Construction of Class Rights (Explained for Founders, Investors, and Company Secretaries)

Construction of Class Rights (Explained for Founders, Investors, and Company Secretaries)

Publisher: Baha’s Books — Practical Accounting, Company Law & Governance Insights
Website: bahasbooks.com

Why this matters

Whenever a Nigerian company issues shares—ordinary, preference, or any special class—their rights (dividends, voting, return of capital, and treatment on winding-up) must be clear. Section 169 of the Companies and Allied Matters Act, 2020 (CAMA 2020) supplies default interpretation rules for those rights. These rules apply whenever the Articles are silent or ambiguous, and they protect both the company and its shareholders from avoidable disputes.

This article explains Section 169 comprehensively, translates each paragraph into plain language, and shows how to apply it in real situations.

The core idea

Section 169 says: when you interpret the Articles about rights attached to shares, you must apply the following rules of construction. If the Articles say something different expressly, that contrary intention will prevail. Otherwise, these rules are the default law.

Clause-by-clause explanation with practical examples

(a) No dividend without a formal declaration

“No dividend is payable on any shares unless the company resolves to declare such dividend.”

What this means:
Profit alone does not create a right to cash. The company must formally declare a dividend (by the Board where empowered, or by the members in general meeting) before any shareholder can be paid.

Practical example:
A company makes ₦50m profit. Ordinary shareholders cannot insist on payment until a dividend is declared. If the Board decides to retain profits for expansion, there is no breach of rights.

Checklist to apply (a):

  • Confirm who has the power to declare dividends in the Articles.

  • Record the decision via board minutes or general meeting minutes.

  • Pay only after the resolution exists.

(b) Fixed preference dividends are cumulative by default

“A fixed preferential dividend payable on any class of shares is cumulative, and no dividend shall be payable on any share ranking after them until arrears are paid.”

What this means:
If preference shares carry a fixed rate (for example, 10% preference shares), missed years accumulate automatically, unless the Articles clearly say “non-cumulative.” No other class (e.g., ordinary shares) can receive dividends until all arrears of the preference class are cleared.

Practical example:
A company misses two years of 10% dividends on preference shares. In year three, before paying anything to ordinary shareholders, it must first settle two years of arrears and the current year’s 10%—unless the Articles expressly made those preference dividends non-cumulative.

Drafting tip:
If the intention is non-cumulative, say so expressly in the share terms to avoid the legal default.

(c) Arrears of cumulative preference dividends are payable on winding-up

“In a winding-up, arrears of any cumulative preferential dividend … are payable up to the date of actual payment.”

What this means:
If the company is liquidated, holders of cumulative preference shares are owed all unpaid dividends up to the liquidation payment date, ahead of junior classes.

Practical example:
At winding-up, the company owes three years of cumulative preference dividends. Those arrears must be calculated to the payment date and settled before any distribution to ordinary shareholders.

(d) Preference dividend = fixed entitlement only (no extra share in profits)

“If any class of shares is expressed to have a right to a preferential dividend … such class has no further right to participate in dividends.”

What this means:
A share with a preferential fixed dividend does not also share in surplus profits, unless the Articles expressly grant participation rights (e.g., “participating preference shares”).

Practical example:
10% preference shareholders receive 10% and stop there. If the company declares an additional final dividend to ordinary shareholders, the preference class does not participate—unless the share terms say “participating.”

Drafting tip:
If holders should share in surplus profits, state: “preference shares are participating to the extent of …”

(e) Preference priority on assets in winding-up does not include surplus participation

“If any class of shares is expressed to have preferential rights to payment out of assets in a winding-up … such class has no further right to participate in the distribution of assets.”

What this means:
In liquidation, once a preference class has received the amount it is entitled to on capital and any arrears, it does not share in any remaining surplus—unless the Articles expressly allow it.

Practical example:
Preference shareholders receive their fixed return of capital and accrued preference dividends. If assets remain, that surplus belongs to the junior classes according to their rights (often ordinary shareholders).

(f) Source of funds is irrelevant in liquidation rankings

“In determining the rights … to share in the distribution … on a winding-up, no regard shall be given to whether … property represents profits or surplus which would have been available for dividend while the company remained a going concern.”

What this means:
During liquidation, all property is one pool. You do not distinguish between what used to be “profits” versus “capital” when deciding class priorities. The class rights determine who gets what.

Practical example:
If the company’s remaining assets include retained earnings and fixed assets, you still follow the class waterfall—secured/creditors as applicable under insolvency law, then preference entitlements, then the remainder to ordinary shareholders—without re-labelling assets as “profit” or “capital” for ranking.

(g) Equality of shares is the default rule

“All shares rank equally in all respects unless the contrary intention appears in the Articles.”

What this means:
If the Articles are silent, all issued shares are presumed to have equal rights to dividends, votes, capital return, and surplus. To create differences, the Articles (or a class terms resolution) must state them clearly.

Practical example:
If a company has only “ordinary shares” and the Articles contain no special provisions, each ordinary share carries one vote, a pro-rata right to dividends when declared, and a pro-rata right on return of capital.

Drafting tip:
When introducing a new class (e.g., “Series A Preference Shares”), include a Schedule or Term Sheet in the Articles or in a members’ resolution that sets out dividend rate, cumulative/non-cumulative, participation, redemption, convertibility, voting, and liquidation preference.

Putting Section 169 to work: scenarios and outcomes

  1. Silent Articles, New Investors Asking for Preference Shares

    • Outcome: Their fixed dividends will be cumulative by default; arrears block ordinary dividends (rule b). Add explicit terms if you intend a non-cumulative structure.

  2. Company Missed Dividends for Two Years, Profitable in Year Three

    • Outcome: Before paying ordinary shareholders, settle all preference arrears (rule b). If the Board wants to pay ordinaries first, it must amend class rights with proper approvals.

  3. Liquidation with Unpaid Preference Dividends

    • Outcome: Pay arrears up to payment date to cumulative preference holders, then proceed to junior classes (rule c).

  4. Preference Holders Claim Participation in Surplus Profits

    • Outcome: Unless the Articles say “participating,” they get only their fixed amount (rules d and e).

  5. Debate Over Whether a Remaining Asset Is “Capital” or “Profit”

    • Outcome: Irrelevant for ranking in winding-up. Apply class waterfall regardless of source (rule f).

  6. Ordinary Shares with No Express Differences

    • Outcome: All ordinary shares are equal in every respect (rule g).

Drafting and governance guidance

  • Be explicit. If you want non-cumulative dividends, participation rights, or special voting, write them expressly in the Articles or in a resolution that validly creates/varies class rights.

  • Keep a schedule of class terms. For each class: dividend rate and status, arrears policy, liquidation preference, convertibility/redemption, voting, anti-dilution (if any), and variation procedures.

  • Document decisions. Dividends require a formal declaration. Keep minutes, dividend warrants, and member communications.

  • Varying class rights. If you later need to change a class right, use the variation mechanism in the Articles and CAMA’s provisions on class consent to avoid invalidation.

Frequently asked questions

1) Can shareholders sue for dividends because profit exists?
No. There is no right to a dividend until one is declared (rule a).

2) Our Articles do not say whether preference dividends are cumulative. What applies?
They are cumulative by default (rule b).

3) In liquidation, do preference shareholders share anything after receiving their fixed entitlement?
Not unless your Articles say they participate. Default is no further participation (rules d and e).

4) Must we clear preference arrears before paying ordinary dividends?
Yes, if the preference is fixed and cumulative (rule b).

5) Do we distinguish between profits and capital when distributing in liquidation?
No. Follow class rights; source of funds does not change ranking (rule f).

6) If we never created different classes formally, do some ordinary shares have special rights because they were issued later?
No. Without express contrary terms, all shares rank equally (rule g).

Key takeaways for boards and founders

  • Profit does not equal dividend; declare first.

  • Preference dividends are cumulative by default and block junior dividends until arrears are paid.

  • On winding-up, pay preference arrears and fixed entitlements before junior classes.

  • Preference holders do not share in extras or surplus unless the Articles expressly allow it.

  • All shares are equal by default; differences must be explicit.

About Baha’s Books

Baha’s Books helps founders, finance teams, and company secretaries translate complex law and accounting principles into practical, board-ready decisions. For company secretarial templates, dividend resolutions, class-rights schedules, and governance checklists tailored to your structure, visit bahasbooks.com.

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