When two or more founders incorporate a Nigerian company, they usually focus on getting the business running. They allocate shares, appoint directors, open bank accounts, and move quickly into operations. What often receives less attention is the legal framework that will govern the relationship between those founders if they later disagree.
That omission can become expensive. One founder may want to raise external capital while the other objects. One may want to sell shares, appoint a new director, take on debt, expand into a new line of business, or exit the company altogether. If the company’s governance documents do not clearly address these issues, a commercial disagreement can quickly become a corporate deadlock.
For Nigerian companies, the relationship between founders is usually governed by the Companies and Allied Matters Act 2020, the company’s Articles of Association, and, where one exists, a Shareholders’ Agreement. These documents are related, but they serve different functions. Founders should understand the distinction.
The Articles of Association
The Articles of Association form part of the company’s constitutional framework. They set out the rules governing the company’s internal management and typically cover matters such as the appointment and removal of directors, shareholder meetings, voting procedures, share transfers, dividends, decision-making authority, and the rights attached to shares.
CAMA allows private companies, subject to their articles, to restrict share transfers and establish rights affecting how shares may be sold or transferred. The Articles therefore play an important role in determining how ownership and control operate within the company.
The limitation, however, is that the Articles will not always address every commercial issue that matters to the founders. A standard set of Articles may establish the legal machinery of the company, but it may not fully reflect the specific understanding between the shareholders about how the business is to be run.
That is where a Shareholders’ Agreement becomes particularly useful.
What a Shareholders’ Agreement Adds
A Shareholders’ Agreement is a private agreement between some or all of the shareholders. It allows the shareholders to regulate their commercial relationship in greater detail and to agree on issues that may not be adequately addressed in the company’s constitutional documents.
For example, the shareholders may agree that certain major decisions cannot be taken unless all founders approve them. These might include issuing new shares, borrowing above a specified amount, selling material assets, entering a new business line, approving a major acquisition, changing the company’s business model, appointing senior executives, or approving annual budgets.
These kinds of provisions are often referred to as reserved matters. Their purpose is to prevent one shareholder or group of shareholders from making major decisions without the level of consent the founders originally intended.
This can be especially important in founder-led businesses where equity may be equally divided or where one founder contributes capital while another contributes operational expertise.
The Risk of a 50/50 Deadlock
One of the clearest examples of why founders need to think carefully about governance is the 50/50 company.
Suppose two founders each own 50% of the shares and each appoints one director. If they disagree on a major issue, neither founder has enough voting power to override the other. The result can be complete deadlock.
That deadlock may affect decisions on financing, hiring, acquisitions, dividends, strategy or even the company’s ordinary operations. Without an agreed process for resolving the dispute, the company may remain paralyzed while the founders argue over what happens next.
A properly drafted Shareholders’ Agreement can provide a mechanism to address this situation. It may require the founders to escalate the matter to a formal meeting, engage in mediation, refer the issue to an agreed adviser, or use a structured buy-sell mechanism. In some cases, a prolonged deadlock may ultimately trigger an exit process.
No single solution works for every company. The key is for the founders to agree on the process before a dispute occurs.
What Happens if One Founder Wants to Sell?
Another common issue arises when one shareholder wants to exit the business.
Can that shareholder sell to any third party? Must the shares first be offered to the existing shareholders? Can the remaining shareholders object to the proposed buyer? What happens if a third party wants to acquire the entire company?
These questions can be addressed through provisions such as pre-emption rights, tag-along rights and drag-along rights.
Pre-emption rights typically give existing shareholders the first opportunity to acquire shares before an outsider buys them. Tag-along rights protect minority shareholders by allowing them to participate in a sale by another shareholder. Drag-along rights can allow a qualifying majority of shareholders to require other shareholders to participate in a sale of the company, subject to the agreed conditions.
CAMA permits private companies to include restrictions on share transfers in their Articles, but a Shareholders’ Agreement can provide more detailed commercial procedures for how those rights operate in practice.
This is particularly important where the founders want to control who can become a shareholder in the business.
What if a Founder Stops Working in the Business?
Founders also need to think about the relationship between ownership and continued participation.
For example, two founders may each receive 50% of the shares because both intend to work full-time in the company. If one founder leaves after six months but retains the full 50% interest, the remaining founder may operate the business while sharing the economic upside equally with someone who is no longer involved.
Whether that result is fair depends on the circumstances, but it is an issue to consider at the beginning.
Founders may use vesting arrangements, good-leaver and bad-leaver provisions, compulsory transfer rights, or agreed buyout mechanisms. These arrangements can determine what happens to a founder’s shares if the founder resigns, is dismissed, becomes incapacitated, dies, breaches certain obligations or otherwise stops participating in the business.
The objective is not necessarily to penalize a departing founder. It is to establish a fair and predictable framework before the relationship is under pressure.
The Articles and the Shareholders’ Agreement Should Work Together
The question is therefore not whether a company should rely on its Articles of Association or a Shareholders’ Agreement. For many closely held companies, both documents are important.
The Articles regulate the company’s constitutional arrangements. The Shareholders’ Agreement can then provide additional contractual protections that reflect the commercial understanding between the shareholders.
The critical point is that the two documents should be consistent.
Problems can arise when, for example, the Shareholders’ Agreement states that a major decision requires unanimous approval while the Articles allow the same decision by a simple majority. Similar inconsistencies may arise around the appointment of directors, share transfers, voting thresholds or the issue of new shares.
If the documents are not aligned, the company may find itself dealing with conflicting obligations at the moment clarity matters most.
For that reason, the Articles and Shareholders’ Agreement should usually be reviewed together rather than treated as separate exercises.
The Best Time to Agree the Rules Is Before There Is a Dispute
Founders often postpone a Shareholders’ Agreement because everyone currently gets along. In reality, that is usually the best time to negotiate one.
When the relationship is still strong, the founders can discuss difficult questions objectively. What happens if one founder wants to leave? Can either founder sell shares without the other’s consent? Who controls the board? What decisions require unanimous approval? Can the company raise new capital and dilute existing shareholders? What happens if the founders cannot agree on a major strategic decision?
These questions become much harder to resolve once the founders are already in conflict.
A Shareholders’ Agreement is therefore not simply a document for dealing with disputes. It is a tool for establishing, in advance, how ownership, control, decision-making and exit will work if the founders’ interests later diverge.
For founder-led and closely held Nigerian companies, that clarity can be as important as the original incorporation itself.
Building or Restructuring a Founder-Owned Company?
Chibasco advises founders, shareholders and private companies on corporate structuring, shareholders’ agreements, governance arrangements, investments and shareholder exits.
If your company has multiple founders or shareholders, our corporate team can review whether your current governance documents adequately address ownership, control, decision-making, share transfers and exit risk.
This publication provides general information only and does not constitute legal advice.