Understanding Sections 185–190 of CAMA 2020: How Nigerian Companies Can Legally Manage Share Buybacks and Treasury Shares

Understanding Sections 185–190 of CAMA 2020: How Nigerian Companies Can Legally Manage Share Buybacks and Treasury Shares

By Baha’s Books
Visit: bahasbooks.com

The Companies and Allied Matters Act (CAMA) 2020 continues to be the foundation of corporate law in Nigeria, guiding how businesses structure ownership, handle their capital, and maintain financial discipline. Among its detailed provisions, Sections 185 to 190 stand out because they define what a company can do after buying back its own shares — how those shares can be held, used, or resold, and what limitations exist to prevent abuse of power.

These sections also explain how subsidiaries can handle shares in their holding companies, and under what circumstances share buyback contracts can be enforced. Taken together, they form a comprehensive and protective framework that ensures every buyback and treasury share transaction is lawful, transparent, and in the best interest of the company’s stakeholders.

Let’s examine these sections in detail to understand what they mean for businesses in Nigeria.

Section 185 — Payment for Share Buyback

When a company buys back its shares, it must pay for those shares using only distributable profits. This is a core financial safeguard.

Distributable profits refer to the profits that are legally available for dividend payments — that is, the company’s retained earnings or surplus that can be shared with shareholders without affecting the company’s capital base. CAMA 2020 insists that this is the only legitimate source for buyback payments.

The reasoning is straightforward: a company’s share capital represents a permanent source of funding and security for creditors. Allowing a company to use capital or borrowed money for buybacks would weaken that foundation, expose creditors to unnecessary risk, and create artificial inflation of share value.

By restricting buybacks to distributable profits, the Act ensures that companies remain solvent and that buybacks do not harm their long-term financial stability.

Section 186 — Who a Company Can Buy Shares From

Once the source of payment is clear, CAMA defines who a company can legally buy back its shares from. Section 186 provides four distinct channels, ensuring fairness and flexibility in corporate capital management.

First, the company can buy shares from existing shareholders or security holders on a proportionate basis. This means that all shareholders are given an equal opportunity to sell part of their holdings in proportion to what they already own. It prevents favoritism and ensures equality among investors.

Second, a company can repurchase shares through a court-sanctioned scheme of arrangement. This happens when the buyback is part of a larger corporate reorganization — such as a merger, consolidation, or internal restructuring — where the court’s approval guarantees fairness and protects minority shareholders.

Third, a company may buy shares on the open market. This usually applies to public companies whose shares are traded on the Nigerian Exchange. In such cases, the company can repurchase shares directly in compliance with securities and capital market regulations.

Finally, a company can buy back shares issued to employees under stock option or share incentive schemes. This often happens when employees are given shares as part of performance-based compensation and the company later repurchases them for reasons such as retirement, termination, or capital optimization.

Through these provisions, CAMA recognizes that buybacks can serve legitimate business purposes — stabilizing share prices, improving earnings per share, or reorganizing ownership — provided they are carried out transparently.

Section 187 — Limit on the Number of Shares a Company Can Hold

After a company buys back its shares, those shares typically become what are called treasury shares — shares held by the company itself instead of being cancelled. Section 187 places strict limits on how many of these shares a company can hold and what it can (and cannot) do with them.

Subsection (1) sets a firm ceiling: a company cannot hold more than 15% of the nominal value of its issued share capital as treasury shares. This prevents companies from accumulating excessive control over their own shares, which could distort ownership and voting balance.

If the company exceeds this 15% limit, subsection (2) requires it to take corrective action within 12 months. The company must either reissue, cancel, or reissue and cancel enough of those shares to bring its holdings back within the legal limit.

Subsection (3) imposes another important restriction: a company cannot exercise any shareholder rights over its treasury shares. It cannot vote, attend meetings, or influence decisions using those shares. Any attempt to do so is automatically void. The rationale is simple — a company cannot act as its own shareholder.

Subsection (4) reinforces this by prohibiting dividends or distributions on treasury shares. The company cannot pay itself dividends or share in distributions made on winding up. This keeps corporate accounting fair and prevents companies from artificially inflating profits.

Subsection (5) introduces flexibility by allowing a company to issue fully paid bonus shares in respect of its treasury shares or to redeem redeemable treasury shares. This means that a company can still engage in normal bonus issues or redemption activities without violating the Act.

Subsection (6) then clarifies that shares issued as bonus shares on treasury shares are treated as if they were purchased at the time they were allotted. This ensures that records and compliance timelines remain consistent.

In essence, Section 187 enforces accountability and prevents treasury shares from being used to manipulate ownership or control. It turns them into a controlled financial instrument — available for legitimate reissue or restructuring but stripped of voting or profit rights.

Section 188 — Enforceability of Contracts to Acquire Shares

Section 188 shifts focus to the legal standing of contracts for share buybacks. It states that any contract by which a company agrees to acquire its own shares is legally enforceable, except when fulfilling that contract would violate the provisions of Section 184 — such as solvency or shareholder approval requirements.

This means that if a company lawfully enters a buyback agreement, it cannot back out arbitrarily. However, if performing the contract would render the company insolvent or otherwise illegal, the company is excused.

Subsection (2) goes further to protect investors: in any lawsuit concerning such a contract, the company bears the burden of proof. It must demonstrate that it could not legally fulfill the contract without breaking the law.

This provision balances fairness and prudence — it ensures that companies cannot exploit loopholes to evade valid obligations, yet it also shields them from being forced into illegal financial actions.

Section 189 — Reissue of Treasury Shares

This section explains what companies can do with treasury shares once they hold them. The Act provides two lawful options, ensuring treasury shares remain a flexible but controlled tool of capital management.

First, the company may sell the shares for cash consideration — that is, reissue the shares to investors in exchange for cash. This helps raise fresh capital without issuing new shares, thereby avoiding unnecessary dilution.

Second, the company can transfer treasury shares under an employee share scheme. Treasury shares may be allocated to staff or executives as part of incentive programs, stock options, or performance bonuses.

In both cases, the company must act in line with its Articles of Association and ensure proper disclosure and accounting. Section 189 ensures that treasury shares are not idle; they can be redeployed in ways that benefit the company and its stakeholders, while still complying with legal and financial standards.

Section 190 — Acquisition of Shares of a Holding Company

The last section in this sequence, Section 190, addresses the special case where a subsidiary company acquires shares in its holding company. Because this situation could lead to indirect control or conflicts of interest, the law imposes strict boundaries.

Subsection (1) permits such acquisitions only in limited circumstances — when the subsidiary is acting as a personal representative, trustee, or as part of its normal business operations (for instance, a bank holding shares as collateral). However, the subsidiary cannot beneficially own or control those shares unless the transaction naturally arises from its line of business.

Subsection (2) deals with subsidiaries that already held shares in their parent companies before CAMA 2020 took effect. They may continue to hold those shares but cannot vote with them or acquire more, except through bonus issues during capitalization. This rule prevents parent companies from indirectly influencing their own control structure through subsidiaries.

Subsection (3) applies to public companies and requires that when a public company (or its nominee) acquires shares and records them as assets on its balance sheet, the amount equivalent to those shares’ value must be transferred from distributable profits into a reserve fund. This reserve cannot be used for dividends. It ensures that the company’s reported profits are not artificially inflated by unrealized gains from shareholding.

The Big Picture — Accountability and Corporate Discipline

Together, Sections 185 to 190 of CAMA 2020 build a complete and self-contained legal framework for managing share buybacks, treasury shares, and intra-group shareholdings in Nigeria.

They ensure that every buyback:

  • Is funded from legitimate profits, not borrowed money or capital.

  • Is carried out transparently and fairly among shareholders.

  • Does not distort ownership or corporate governance.

The 15% cap on treasury shares, along with strict restrictions on voting and dividend rights, prevents companies from misusing treasury shares for manipulation or control. Furthermore, CAMA provides lawful ways to reissue, sell, or use those shares, while protecting creditors and investors through solvency and disclosure requirements.

Lastly, by regulating how subsidiaries interact with their parent companies’ shares, CAMA prevents complex corporate structures from undermining transparency and accountability.

Conclusion

Sections 185–190 of the Companies and Allied Matters Act, 2020 represent Nigeria’s strong commitment to responsible corporate governance and financial integrity. They encourage companies to manage their share capital in ways that are transparent, fair, and compliant with international standards.

For entrepreneurs, accountants, and corporate managers, understanding these sections is essential for proper compliance, risk management, and corporate planning. Whether your company is restructuring, running an employee share scheme, or considering a buyback, every step must align with these legal safeguards.

For in-depth insights on corporate compliance, accounting system setup, and financial advisory services tailored for Nigerian businesses, visit bahasbooks.com — your trusted partner for clarity, compliance, and growth.

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