A shareholder does not lose the right to seek legal protection simply because the company is managed by a board of directors.
Where a director acts unlawfully, breaches a duty, misuses company assets, commits fraud or engages in conduct that unlawfully affects a shareholder’s rights, the law provides remedies that can be pursued in appropriate circumstances.
However, a shareholder cannot sue a director for every wrong committed against the company.
This distinction is important because a company is a separate legal person. Where the wrong is done to the company, the general rule is that the company itself is the proper party to sue.
The Companies and Allied Matters Act 2020 (CAMA 2020), however, provides specific exceptions through personal actions, representative actions, derivative actions and remedies for oppressive or unfairly prejudicial conduct.
This article explains when a shareholder can sue a company director in Nigeria and the circumstances in which the court can grant relief.
Can a Shareholder Sue a Company Director?
Yes, but the shareholder must establish a recognised legal basis for the action.
A shareholder can bring proceedings against a director where the director has violated a right belonging personally to the shareholder.
A shareholder can also, in appropriate circumstances, bring proceedings on behalf of the company through a derivative action where the wrong was committed against the company and the company itself has failed to take appropriate action.
CAMA 2020 specifically provides mechanisms for members and other qualified persons to commence derivative proceedings. Sections 341 to 350 deal with actions by or against companies, protection of members and derivative actions.
The nature of the wrong therefore determines the appropriate type of action.
When Can a Shareholder Bring a Personal Action Against a Director?
A shareholder can bring a personal action where the director’s conduct infringes a right belonging to the shareholder personally.
Examples can include circumstances involving:
- unlawful interference with voting rights;
- improper treatment of the shareholder’s shares;
- conduct affecting rights attached to the shareholder’s membership;
- unlawful acts affecting the shareholder personally; or
- other breaches of rights recognised by law.
The key question is:
Was the shareholder personally wronged, or was the company wronged?
If the shareholder was personally wronged, a personal action can be appropriate.
If the company was wronged, the proper route will ordinarily be a derivative action or an action brought by the company itself.
What Is a Derivative Action?
A derivative action is an action brought by a shareholder or another qualified person on behalf of the company to remedy a wrong done to the company.
This is important because the company, rather than an individual shareholder, normally owns the cause of action arising from a wrong done to the company.
For example, suppose a director unlawfully diverts ₦100 million belonging to the company to a personal account.
The immediate victim of the wrongdoing is the company.
A shareholder cannot simply treat the ₦100 million as the shareholder’s personal money and sue for its recovery in a personal action.
Instead, where the statutory requirements are satisfied, the shareholder can seek to bring a derivative action on behalf of the company.
Why Would a Shareholder Need a Derivative Action?
The derivative action exists because there are circumstances in which the company is technically the proper claimant but the people controlling the company are unwilling to sue.
Consider a company with five directors.
Suppose four directors have participated in diverting company funds for their personal benefit.
The company is the proper party to recover the money.
But the board controlled by those directors is unlikely to commence proceedings against itself.
A derivative action provides a mechanism through which a qualified person can seek the court’s intervention to protect the company’s interests.
What Does CAMA 2020 Provide About Derivative Actions?
CAMA 2020 contains specific provisions governing derivative proceedings.
Section 346 permits an eligible applicant to commence or intervene in proceedings on behalf of a company in circumstances prescribed by the Act.
The court must consider the statutory requirements before allowing the action to proceed.
Among the matters considered is whether the applicant is acting in good faith and whether bringing, prosecuting, defending or discontinuing the action appears to be in the best interests of the company.
This means that a shareholder cannot commence a derivative action simply because the shareholder disagrees with a director.
There must be a proper basis for invoking the statutory remedy.
Who Can Bring a Derivative Action?
CAMA 2020 gives the court jurisdiction to entertain applications from specified persons.
Section 352 identifies an “applicant” for the purposes of the derivative-action provisions to include:
- a registered holder or beneficial owner of a security of the company;
- a former registered holder or beneficial owner;
- a director or officer, including a former director or officer;
- the Corporate Affairs Commission; and
- another person whom the court considers a proper person to make the application.
The statutory definition is therefore broader than simply a current shareholder.
What Must a Shareholder Establish Before Bringing a Derivative Action?
The shareholder must satisfy the requirements prescribed by CAMA.
The court considers, among other matters, whether the applicant is acting in good faith and whether the proposed proceedings are in the best interests of the company.
The court can therefore prevent derivative proceedings from being used merely as a weapon in a personal dispute between shareholders.
The applicant should be able to demonstrate a genuine corporate wrong and a legitimate reason why the company has not adequately pursued the matter itself.
Can a Shareholder Sue a Director for Stealing Company Money?
A shareholder can seek appropriate relief where a director has misappropriated company funds, but the proper procedure depends on who suffered the legal wrong.
If the money belongs to the company, the company’s cause of action is ordinarily against the director.
The shareholder should therefore consider a derivative action where the company is unwilling or unable to pursue the claim.
The shareholder should not simply claim that the director stole “the shareholder’s money” because the shareholder owns shares in the company.
Company assets belong to the company, not directly to its shareholders.
Can a Shareholder Sue a Director for Breach of Fiduciary Duty?
A shareholder can pursue appropriate proceedings where the director’s conduct affects a right belonging personally to the shareholder.
Where the alleged breach is a duty owed to the company, however, the company is ordinarily the proper claimant.
A derivative action can become relevant where the company fails to enforce its rights.
This distinction is critical.
A director’s fiduciary duty to the company is not automatically transformed into a personal cause of action in favour of every shareholder.
Can a Shareholder Sue a Director for Fraud?
Yes, where the facts establish a legally sustainable claim against the director.
A director cannot rely on the company’s separate legal personality to shield personal fraudulent conduct.
However, the shareholder must still identify the legal wrong and the loss or right affected.
Where the fraud was committed against the company, the company can have the primary cause of action.
Where the fraud directly affects the shareholder’s personal rights or property, the shareholder can have a personal claim.
Can a Shareholder Sue a Director for Diverting a Company Opportunity?
A director who improperly diverts a corporate opportunity can expose himself or herself to legal consequences.
If the opportunity belonged to the company, the company’s interests are directly affected.
A shareholder seeking to enforce the company’s rights should therefore consider the derivative-action procedure where appropriate.
The fact that the shareholder’s investment in the company has consequently lost value does not, by itself, convert the company’s loss into the shareholder’s personal cause of action.
Can a Shareholder Sue a Director for Issuing Shares Unlawfully?
Potentially, yes.
The circumstances matter.
An unlawful share issue can affect both the company and individual shareholders.
For example, if directors issue shares for an improper purpose with the intention of diluting a particular shareholder’s voting power, the affected shareholder can have grounds to seek appropriate relief.
CAMA provides protection to members in circumstances involving unlawful or improper corporate acts.
The court can grant declaratory or injunctive relief where the statutory requirements are satisfied.
Can a Shareholder Challenge an Act That Is Illegal or Ultra Vires?
Yes.
CAMA provides protection for members against certain unlawful corporate acts.
A shareholder can seek appropriate relief where the company proposes to undertake an act that is illegal or outside the company’s powers.
The remedy can include an injunction or declaration in appropriate circumstances.
This is particularly important where a director or board is attempting to implement a transaction that exceeds the company’s lawful powers.
Can a Shareholder Sue a Director for Oppressive Conduct?
Yes.
CAMA 2020 provides a specific remedy where the affairs of a company are conducted in an illegal, oppressive or unfairly prejudicial manner.
Section 353 permits an application to the court by petition by, among others, a member of the company.
Section 354 provides grounds upon which relief can be sought, including where the affairs of the company are conducted in a manner that is oppressive, unfairly prejudicial or unfairly discriminatory against a member or members.
This remedy is particularly relevant to minority shareholders who are being unfairly excluded, discriminated against or subjected to oppressive conduct.
What Is an Oppressive Act Against a Shareholder?
Oppression is not established merely because a shareholder is unhappy with a business decision.
The conduct must be sufficiently serious to fall within the statutory protection.
Examples can include circumstances such as:
- deliberately excluding a shareholder from management contrary to the parties’ established arrangements;
- improperly diverting corporate benefits to controlling shareholders;
- manipulating the company’s affairs to unfairly prejudice minority shareholders;
- using corporate powers to unfairly dilute a shareholder’s interest; or
- persistent conduct that disregards the legitimate interests of a member.
The court examines the facts and circumstances of each case.
Can a Minority Shareholder Sue a Director?
Yes.
Minority shareholders are not without legal protection simply because they do not control the board.
CAMA provides several remedies through which minority shareholders can challenge unlawful or oppressive conduct.
These include:
- personal actions;
- representative actions;
- derivative actions;
- applications for injunctions or declarations; and
- petitions based on oppressive or unfairly prejudicial conduct.
The appropriate remedy depends on the nature of the complaint.
What Is a Representative Action?
A representative action allows a member to pursue certain rights on behalf of the member and other affected members.
This is different from a derivative action.
In a derivative action, the underlying wrong is generally a wrong done to the company.
In a representative action, the claim concerns rights shared by the affected members.
The distinction matters because the relief and procedure can differ.
What Remedies Can a Shareholder Obtain Against a Director?
The remedy depends on the nature of the claim.
A court can, where legally appropriate, grant relief including:
- declarations;
- injunctions;
- orders restraining unlawful corporate conduct;
- orders concerning the conduct of company affairs;
- recovery of company property;
- orders requiring payment of money;
- an account of profits;
- orders concerning oppressive or unfairly prejudicial conduct; and
- other appropriate relief.
In derivative proceedings under CAMA, the court has broad powers concerning the conduct of the proceedings.
For example, section 347 permits the court to make orders concerning who should control the proceedings, directions for conducting the action, payment of amounts recovered and reasonable legal fees incurred by the applicant in connection with the proceedings.
Does the Money Recovered in a Derivative Action Belong to the Shareholder?
Not ordinarily.
This is one of the most important distinctions between a personal action and a derivative action.
Where the shareholder brings an action on behalf of the company to recover money belonging to the company, the recovery is ordinarily for the benefit of the company.
The shareholder does not simply become personally entitled to the company’s money because the shareholder commenced the proceedings.
CAMA, however, gives the court power in derivative proceedings to direct that an amount adjudged payable can, in appropriate circumstances, be paid directly to former and present security holders.
The ultimate relief therefore depends on the court’s order and the circumstances of the case.
Can a Company Stop a Shareholder’s Derivative Action?
A derivative action is subject to the supervision of the court.
CAMA provides that an action brought under the derivative-action provisions cannot simply be stayed, discontinued, settled or dismissed for want of prosecution without the court’s approval.
This protects the integrity of the proceedings and prevents parties from compromising the company’s claim without appropriate judicial oversight.
Can Shareholders Approve a Director’s Wrongdoing?
Shareholder approval does not automatically prevent a derivative action from being considered.
CAMA expressly provides that an application or action under the relevant provisions is not to be stayed or dismissed merely because it is shown that the alleged breach of a right or duty owed to the company has been or may be approved by shareholders.
However, evidence of shareholder approval can be considered by the court when making an order.
This prevents shareholder approval from being used as an automatic shield against every allegation of wrongdoing.
What Evidence Does a Shareholder Need?
A shareholder considering legal proceedings should preserve relevant evidence, including:
- share certificates or evidence of shareholding;
- company resolutions;
- minutes of meetings;
- notices of meetings;
- financial statements;
- company accounts;
- contracts;
- correspondence;
- emails;
- corporate filings;
- evidence of transactions involving directors;
- evidence of conflicts of interest;
- evidence of payments or transfers; and
- documents showing the effect of the alleged conduct.
Where the dispute concerns a transaction involving company assets, documentary evidence can be particularly important.
Can a Shareholder Demand Company Records?
The shareholder’s rights concerning inspection and access to company records depend on the nature of the documents and the applicable provisions of CAMA.
Where proceedings are contemplated, the shareholder should identify the documents necessary to establish the claim and consider the appropriate legal procedure for obtaining them.
In derivative proceedings, CAMA gives the applicant a right to obtain relevant documents from the defendant and witnesses at trial, including the ability to request categories of documents without identifying individual documents.
What If the Director Is Also the Majority Shareholder?
The director’s position as majority shareholder does not automatically immunise the director from legal proceedings.
However, the appropriate remedy becomes particularly important.
Where the majority shareholder-director uses control of the company to suppress the rights of minority shareholders, the statutory remedies concerning unfairly prejudicial and oppressive conduct can become relevant.
A minority shareholder should not assume that lack of voting control means there is no legal remedy.
What If the Company Refuses to Sue the Director?
This is precisely one of the situations in which a derivative action can become important.
Where a director has allegedly wronged the company and the company refuses to enforce its rights, a qualified applicant can approach the court under the derivative-action provisions of CAMA.
The applicant must satisfy the statutory requirements.
The court, rather than the applicant alone, ultimately determines whether the derivative action should proceed.
What Is the Difference Between a Personal Action and a Derivative Action?
The distinction can be summarised simply:
Personal Action
The shareholder’s own right has been violated.
The shareholder sues to protect that personal right.
Derivative Action
The company’s right has been violated.
The shareholder seeks permission to pursue the company’s claim because the company has failed to do so.
Oppression Petition
The company’s affairs are being conducted in a manner that is oppressive, unfairly prejudicial or unfairly discriminatory against a member.
Different facts can sometimes give rise to more than one possible remedy, which is why the cause of action should be carefully analysed before proceedings are commenced.
Practical Example
Suppose ABC Limited has three shareholders.
James owns 20%, while two other shareholders collectively own 80% and control the board.
The directors cause ABC Limited to sell valuable company property to a company owned by themselves at substantially below market value.
The immediate loss is suffered by ABC Limited.
James cannot simply sue for the full value of the company’s loss as though the property belonged personally to him.
The appropriate route can include a derivative action, provided the statutory requirements are satisfied.
Now assume instead that the majority shareholders deliberately issue new shares solely to dilute James’s existing shareholding and voting rights in circumstances prohibited by law.
James’s personal membership rights are directly affected.
A personal action or other statutory remedy can therefore become relevant.
The distinction between these two situations is fundamental.
Should a Shareholder Sue the Director Personally or Sue the Company?
This should not be decided merely by looking at who committed the alleged wrongdoing.
The first question is:
Who suffered the legally recognised wrong?
If the wrong was done to the company, the company is ordinarily the proper claimant.
If the shareholder’s personal rights were violated, the shareholder can have a personal claim.
If the company is unwilling to enforce its rights, a derivative action can provide a mechanism for pursuing the company’s claim.
If the company’s affairs are being conducted oppressively or unfairly prejudicially against the shareholder, the oppression provisions can provide another route.
Conclusion
A shareholder can sue a company director in Nigeria, but the shareholder must select the remedy that corresponds with the nature of the wrong.
Where a director infringes a shareholder’s personal rights, the shareholder can bring an appropriate personal action.
Where the wrong is committed against the company, the general rule is that the company is the proper party to sue. However, CAMA 2020 provides a statutory mechanism for derivative proceedings where the requirements for such an action are satisfied.
CAMA also protects members against certain unlawful corporate acts and provides remedies where the affairs of a company are conducted in an oppressive, unfairly prejudicial or discriminatory manner.
The most important question is therefore not simply “Can a shareholder sue a director?” but “What right was violated, who suffered the wrong, and what remedy does CAMA provide?”
A shareholder who chooses the wrong procedure can face unnecessary delay and expense. The facts should therefore be carefully analysed before commencing proceedings.
If you are a shareholder who believes that a company director has misused company assets, breached your rights, acted fraudulently or conducted the affairs of the company in an oppressive manner, Lexforte Attorneys can review the circumstances and advise you on the appropriate remedy, including personal, representative, derivative or oppression proceedings. Contact Lexforte Attorneys for professional assistance with shareholder and corporate disputes in Nigeria.
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