitted to buyback its shares, such repurchase must be out of profits of the company that
would otherwise be available for dividends or the proceeds from fresh issue of shares made
for the purpose of the repurchase.60
The use of funds other than that available for payment as
dividends is a breach of the maintenance of capital doctrine. The company’s capital is seen as
a guarantee to creditors that their debt will be paid in full. The use of such capital for objects
59
CAMA, s 160(2)(a)-(e).
60
CAMA, s 161(a).

14
not authorised are prohibited. The funds available for dividends are not part of the company’s
capital and are used for different forms of reinvestments. Even with the exceptions provided
in CAMA, CAMA prohibited the company from purchasing more than 15% of its total
shares.61
Under CAMA, acquired shares can be cancelled or kept to be reissued at a later
period. Where the company cancels its shares, the company must alter its articles to reflect the
new share capital. The effect of this provision is that the company is indirectly permitted to
traffic its own share, a concept that was vehemently criticised in Trevor v Whitworth.
There is no provision in CAMA for the consequences for contravening the prohibition.
In the UK, where a company contravenes the general restrictions in section 658 CA, the
company is liable to a fine and every officer of the company who is in default is also liable to
imprisonment or a fine or both and the purported acquisition is void.62
2.2.2 Share buyback under the old SEC Rules.
Prior to the 2008 amendments, the old SEC Rules complemented the provisions in
CAMA. The rules were applicable to public companies and banks.63
The SEC rules like
CAMA lacked substance and had little impact on the Nigerian corporate law as against the
provisions in other jurisdictions. To ensure the liquidity and viability of the company, the
company was required to file an application accompanied by its last audited account to SEC
for approval.64
Rule 109(B) SEC Rules required any company wishing to repurchase its
shares to be authorised by its articles of association. Where the articles authorises a SBB, the
shares repurchased must not exceed 15% of the company’s issued capital.65
The identity of
61
CAMA, ss 161(c), 162.
62
Ferran, Corporate Finance, n.6 above, p.212.
63
SEC Rules 1999, Rule 109(B)(1).
64
Ibid, Rule 109(B)(2).
65
The new rules maintains this provision.

15
the company’s nominees and trustees must be disclosed66
and such persons were prohibited
from voting at meetings.67
Even though the rules had more procedural guidelines than CAMA, the provisions
were still laconic. Some of the lacuna in the rules has been addressed by the recent
amendments even though most of the old provisions are retained.
66
SEC Rules 1999, Rule 109(B)(4).
67
Ibid, Rule 109(B)(3)(iii).

16
CHAPTER THREE
NIGERIAN SHARE BUYBACK UNDER THE NEW LEGISLATIVE REGIME
Before going into the legislative framework of the SEC amendments, it is prudent to
discuss first, the activities that led to the amendments. This chapter shall deal with the factors
that led to the changes in the SEC rules and shall analyse the provisions of the new rules.
3.1 Activities that led to the changes in legislation.
‘The Nigerian capital market was described as the fastest growing in the Sub-Saharan
Africa and lived up to this billing’68
until the Nigerian stock market crash of March 2008.
This was partly because of the recapitalization of Nigerian banks that was initiated in 2004
and the influx of foreign investors. The recapitalization exercise required Nigerian banks to
have a capital base of N25 billion. To raise this capital most banks engaged in public offers.
The banks that could not raise the required capital either merged with other banks or were
acquired. Once the shares were listed, investors witnessed a quick return as the unit price of
most shares doubled, boosting the stock market as a good means of investment, and leading to
an influx of investors.
Two years after the recapitalization exercise, most banks besieged the capital market,
competing amongst each other to raise funds through mega offers in a single trench.69
Through enticing marketing strategies, the banks succeeded in their various offers but that left
the market exhausted. The primary market experienced a boom while in the secondary market
investors dumped their shares opting to invest in the considerably cheaper primary market. A
total of N2.2 trillion was raised through various public offers dominated by banks and most of
the money came from the disposal of shares in the secondary market.
68
State of the Nigerian Capital Market and Share Buy-back. Available at
www.dominionng.com/LinkClick.aspx?fileticket=AXPODnAGvM%3D&tabid=67&mid=421 accessed on
29/07/09.
69
A. Olisaemeka, The Meltdown of the Nigerian Capital Market: Causes and Consequences. Available at
www.nairaland.com/nigeria/topic-241080.0.html accessed on 29/07/09.

17
With the boom in the stock market, the banks saw the capital market as a prolific
investment. Thus, banks financed about 65 per cent of trading in the capital market through
short margin facilities granted to investors and stock broking firms.70
This margin facility
introduced by the banks was unsupervised and unregulated by the regulators – the Central
Bank, SEC or the Nigerian Stock Exchange. The market ceased to be an avenue for long-term
investments as speculators flooded the market. The speculative trading paid off until the crash
of March 2008.
The global financial crises saw foreign investors, who were already suffering huge
losses in their home countries, dispose their shares thus leading to excess shares available for
sale with few investors willing to buy. This proved disastrous as share price continued to
drop. Other than the international factors, the high cost of doing business in Nigeria led to the
closure of some plants like Dunlop Nigeria Plc. The effect left a lasting impact on the market
as the company’s share dropped from N6 to N0.6.71
The deficiencies in the regulations, especially the absence of market makers also
contributed to the collapse of the stock market. The inconsistencies and the lack of
transparency by SEC also contributed to the problem in the stock market. In 2008, SEC
publicly accused some of the listed companies of manipulating their shares and suspended
them. The announcement led to panic selling. SEC is yet to publish the result of the
investigation.72
The Nigerian government was first reluctant to interfere with the activities in the stock
market but with the continual drop in the price of shares, the fear of the crash in the market
and pressure mounted by the Independent Shareholders Association made the government to
act. According to a report,
70
ibid.
71
ibid.
72
ibid.

18
‘...following anxiety about the looming possibility of a stock market crash in Nigeria
based on declining fortunes…, the federal government convened a meeting with capital
market stakeholders… to formulate policy measures that will restore stability in the stock
market’.73
Pursuant to the decisions made during the meeting, the office of the Attorney General was
directed to issue an exemption to the relevant sections of CAMA prohibiting SBB.74
Pursuant
to the directive, SEC Rules were amended allowing public companies to repurchase their
shares following the trend in other jurisdictions such as the UK, Australia and US. The
amendments aim to improve the bearish stock market by signalling investors that the prices of
the shares are undervalued and to increase the earnings per share of the companies.
3.2 Forms of share buybacks permitted under SEC Rules
There are different forms of SBB regulated in different jurisdictions. Some
jurisdictions regulate more forms than others, giving companies a diverse choice while
repurchasing their shares. The current Nigerian SBB regime recognises two different forms of
SBB; the on-market SBB and the tender offer.
A SBB is an on-market SBB if it results from an offer made by a listed corporation on
a prescribed financial market in the ordinary course of trading on that market.75
An on-market
SBB will not be in the ordinary course of trading if the company’s offer is not capable of
being accepted by any shareholder according to the exchange’s usual business rules.76
On-
market SBB is very common because it offers flexibility as well as regulatory scrutiny.77
Amongst the other forms of SBB, it is usually used for signalling. Rule 109B(3)(xiv) SEC
Rules provides that the SBB must be at the current market price. This rule is impracticable in
73
Stanbic IBTC Bank, ‘MARKET WATCH: Analysis of the Nigerian Stock Market Intervention’ (26 August
2008) available at www.stockmarketnigeria.com/.../477d1220010303-marketwatch-stanbic-ibtc-market-
watch_29-august-2008-edit.pdf.
74
Ekineh, n.1 above.
75
Corporations Act, Act No. 50 of 2001 as amended. s 257B(6).
76
Attorney General (Vic) v Walsh’s Holding Ltd (1973) VR 137, 144.
77
A. Idigbe, Nigeria: Legal Implications of Share buybacks (5) available at
www.allafrica.com/stories/200812170047.html

19
the present market because most investors may be unwilling to sell at the present price. Using
Fin Bank as an example, before its initial public offer on January 3rd
2008, the bank was
trading at N13, and the offer price on the said date was N9.40 which dropped to N1.55 by
August 19th
2009 78
It is quite unlikely that any investor will be willing to sell at the current
price because the investor would make a loss of about N7.85 or more. Investors that used the
short loan margin will make more losses than others that did not borrow to purchase the
shares.
SEC prohibits the use of more than two stock broking firms or a stock broking firm
that is its subsidiary in buying the shares.79
This is aimed to avoid a false market effect. In the
UK, the Association of British Insurers allow companies to undertake this exercise if to do so
will result in an increase in the earnings and is in the best interest of the shareholders
generally.80
If this approach is applied in Nigeria, the aim of an on-market SBB would be to
increase earnings but at the going rate it will be suicidal for any investor to sell.
When a company engages in a tender offer, the company offers all shareholders the
opportunity to tender shares at a fixed price. This allows the company to repurchase a
substantial quantity of its own shares at a single trench, giving all the shareholders the same
opportunity to tender an offer.81
The tender is usually made at a premium as a compensation
for tendering the shares rather than holding on to the shares. 82
Rule 109B(xiv) SEC Rules
empowers the directors to determine the price which shall not be more than 5% above the
average market price over the last five trading days. This form of SBB will suffer the same as
the on-market SBB because at the present market it would be impossible to find sellers.
78
Galleria Finance: Daily Stock Market Prices available at
http://www.nigeriagalleria.com/Galleria_Finance/Nigeria_Stock_Market_Reports/Daily_Stock_Prices_Wednesd
ay.html accessed 19/08/09.
79
SEC Rules, Rule 109B(3)(xxi).
80
Ferran, Corporate Finance, n.6 above, p.214
81
Ekineh, n.1 above, p.5
82
ibid, p.5

20
The other forms of SBB will be discussed below. The company uses an equal access
SBB to make an offer to all shareholders to repurchase a uniform percentage of shares from
each shareholder.
In using a derivative-based SBB, the company purchases its shares by selling a put
option or warrant on its own shares, the issues provide the put buyer with a right to sell a
specified number of shares at a fixed price in the future. By buying a call option, the issuer
gains the right to buy a specified number of shares at a fixed price in the future.83
A company engages in an employee share scheme by buying shares held by or for the
benefit of current or former employees under an existing employee share acquisition plan
approved by the shareholders.84
This form of SBB enables the exit of former employees. This
has little effect on the capital maintenance protection available to creditors. Even though this
form of SBB is not expressly provided for in the SEC amendment, it is still applicable based
on the provisions in CAMA.
When a company engages in a selective SBB, the company repurchases shares from
one or more shareholders on a selective basis. The SBB does not result from an identical
proportional offer to all shareholders, nor does it involve an employee-share purchase, odd-lot
purchase or an on-market purchase.85
The number of shares purchased from one shareholder
need not bear any relationship to the number (if any) purchased from other shareholders.86
This form of SBB is often used as a defence mechanism by management to improve its
financial ratings by way of avoiding dilution of shares owing to an executive compensation,
or as a mechanism against a hostile takeover.87
The problem with this form of SBB is that
shareholders may be treated unequally.
83
ibid, p.5
84
Ramsay, n.21 above, p2.
85
ASIC, Policy Statement 110: Share Buybacks (Australia, 1998) p.6
86
Ibid, p.6
87
Idigbe, n.78 above

21
This form of SBB is similar to a fixed price tender offer. In Dutch auction SBB, the
company states the number of shares that it wishes to acquire. To achieve this, the company
sets a price range within which the shareholders may tender their shares rather than tendering
them at a predetermined fixed-price.88
The company receives the price required for the
minimum shares it requires and the shareholders receive the selected price for their shares.
This form of SBB sends signals to the market and results in long lasting increase in the value
of the shares of the company.89
The new SEC rules seem to have excluded these alternative forms of SBB. It also
seems to have excluded some types of SBB anticipated under CAMA. There is no reasonable
explanation for the new position. It may have been a regulatory oversight or because of the
stringent regulatory control that was introduced in the rules. In addition, the difference in the
markets may have contributed to the omission since Nigeria is a developing market and the
introduction of complex concepts may prove difficult to regulate. Because we are treading on
foreign ground, the rules on SBB are applicable to the two forms of SBB permitted unlike in
Australia and in the UK where specific rules regulate the different forms of SBB.
3.3 Authorisations required under the new SEC Rules
For a public company to repurchase its shares, the transactions must be authorised by
the shareholders and approved by SEC. It was previously required under the old rules for the
SBB to be authorised by the articles of association of the company.90
This has been removed
and the required authorisation for a SBB shall be by a special resolution of the company as
provided in CAMA.91
In the UK, the power of a company to repurchase its shares is subject to
restrictions provided in its articles.92
‘That the 2006 Act provides that companies can
repurchase shares unless their articles provide otherwise is a reversal of the provision under
88
Ramsay, n.21 above, p4.
89
Idigbe, n.78 above.
90
SEC Rules 1999, Rule 109B(3)(i).
91
SEC Rules, Rule 109B(3)(iv).
92
CA, s.690.

22
the previous company’s legislation, which was that specific constitutional authorisation via
the articles was required.’93
The new Companies Act provision is in line with the Second
Company Law Directive, which requires SBB to be authorised by the general meetings.94
In Nigeria, special resolution is required to authorise a SBB, and is applicable to both
the on-market SBB and the tender offer. The special resolution shall be as provided by
CAMA. Under Section 233(2) CAMA, a resolution is special if passed by not less than three-
fourths of the votes cast at a general meeting of which 21 days’ notice, specifying the
intention to propose the resolution as special is given. The notice of the meeting shall specify
the nature of the business at the meeting and the detail of the resolution.95
In addition to the
notice in CAMA, SEC in the bid to protect investors requires the company to publish in two
daily newspapers a notice of the general meeting to authorise the SBB and the evidence of
such publication filed with SEC.96
In the UK, there are different resolutions required for the different types of SBB
permitted. ‘Section 701 CA provides that the shareholder authorization required in respect of
an on-market purchase is a resolution, which implies an ordinary resolution.’97
In practice the
Association of British Insurers, require the resolution for an on-market SBB to be by special
authorisation.98
The authorisation for an on-market SBB may be a general authority not linked
to any particular SBB, but must specify the maximum number of shares to be authorised and
the maximum and minimum prices to be paid.99
Where the SBB is to be an off-market SBB,
special resolution is required.100
Before shares are repurchased, the company must authorise
the SBB or the SBB contract. The SBB contract must be made available for inspection by
members at the company’s registered office for not less than fifteen days ending with the day
93
94
Second Company Law Directive 77/91/EEC, [1977] OJ L26/1, Article 19.
95
CAMA, s 218.
96
SEC Rules, Rule 109B(3)(v).
97
98
IVIS Guidelines: Own Share Purchase. Available at http://www.ivis.co.uk/OwnSharePurchase.aspx
99
CA, s. 701(3).
100
Ibíd., s. 694.

23
of the resolution and at the meeting itself.101
Where creditors agree, they can waive the
provision.102
The authorisation requirement is mandatory103
in the UK where the provisions are
similar to the provisions of the SEC rules. Hence, the provision must be complied with even
in situations where the shareholders are willing to waive their rights. In such situations any
such acquisition is void.104
Even though the protection lies first with existing shareholders, the
protection extends to creditors and other investors.105
Once the members pass the special resolution authorising the SBB, the transaction
must be completed within twelve months. Notwithstanding the different types of shares
repurchased, each repurchase must be separated by a period of 365 days. This is different
from the trend in other jurisdictions. In the US the time, price, volume and number of brokers
are limited on a daily basis.106
In the UK, authorisation expires after eighteen months after the
passing of the resolution.107
‘This time limit is consistent with the unamended Second
Company Law Directive Article 19.’108
3.4 Regulatory restrictions required under the Rules.
A company must not purchase its own shares if the purchase would be materially
prejudicial to the creditors. Hence, an illiquid company is prohibited from carrying out a
SBB.109
SEC introduced two investor protection rules. The first protection against an illiquid
company is the requirement that the company’s auditors are to file a letter on the status of the
101
Ibíd., s. 696(2)(b).
102
Kinlan v Crimmin [2007] BCC (CD) 106, citing BDG Roof-Bond Ltd v Douglas [2000] 1BCLC 401(CD).
103
Re RW Peak (Kings Lynn) Ltd [1998] 1 BCLC 193 (CD).
104
Wright v Atlas Wright (Europe) Ltd [1999] 2 BCLC 301 CA, 310-15 per Potter LJ in Ferran, Corporate
Finance, n.6 p.217; Note CA, s 696(5).
105
Ibid, 204-5.
106
Idigbe, n.78 above.
107
CA, s 694(5).
108
Ferran, Corporate Finance, n.6 above, p.216, n55.
109
SEC Rules., Rule 109B(3)(xiii).

24
company with SEC. The audited accounts showing the status of the company shall not be
more than nine months prior to the buyback.110
The second protection accorded to creditors is required from the directors to ensure
that the company is liquid or will not go into liquidation after the SBB. The directors are
required to make a declaration of solvency that they believe that the company will remain
solvent in the foreseeable future.111
This is to ensure that directors are accountable and adhere
to their duty to inform the shareholders of any serious loss in capital.112
There is no time limit
for the declaration but in Australia, under the 1989 Corporations Act, companies were
required to make a solvency statement that the company would remain solvent twelve months
after the SBB. The statement must not be more than two months to the commencement of the
acquisition.
If an Australian company became insolvent during the period of twelve months after
the SBB, the directors who signed the solvency statement will be liable to indemnify the
company for the funds it paid out to the shareholders to repurchase their shares.113
SEC has no
provision on consequences for making a false declaration but liability can be inferred from the
duties of a director and CAMA. Since directors are fiduciaries, a breach of Rule 109B(xii)
SEC Rules will amount to a breach of a director’s fiduciary duty to act in utmost good
faith.114
Under CAMA a director, who makes a declaration without reasonable ground for the
opinion that the company will be able to pay its debts in full within the period specified shall
be guilty of an offence. The director shall be liable on conviction to a fine of N1500 or to
imprisonment for a term of three months, or both within a period of five weeks after making
the declaration. 115
There is always a presumption that the directors’ declaration is valid. If
110
Ibid, Rule 109B(3)(xiii).
111
Ibid, Rule 109B(3)(xii).
112
CAMA, s 112.
113
Ramsay, n.21 above, p. 21.
114
CAMA, s 279, Re City Equitable Fire Insurance Co (1916) 32 T.L.R. 253 (CD).
115
CAMA, s 462(3).

25
the company’s debts are not paid or provided for in full within the period specified for in the
declaration, the presumption ends. Even though CAMA tries to fix the lacuna, the
punishments neither deter directors nor indemnify investors for losses suffered.
3.5 Financial Requirements required under the SEC rules.
The SBB must not result in the company’s insolvency. Hence, the source of financing
the buyback must be disclosed.116
Since the SBB however has an implication on the
shareholders, the shares shall be repurchased out of the share premium account or any other
accumulated profit of the company that would otherwise be available for dividends.117
The
reduction in the company’s cash or other assets represented by the purchase price will be
matched by a reduction in the distributable reserves.118
Another source of funds in the UK is a
fresh issue of shares to finance the repurchased shares provided the issue was made for the
repurchase.119
The company uses its distributable profits to pay for any premium payable on
the purchase. Where shares were issued at a premium, the company may pay a premium on
the redemption out of the proceeds of the fresh issue of shares. The company can pay ‘up to
an amount equal to the lesser of the aggregate of the premiums received by the company on
the issue of the shares repurchased and the current amount of the share’s premium account
(including any premium in respect of the new shares).’120
To ensure the financial soundness of the company after the SBB, Rule 109B(3)(xx)
prohibits the company’s capital to fall below the legally prescribed minimum for the line of
the particular business. The rule is more pertinent in specific sectors like the banking sectors,
pension fund administrators, insurance companies and unit trust managers required to keep a
certain minimum capital under their various statutes. This stems from the maintenance of
capital doctrine, that the company’s capital protects creditors in event of the company’s
116
SEC Rules, Rule 109B(3)(xix).
117
Ibid, Rule 109B (3) (vi).
118
119
Ibid, p.218.
120
CA, s 692(2) (a) (i). Ferran, Corporate Finance, n.6 above, p.218.

26
insolvency. This doctrine has been criticised in the UK. Commentators believe that the
doctrine is an outdated concept and does not offer real protection to creditors. 121
In the UK,
the minimum share capital requirement for public companies is not a capital adequacy rule
but simply a requirement that a minimum amount of capital must be issued at formation.122
The concept is seen as outdated because creditors can have contracts123
with the company to
protect their interests or rely on the claw back provisions.124
These remedies are not available
to creditors of Nigerian companies, hence, the retention of the maintenance of capital
doctrine.
The company is required to buy the shares directly from the seller for its own
benefit.125
Repurchased shares must be cancelled in accordance with the procedures set out in
CAMA.126
Section 106 CAMA requires the reduction of a company’s capital to be authorised
by the articles and confirmed by the courts after the shareholders have made a special
resolution.127
The court order confirming the reduction and the minutes of the meeting is to be
at the Corporate Affairs Commission.128
The provision in CAMA applies to all companies
registered by the commission and does not improve the rules on SBB by ensuring that
companies repurchasing their shares do not prejudice creditors.
The Nigerian approach differs from the UK approach. In the UK, the laws relating to
SBB are specific to the mechanism. Thus, where shares are cancelled as a result of a SBB
from distributable reserves, an amount equivalent to the nominal value of those shares must
be credited to a capital redemption reserve, which is to be treated as if it were share capital
121
J Armour, ‘Legal Capital: An Outdated Concept?’ (2006) 7 EBOLR; Alexander Daehnert, ‘The minimum
capital requirement - an anachronism under conservation’ (2009) 30 Company Lawyer 34.
122
CA ss 761-767, Araid Reisberg, ‘Maintenance of Capital: power point lecture slides’
http://moodle.ucl.ac.uk/mod/resource/view.php?inpopup=true&id=107195.
123
WW Bratton, ‘Bond Covenants and Creditor Protection’ (2006) 7 EBOLR 39-87.
124
R Calnan, Taking Security: Law and Practice (Bristol, 2006) chapter 9; Goode: Principles of Corporate
insolvency Law (London, 2005) chapter 11.
125
SEC Rules, Rule 109B(3)(ix).
126
Ibid, Rule 109B(3)(x).
127
CAMA, s 106(1).
128
Ibid, s 109.

27
with the one exception that it may be used to pay up fully paid bonus shares.129
This is to
prevent SBB being used to reduce the share capital. When shares are bought from the
proceeds of a fresh issue of shares made specifically for that issue, the capital redemption
reserve will be credited with the amount by which the aggregate amount of the proceeds is
less than the aggregate nominal value of the shares purchased.130
In effect, the new capital
raised from the issue of shares takes the place of the repurchase sum. Creditors are not
prejudiced because the fresh issue was made for the purpose of the SBB and not as an
injection of new equity finance.131
The UK provisions are specific on what happens to the
shares and the measures of using SBB as means of capital reduction. The Nigerian section
under review is on the general reduction of capital and may not be an adequate provision in
the present financial climate.
Rule 109B(3)(viii) SEC Rules provides that the Debt-Equity Ratio after a SBB
programme shall not exceed 2:1, the equity for this purpose being the shareholders fund. The
ratio is a measure of the company’s financial leverage. High debt/equity ratio generally
indicates that a company has been aggressive in its debt financing, thereby using less equity
capital to finance its assets. Investing in a company with a high debt/equity ratio is riskier
especially in times of rising interest rates, due to additional interests that have been paid for
the debt capital. 132
The company may be subject to volatile earnings because of additional
interest expense. Such aggressive debt financing may result in higher earnings on returns.
SEC by the restriction tries to protect the company from too much exposure to the volatile
conditions of the market by fixing a maximum of 50% loan to the value ratio.133
It seems that
129
CA, s 733.
130
Ibid, s 733(3).
131
Ferran, Corporate Finance, n.6 above, p. 9.
132
Idigbe, n.78 above.
133
Ibid.

28
the 2:1 imposition is arbitrary. Gearing ratio varies from industry to industry, so to put a one-
fits-all solution may not be appropriate.134
134
Ibid.

29
CHAPTER FOUR
LEGAL ISSUES ARISING FROM THE INTRODUCTION OF SHARE BUYBACK IN
NIGERIA
The amendments made to the SEC rules in 2008 are quite laudable but certain market
forces may affect the policy making it difficult and expensive to carry out. A question arises
whether the new rules can co-exist with the current restrictions in CAMA. The directive given
to the Attorney General of the Federation to waive section 160 CAMA, to make allowance for
the application of the SEC amendments, is unconstitutional.135
The power to make laws is
within the domain of the National Assembly and it cannot be delegated.136
The discussion on
the interference by the Attorney General is beyond the scope of this work. The SEC rules
cannot be fully enforceable and applicable, until the prohibition in CAMA is amended.137
Other than the constitutionality of the directive given to the Attorney General, other issues
may arise ranging from actions against unfair conducts and market abuse whether in the form
of market manipulation or insider trading.
4.1 Share buyback and Market Manipulation
Market Manipulation ‘is a course of conduct intended to rig or distort the price of
securities with the view to deceiving other users of the market in order to make a profit or
avoid a loss.’138
It is not market manipulation to buy shares with a view to making a profit
even though the purchase of a large line of shares can result in an increase in the value of the
securities so that profit can be realised.139
The essence of all trade is the profit made between
the purchase and sale price and this makes it difficult to distinguish between an ordinary
135
A.G. Abia State V A.G. Federation (2002) 95 LRCN 407(Nigerian Supreme Court).
136
1999 Constitution, s.1 (3), s.4.
137
A. Jemide, “Come on SEC, Think outside the box” available at http://www.detail-solicitors.com/sec.pdf
accessed on 12/07/09.
138
Philip Wood, Law and Practice of International Finance: University Edition (London, 2008) p.391.
139
Philip Wood, Regulation of International Finance (London, 2007) p. 534.

30
transaction not intended to influence the price and a transaction that intends to manipulate the
price by deliberately changing it up and down.140
Equity price manipulation is an offence in Nigeria. Section 105 ISA expressly
prohibits false trading and market rigging transactions141
whether in the form of fictitious
transactions or devices to maintain, inflate, depress or cause fluctuations in the market price
of any securities. SBB would violate Section 105 ISA if it were conducted with the intention
of boosting or stabilising the market price. A similar provision exists in US.142
However, US
SEC rules provide companies with a safe harbour if the companies do not repurchase shares at
the start or during the last half hour of trading or conduct all repurchases through one
brokerage firm.143
The prohibition in Section 105 also applies to the dissemination as well as authorizing
the dissemination of materially false or misleading information likely to induce the sale or
purchase of securities by others or likely to affect the price of securities.144
Studies have
shown that signalling is one of the key motivations for a SBB and that the announcement
usually boosts the price of the shares whether abnormally or otherwise.145
A SBB
announcement may be an incentive for managers aiming for the highest possible price for
their shares. To do this, managers can use the signal from the announcement for sinister
purposes by boosting the price of the shares and selling immediately afterwards. Managers
aware of the price spike of SBB announcements may announce a SBB they do not intend to
carry out.146
According to one commentator:
140
Ibid, p.534.
141
Paul Usoro and Co, “Equity Price Manipulations in Nigeria: Legal Issues.” (2008) PUCJ p.2.
142
US SEC Act 1934, s 9(a)(2).
143
US SEC rule 10b-18.
144
Usoro, n. 135 above, p.2.
145
T. Vermaelen, ‘Repurchase Tender Offers, Signalling, and Managerial Incentives’ (1984) 19 Journal of
Financial and Quantitative Analysis 163; Netter and Mitchell, n.13 above, p.85. Vermaelen, n.31 above.
146
M Simkovic ‘The Effect of Enhanced Disclosure on Open Market Stock Repurchases’ available at
http://blogs.law.harvard.edu/corpgov/files/2007/05/20070516%20Open%20Market%20Stock%20Repurchases.p
df accessed on 15/07/09.

31
‘Managers can exploit the market’s predictable reaction to repurchase announcement by
announcing…buyback programs they have no intention of conducting, and then unloading
their shares at the higher post-announcement price.’147
The practice is referred to as ‘false signalling’ and is usually used by managers of
undervalued company to repurchase at a low price.148
When managers give a false signal, they
hope that investors view the SBB as an indication that the market is undervalued. A SBB
announcement is not binding on the company,149
thus the company is not liable in damages if
it fails to purchase any of its shares or if it does not purchase the number of shares
announced.150
A study estimates that within three years of a SBB, 43% purchased fewer
shares than announced, while 10% bought less than 5% of the announced target.151
Amongst
the SBB announced, only 27% repurchased shares within the announcement.152
False signalling is a breach of section 105 ISA prohibition on companies
disseminating misleading information in other to boost the price of their shares. This section
is similar to section 1041A Corporations Act 2001, which provides that a person should not
carry out transactions likely to have the effect of creating an artificial trading price for a
financial product or security.153
Substantive dissemination of misleading information will
make managers liable. A problem usually arises where the plaintiff is to prove that the
managers did not intend to carry out the SBB. According to O’Mahoney:
147
J Fried ‘Informed Trading and False Signalling with Open Market Repurchases’ (2005) California Law
Review, Vol. 93, pp. 1323-1386.
148
O’Mahoney, n.33 above, p.158.
149
D. Ikenberry and T. Vermaelen, ‘The Option to Repurchase’ (1996) 25 Financial Management 9, p.10.
150
Barclays Bank v British & Commonwealth Holdings [1995] BCC 19 CA, Michael Wyatt, Company
Acquisition of Own Shares (Bristol, 2004) p.51.
151
C Stephens and M Weisbach ‘Actual Share Reacquisitions in Open-Market Repurchase Programs.’ (1998)
Journal of Finance 53 pp.313-333.
152
U Bhattacharya and A Dittmar ‘Costless Versus Costly Signalling: Theory and Evidence.’ Available at
http://ssrn.com/abstract=250049
153

32
‘Management may readily cite changing market conditions, the emergence of new business
opportunities or a material shift in the company’s share price, as a reason for not
proceeding with a repurchase transaction.’154
The failure to carry out an announced SBB may be because of legitimate changing conditions
between the time of the announcement and the execution. This can be attributed to the fact
that shares are not repurchased immediately after the announcement to purchase is made. In
the period between the announcement of the SBB and the repurchase, different unanticipated
but positive changes may be felt in the market leading to a change in the original intendment
to repurchase shares. Such positive changes may make the managers reverse their decisions to
engage in the SBB. An example of such changes is equilibrium returns to the stock market.155
The system of disclosure enshrined in the SEC rules maybe a tool to prevent
manipulation. SEC requires a company to make a public announcement in at least two
national daily newspapers, at least five days to the commencement and conclusion of the
buyback, disclosing relevant information such as the proposed size, nature, duration and
potential impact on the company’s financial position. In addition, the financial adviser of the
company shall file a report not later than five working days after each month indicating the
number of shares repurchased, the total amount paid, and the number of shares cancelled. The
disclosure requirement will check manipulation because investors will lose confidence in
companies that do not repurchase shares after a SBB announcement. Hence, there is the need
to prevent companies from giving such signals. A way of preventing such signal is to mandate
companies that have approval from SEC to repurchase the shares irrespective of the change in
the market. In addition, SEC may mandate companies that already have the commission’s
approval to repurchase to do so irrespective of the change in the market.
154
Ibid, p.159.
155
Ibid, p.160.

33
4.2 Share buyback and Insider Trading
According to Phillip Wood,
‘Insider dealing (sometimes called insider trading) occurs where a privileged insider, such
as an officer or professional adviser, who has unpublished material price-sensitive
information about securities gained by virtue of his relationship with the company, exploits
that information to make a profit or avoid a loss by dealing in the securities, the price of
which would have been materially altered if the information had been disclosed.’156
From the definition given above the main aim of insider trading like market manipulation is to
buy low and sell high. The two concepts can be quite confusing but while in market
manipulation, the manipulator aims to rig the market in order to deceive other investors in
investing and in turn, he makes a profit or avoids a loss. An insider utilizes157
material,
undisclosed, price-sensitive information to make a profit or avoid a loss. Therefore, to prove
the offence of insider trading, a party is required to prove that the information was material
and yet undisclosed at the time.
The price-effect from a SBB announcement may increase the prospect of insiders
profiting at the expense of other shareholders and investors because of the significant short-
term gains in the repurchasing company’s share price. This is associated more with off-market
SBB than with the on-market SBB. This can be attributed to the fact that the company as the
price maker purchases at a premium as against an on-market SBB where the price is
determined by market forces. Studies have also shown that off-market SBB are usually larger
and elicit more sizeable share price gains.158
The abnormal returns associated with SBB announcement is an incentive for insiders
to use the information in their personal trading, whether investors see the announcement as a
156
Wood, Regulation of International Finance, n.139 above, p.552.
157
ISA, s 315.
158
S. Ekanayake, ‘Information Signalling of Share Buy-Back Announcement – Recent Australian Evidence’
(Working Paper, Deakin University 2004) p.18-20 in O’Mahoney p.154.

34
signal that the shares are undervalued or not. Insiders armed with the knowledge of the
possible effect of the announcement, purchase shares before the company announces the
buyback. After the announcement and the abnormal returns associated with the repurchase
price-effect is secured, the insiders sell the purchased shares either in the weeks or months
following the announcement.159
In Nigeria to prevent this sort of dealings, directors are
required to file a detail of their shareholding while the company is required to file quarterly
returns of the acquisition and disposals.160
This is to restrict insider dealings and ensure that
directors maintain their fiduciary duties. Time will tell whether this requirement will be
effective.
Insiders can take advantage of price-sensitive information without buying or selling
their own shares. While in personal insider trading, the insider relies in price-effect of the
SBB announcement, in ‘indirect’ insider trading, the insider relies on the distributional effects
of the buyback transactions. The directors by conducting a SBB and not selling their shares
increase the proportional value of their shares. Where the repurchase price is below the value
of the company’s shares, managers are able to transfer value to themselves (and other non-
selling shareholders) by effectively purchasing shares at a bargain.161
The company transfers
value in the shares pro rata. Hence, the more shares a person has the more value he gets. The
non-selling manager has a greater incentive when the shares are under-priced. Some US cases
demonstrate the danger of indirect insider dealings. In Walker v Action Industries Inc,162
management caused the company to conduct a SBB while aware of a forecast predicting the
increase in orders and sales that caused the share of the company to rise. By not selling their
shares, the managers were able to increase their proportionate ownership.
159
160
SEC Rules, Rule 109B(iv).
161
O’Mahoney, n.33 above, pp.169-170.
162
906 F Supp 1145(E D Mich 1995); Lessner v Casey 681 F Supp (E D Mich 1988).

35
Insider trading like market manipulation is very difficult to detect. Buyback-related
insider trading will prove a bigger challenge to Nigerian regulators because of its elusive
nature. In Australia, buyback-related insider trading has not been subjected to scrutiny unlike
takeover-related insider trading. This is besides the fact that commentators believe that it
would most likely accompany a repurchase, and because of its form, would most likely go
undetected.
Given that a SBB announcement would lead to insider dealing, the question emerges;
what makes a SBB announcement so elusive that it usually goes undetected? The answer lies
in the limited prospect of liability.163
There are two reasons that make liability less likely for
insider dealings around SBB. The reasons are detection of the insider activity and
prosecution. Insider dealings around SBB are less likely to attract the regulators because the
regulators usually focus on dealing around announcement that have a more pronounced share
price impact like announcements concerning takeovers, earning forecasts, dividends, capital
expenditure and asset sales. In R v Hannes,164
the defendant was aware of an impending,
undisclosed takeover bid for TNT purchased the company’s shares and made a profit of Aus$
2million.165
In this case and most other cases investigated by the Australian Securities and
Investment Commission (ASIC), the price increase attracts the commission’s attention. Even
though profitability is not a prerequisite for an insider dealing offence in Australia, the
position taken by the commission is borne out of practical consideration about allocating
limited resources.166
The effect is that the buyback-related insider trading carries a lower risk
of detection.
163
164
[2000] NSWCCA 503(Criminal Appeal).
165
R Januarita, ‘Australia and Indonesia: a comparative analysis of insider trading regulation’ (2003) Company
Layer p.313. R v Rivkin (2004) 59 NSWLR 284 (SC); R v Firns [2001] N.S.W.C.C.A. 191(HC).
166
T Sykes, ‘Share Buybacks are on the Nose’ Australian Financial Review (Sydney 11 June 2004) p.17 in

36
The second reason concerns the difficulties that are likely to arise in prosecuting an
insider. The materiality requirement in section 315 ISA makes it difficult to prosecute
investors.167
The section prohibits dealings or tipping others to deal in securities while in
possession of price sensitive information which if made known to the public is likely to affect
the price of the securities materially. What amounts to a material impact was not defined in
both the Nigerian and the Australian Acts. Trading prior to a takeover168
or a merger169
will
have a material impact on the shares. The question arises whether information about an
impending undisclosed SBB would have the same effect.170
This has not been tested in
Australia but O’Mahoney believes ‘a court is likely to have regard to the circumstances of the
case regarding both the proposed SBB and the position of the repurchasing company.’171
It is
quite unlikely that the announcement would have a material effect irrespective of the
empirical evidence on the abnormal earnings after a SBB announcement. This is because the
price impact on the shares is not high enough for the regulator to notice the trading.
In the US, Rule 10b-5 of the Securities and Exchange Act 1934 also provides for
materiality. The courts in the US adopt a high threshold for materiality. Not every inside
information will entail a prosecution of the insider. The information must be a ‘bombshell
event’172
like a takeover or capital expenditure. In Basic Inc v Levinson,173
the court held that
the information is not material even if the insiders earn profit while trading. It is quite
unlikely that the US courts would consider a SBB announcement as material where an insider
purchases before the SBB. If this degree of proof were adopted in Nigeria with its developing
market where investors are hardly protected, it would increase the hardship suffered by
investors. Such an approach by the courts will dissuade investors who may be unwilling to
167
Corporations Act, s 1042A.
168
R v Hannes [2000] NSWCCA 503(Criminal Appeal).
169
Toledo Trust v Nye 588 F.2d 202 (6th
Cir 1978).
170
171
Ibid.
172
D Carlton and D Fischel, ‘The Regulation of Insider Trading’ (1983) 35 Stanford Law Review 857 p.886.
173
485 US 224, 234 (SC).

37
invest in the stock market because of the burden of proof that has to be met before a director
is found liable for buyback-related insider dealing.
From the above analysis, it seems almost impossible to prosecute an officer from
buyback-related trading. Hence, a new rule prohibiting repurchases preceding preliminary
announcements of annual results or the publication of interim reports may be adopted and
managers should be prohibited from buying before or selling after announcements. SEC can
in turn monitor the repurchases through the shareholding details and the quarterly returns.
4.3 Share buyback and Minority Protection
Where a shareholder objects to a buyback transaction, it is open to such a shareholder
to seek relief under section 311 CAMA, on the ground that the action amounts to an unfairly
prejudicial conduct.174
It may be difficult for a shareholder to prove that a SBB is unfairly
prejudicial to him. In Rutherford, Petitioner,175
the company sought to repurchase 33% of its
shares at a premium, aimed to satisfy the view of most shareholders that the shareholding
should be widely spread and that there should not be any dominate block of shares. The
petitioner sought an injunction against the company because the company was purchasing its
shares at a premium, which it lacked the funds to purchase and that the elimination of block
shares would discourage investment trust willing to pay premium price for controlling shares.
The court refusing the request for an injunction held that the shares selling below the
premium price were small blocks of shares and that the bulk of the shares were worth
considerably more. The court held that the petitioner was unable to prove that the company
was unable to finance the purchase. Although the petitioner alleged that the repurchased
shares discouraged the investment trust from purchasing the controlling shares, the court held
that since the repurchase was what the majority wanted, the petitioner was unable to prove
174
Ferran, Company Law and Corporate Finance, n.16 above, p.453.
175
[1994] BCC 876 (CS).

38
how the decreased chance of securing a bidder could be described as unfair.176
It may be
difficult for a shareholder to prove that the SBB was unfairly prejudicial.
176
Ferran, Company Law and Corporate Finance, n.16 above, p.454.

39
Conclusion
The introduction of SBB is a step in the right direction as Nigeria seeks to follow the
trend in other jurisdictions. However, Nigerian investors view dividends as a source of
income and before investors can opt for SBB over dividends, the legislation has to be clear
and straightforward. Because the government was under pressure to stabilize the ailing
market, some provisions that would have ensured the smooth operation of the mechanism
were omitted.
To use SBB to stabilize the ailing market, some reforms need to be made. First,
CAMA should be amended to incorporate the provisions in the rules by removing the SBB
prohibition. This will eliminate any conflict that may arise between the two statutes. The
provision on declaration of insolvency should be changed so that directors who declare
wrongly will indemnify investors for any loss suffered. Second, companies should be
prohibited from purchasing shares where to do so would result in the existence of only
redeemable shareholders. This reform will ensure that the company will not use SBB to end
its existence.
Third, ISA needs to define the materiality requirement incorporating SBB as having a
material impact. This will ensure that the need for a material impact will not out-weigh the
need to protect investors. Fourth, exceptions should be made to s.105 ISA to enable
companies repurchasing shares to boost or stabilize their shares to avoid falling foul of the
section.
If the previously mentioned issues and suggestions are adopted, it will ensure the
smooth operation of SBB in Nigeria and may even introduce a safe means of investment.

40
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46
 In the Matter of George Raymond Pty Ltd (2001) 19 ACLC 553.
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CLR 49.
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 BDG Roof-Bond Ltd v Douglas [2000] 1BCLC 401.
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 Lessner v Casey 681 F Supp (E D Mich 1988).

47
 Re Castle Braid Co. Ltd 145 Fed 224 (DC SDNY 1906),
 Toledo Trust v Nye 588 F.2d 202 (6th
Cir 1978).
 Walker v Action Industries 906 F Supp 1145(E D Mich 1995)
TABLE OF STATUTES
NIGERIA
 Companies and Allied Matters Act 2004
 Nigerian Companies Act 1968
 Investments and Securities Act 1999
 Securities and Exchange Commission Rules as amended.
FOREIGN STATUTES
 AUSTRALIAN Corporations Act 2001(Cth)
 AUSTRALIAN Corporations Act 1989
 English Companies Act 2006
 Second Council Directive 77/91/EEC of 13 December 1976
 United States Securities and Exchange Act 1934
TABLE OF ABBREVIATIONS
 SBB- Share Buybacks
 CAMA – Companies and Allied Matters Act
 SEC – Securities and Exchange Commission
 ISA – Investments and Securities Act
 CA – Companies Act
 App Cas – Appeal Cases
 ACLC – Australian Company Law Cases
 Ch D – Chancery Division
 CA – Court of Appeal

48
 SC – Supreme Court
 HL – House of Lords
 CLR – Commonwealth Law Reports
 All ER – All England Reports
 NSWLR – New South Wales Law Reports
 FLR – Federal Law Reports
 VR – Victorian Reports
 ASIC – Australian Securities and Investments Commission
 BCC – British Company Cases
 BCLC – Butterworths Company Law Cases
 TLR – Times Law Reports
 EBOLR – European Business Organization Law Review
 PUCJ – Paul Usoro & Co Journals
 NSWCCA – New South Wales Court Of Criminal Appeal

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