Some of the easiest ways to put a dagger in the heart of an existing company is through corporate conflicts, internal rivalry, and managerial misconduct. It is a known fact that corporate conflicts affect the operation of the company and jeopardizes relationships of shareholders and directors. In order to avoid being tangled in these webs, it is essential to implement legal frameworks and preventive strategies to minimize risks that maybe occasioned from corporate conflicts and misconduct especially among shareholders and directors so as to ensure viability and continuity of the company. But before going into the main subject matter of this article, let’s walk you through the meaning of the major pillar words of this article.
Legal Framework: A legal framework through the lens of Black’s Law Dictionary, means established set of rules, principles, and guidelines used for making decisions or policies, directing how entities operate within the law. It encompasses statutory law, regulations, and judicial decisions, providing the structural foundation for legal procedures and compliance.
Corporate Conflicts: Corporate conflicts are disputes, disagreements, or open confrontations arising between members of the company such as shareholders, directors due to incompatible interests, strategic differences, or non-compliance with duties.
Misconduct: According to the Oxford Learner’s Dictionaries, Misconduct can be defined as unacceptable behaviour, especially by a professional person.
CORPORATE CONFLICTS AND MISCONDUCT
As an owner of a registered company, the best way to protect yourself from Corporate Conflicts and Misconduct within your company is by implementing several preventive measures. In the context of business, preventive approach is invariably better than cure. The corporate sector is massive, so it may be extremely difficult for this article to fully capture all the prevention measures that should be put in place in order to avoid conflicts. Consequent to the foregoing, here are the necessary things to do to avoid corporate conflicts.
1. Shareholder’s Agreement
The foundation to successfully navigate through corporate conflicts lies in having a shareholders agreement. A shareholders’ agreement is one of the most effective corporate instruments that helps mitigate or to a great extent prevent conflicts and misconduct. A shareholder agreement regulates fundamental aspects of a company such as:
- Number of shares held by each shareholder
- The worth of each unit of shares
- How a share can be transferred
- Issuance of shares and participations
- Decisions making
- Dispute resolution
- The rules of entry and exit of shareholders
A shareholders’ agreement may include specific clauses to protect the company; such as the obligation of pre-emptive right or right of first refusal to purchase shares by existing shareholders and the establishment of arbitration mechanisms to resolve internal disputes. It must be emphasized that the Memorandum and Articles of Association (MEMART) remain supreme and takes priority over shareholders’ agreement, however a well-drafted shareholders’ agreement can help provide protection for minority rights, outlines dispute resolution mechanisms, and manages share transfers. Notably, when such agreement exist, it should be integrated into the MEMART of the company so as to give it legal backing and corporate protection under CAMA. While the Companies and Allied Matters Act (CAMA) 2020 provides a comprehensive legal framework governing the incorporation, structure, and management of companies including the Memorandum and Articles of Association, directors’ duties, meetings, shares, and corporate governance it does not provide or prescribe a standard shareholders’ agreement. A shareholders’ agreement therefore remains a private contractual arrangement, to be independently drafted by the parties in line with their specific needs.
2. A Comprehensive and Well-Structured Memorandum and Articles of Association
The Memorandum and Articles of Association (MEMART) are part of the principal documents required under the Companies and Allied Matters Act (CAMA) 2020 for the incorporation of a company through the Corporate Affairs Commission (CAC). The Memorandum of Association serves as the company’s external charter, outlining its objects and scope of operations, while the Articles of Association provide the internal regulatory framework governing the management and administration of the company.
Section 27 of CAMA did not provide a definition of what Memorandum of Association is but it provided what it should contain and they include the followings: the name and address of the company, nature of the business (lawful business), whether it is a private or public company, liability of its members (limited by shares, by guarantee or unlimited), restriction on the powers of the company if any, minimum issued share capital, name of subscribers, the number of shares and a lot more. In contrast to that Section 32 of CAMA provides that a company shall have an Articles of Association signed by its subscribers. Just like we earlier explained, the Article of Association regulates the internal relationship between the company and its organs.
Why is a well detailed Memorandum and Article of the company necessary to avoid corporate conflict and misconduct?
The MEMART of a company are important document that plays a deciding role in the event of misunderstandings or disputes among shareholders and directors. A well-crafted MEMART provides a defined structure of the company, exit strategies, capital contributions, set rules and procedures, powers and limitation, establish roles, duties and responsibilities of members of the company and this helps in a great way to eliminates ambiguity, thereby giving clarity how the company should be managed and the necessary decisions to take in any and every circumstance.
3. Implementation Of Conflict Resolution Mechanisms
In any business, conflict is inevitable., so despite all preventive measures, conflicts may still arise. However, the first step is to understand how disputes can arise and the typical areas of disagreement and most importantly how to resolve it. It is important to highlight that understanding the nature of conflict in company especially among directors and shareholders begins by acknowledging that every member of the company has unique perspectives and interests which may not always align. The common areas where conflicts may arise are financial matters, control mechanism, reinvestment strategies, salary, sharing of profit and loss and exist means. In addition to that, some interpersonal challenges which involves differences in working styles, personality clashes, or work ethics can arise among members who oversees the day to day running of the business.
Regardless of the nature of the dispute, members of the company can achieve an amicable and beneficial resolution through constructive negotiation, arbitration, and mediation. Apart from being expeditious and cost-effective, these dispute resolution mechanisms also preserve valuable time, protect the company’s confidentiality, and promote mutually beneficial outcomes for all parties.
4. Separation Of Personal And Company’s Assets
In Nigeria, it is common for personal and company assets to be intertwined, however CAMA and the court frowns at such practice because it can generate conflicts. In order to avoid this, it is very important that the assets of the company be used exclusively for its benefit. To ensure that personal and company assets are not mixed, it must be stated boldly in the articles of the company that such act is outrightly forbidden and when any director or shareholder is in breach, there should be punishment for action.
5. Engage The Services Of A Qualified Legal Practitioner
The complexity of establishing and running a company requires the support of legal practitioner who is experience in corporate law, mediation and taxation. Hiring a lawyer will definitely make a difference in providing legal framework for your company. A lawyer can assist in identifying legal risks, provision of legal advice, drafting of documents, execution of compliance task and provision of solutions which fall within the area of his specialty. In addition to the above-mentioned services, a lawyer’s intervention can help avoid unnecessary tensions during conflict.
6. Written Contracts
It is important that you begin every business relationship with a written agreement or contracts outlining rights, responsibilities, and expectations of all parties. Clear and comprehensive contract or agreement provides tangible proof of agreed terms by contracting parties, prevents disputes, secures payment terms, protects confidential information, and serves as a legally binding record of obligations.
HOW THE ADHERENCE TO DUTIES OF DIRECTORS PROVIDED UNDER CAMA PREVENTS CORPORATE CONFLICTS AND MISCONDUCT
CAMA places great responsibility on directors of companies. Under the Companies and Allied Matters Act (CAMA) 2020, directors are bound primarily by two fundamental legal duties; the fiduciary duty and duty of care. The fiduciary duties requires them to act in good faith, and in the best interests of the company and its shareholders. Understanding the duties and responsibilities of directors is therefore crucial because when there is any breach, such act or misconduct may lead to civil liability, regulatory action, or even criminal charges, depending on the severity.
Core Duties of Corporate Directors
- Duty must act within authorized powers given in the memart.
- Duty must avoid conflicts of interest.
- Directors must act honestly, in good faith, and in the best interests of the company.
- Directors cannot prioritize personal benefit over corporate welfare.
- Directors must exercise the same level of care, diligence, and skill that a reasonably prudent person would use in similar circumstances.
- Duty to promote the business of the company and a lot more.
What is Misappropriation of Company’s Assets?
Misappropriation of assets happens in many ways; for example, when a director uses corporate funds, property, or resources for their own benefit without authorization, it can be said that misappropriation have occurred. The following assets of a company can be misappropriated:
- Data
- Trade secrets
- Intellectual property
- Inventory
- Cash or funds
- Property of the company
What Happens When Directors Breach Their Fiduciary Duty and Duty of Care?
- Regulatory Sanction
- Criminal Liability
- Civil Liability
- Loss of Investment
Common Methods of Misappropriation
The easiest and most common methods of misappropriation of company assets occurs through invoice falsification, unauthorized fund transfers, conversion of property, intellectual property theft, payroll fraud and fraudulent expense claims.
How to Prevent Misappropriation of Assets
When strong policies are incorporated into the company’s Articles of Association especially against conflicts of interest and unauthorize use of corporate assets there will be serious check against corporate misconduct. Among other prevention strategies, it is important to carry out deep background checks before appointment of any director, vet and verify their activities, routinely review and reconcile corporate accounts, limit who can access financial accounts, records, and sensitive data.
Note: Where a director also holds shares in the company, it is advisable for the company to incorporate robust protective provisions within its Articles of Association to mitigate the risk of abuse of office or breach of fiduciary duties. Such provisions may include, for instance, clauses stipulating that where a director–shareholder is found to have breached his fiduciary obligations, he may be subject to the forfeiture or compulsory transfer of his shares to the company or as otherwise determined in accordance with the Articles.
ACTIONS TO BE TAKEN
When a director is suspected of misusing corporate assets, the following actions should be taken:
- The company should conduct internal investigation or even engage forensic experts to trace financial irregularities.
- A resolution can be passed removing such director.
- The company can seek civil redress in court to recover losses.
- He should be reported to appropriate law enforcement agencies or regulators.
RECOMMENDATIONS: WHAT TO DO WHEN CORPORATE CONFLICT ARISES
When corporate conflict occurs, the response must be structured, lawful, and strategic. Acting informally or emotionally often escalates the situation and may expose the company or its officers to liability. The following steps represent best practice:
1. Revert to the MEMART and Shareholders’ Agreement
Always consult the company’s governing documents. These define rights, obligations, and procedures, and are binding under CAMA.
2. Ensure Compliance with Directors’ Duties
All actions must align with fiduciary duties and the duty of care. Directors must act in the best interest of the company at all times.
3. Proper Documentation
Maintain accurate records of meetings, resolutions, and communications. This ensures transparency and provides evidence if disputes escalate.
4. Activate Dispute Resolution Mechanisms
Utilize negotiation, mediation, or arbitration where provided. These methods preserve relationships and are more efficient than litigation.
5. Convene Proper Meetings
Ensure that board or general meetings are properly called in line with CAMA and the Articles. Decisions must follow due process.
6. Seek Legal Advice Early
Engaging a legal practitioner early helps prevent escalation and ensures compliance with legal requirements.
7. Avoid Unilateral Actions
No director or shareholder should act outside their authority. Unauthorized actions may amount to misconduct and legal breach.
8. Investigate Allegations Promptly
Where misconduct is suspected, conduct internal investigations and take appropriate disciplinary or legal action.
9. Protect Minority Interests
Ensure fairness and avoid oppressive conduct. Transparency and accountability are essential.
10. Resort to Litigation as a Last Option
Court intervention should be considered only after all alternative dispute resolution mechanisms have been exhausted.
11. Strengthen Internal Controls
After resolving disputes, review and improve governance structures to prevent recurrence.
12. Maintain Professionalism
Parties should separate personal emotions from business decisions and prioritize the company’s long-term success.
CONCLUSION
At the end of the day, most corporate conflicts don’t just appear out of nowhere they grow from unclear structures, poor communication, and lack of proper legal safeguards. The good news, however, is that many of these issues can be avoided when the right systems are put in place from the very beginning.
DISCLAIMER: This article is for informational purposes only and does not constitute legal advice. For specific legal guidance, please email info@bimakassociates.com.
Statutes and Legal Instruments
- Companies and Allied Matters Act (CAMA) 2020, Federal Republic of Nigeria – provisions on incorporation, MEMART, directors’ duties, meetings, shares, and corporate governance.
- Corporate Affairs Commission (CAC), Nigeria – Guidelines on company incorporation and filing of MEMART.
Legal Dictionaries
- Black’s Law Dictionary, 11th Edition, 2019 – definition of legal framework, fiduciary duties, and corporate governance terms.
- Oxford Learner’s Dictionaries – definition of “misconduct.”
Books and Corporate Governance Resources
- Bello, A. & Adeola, T., Corporate Governance and Compliance in Nigeria, Lagos: Corporate Law Press, 2021.
- Ude, P., Directors’ Duties and Corporate Liability under Nigerian Law, Abuja: Legal Framework Publications, 2020.
- Ogunleye, F., Corporate Conflicts and Dispute Resolution in Nigeria, Ibadan: University Press, 2018.
Articles and Journals
- Okonkwo, C., “Shareholders’ Agreements and Minority Protection in Nigeria,” Nigerian Journal of Business Law, Vol. 15, 2021.
- Eze, K., “Conflict Resolution Mechanisms in Nigerian Companies: Negotiation, Mediation, and Arbitration,” Journal of Corporate Law and Governance, 2020.
- Ojo, S., “Misappropriation of Corporate Assets and Legal Remedies in Nigerian Companies,” African Law Review, 2019.