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Oral Agreement by Directors of a Company to Share Profit With a Person: Effect of Failure of Company

ORAL AGREEMENT BY DIRECTORS OF A COMPANY TO SHARE PROFITS WITH AND MAKE A PERSON A DIRECTOR FOR THE SERVICE RENDERED BY THE PERSON: IMPLICATIONS OF THE COMPANY’S FAILURE TO FULFILL THE SAID AGREEMENT UNDER THE EXTANT LAWS IN NIGERIA

SCENARIO

A (Managing Director) and B were the only registered directors and shareholders of a Nigerian Company. The company decided to increase its business prospects especially in the public sector by involving C who was expected to use both his expertise and political contacts to gain business advantage and expansion for the company. A and B orally agreed with C that profits made by the company shall be shared equally with C and that C would be made a director of the company. On the basis of the said agreement, C contributed greatly in securing a contract for the company which made A commend C’s effort vide a letter.

Consequently, C was designated and instructed to act as the Director of Business Development (DBD) of the company and other efforts were begun to ensure that C was made a director of the company as orally agreed by all the parties. But there was never any written resolution passed to make C a director neither was the register of directors of the company amended.

Consequently, the company secured a contract where it made a total profits of N60,000,000 (Sixty Million Naira only). Shockingly, A and B had refused to share the said profits with C.

INTRODUCTION

The scope of this write-up is to: identify the attendant legal issues arising from the scenario; and appraise the identified legal issues in the light of the extant principles of law (statutory and judicial). Also, a brief attempt will be made to advise C on the strength or otherwise of his case.

LEGAL ISSUES

1. Whether C was in law a director of the company.

2. Whether C can be said to be a partner with A and B.

3. Whether C was an employee or worker in the company.

4. Whether C is entitled to share in the income made by the company

LEGAL POSITION ON ISSUES

1. Whether C was in law a director of the company:

Generally, the question of: who is a director of a company is more of a question of law than fact. Section 244 of the Companies and Allied Matters Act (CAMA) describes ‘a director of a company registered under this Act is a person duly appointed by the company to direct and manage the business of the company’. Undoubtedly, the directors’ roles are as fundamental to the wellbeing of a company just as blood is to the survival of the human body. Perhaps, that is why company statutes all over the world make special provisions about the procedures of appointment and removal of a director.

In the light of the foregoing, one can safely say that C was not a director of the company because he was never validly appointed so. Though, C was designated as a Director of Business Development (DBD) of the company but nothing was done to amend the necessary registers of the company at the Corporate Affairs (CAC) registry. In other words, the designation of C as the DBD without filing necessary amendments in the company’s register of directors was a mere expression of intention which was never perfected in law.

2. Whether C can be said to be a partner with A and B:

According to Section 3, of the Partnership Law of Lagos State, partnership is the relationship which subsists between persons carrying on a business in common with a view to profit. From the foregoing statutory definition, one can say a partner is a person who carries on business with such other partners. It is imperative to examine the various statutory rules that determine the nature of partnership. Section 4 of the Partnership Law provides thus:

(a) ”Joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned whether the tenants or owners do or do not share any profits made by use thereof.

(b) The sharing of gross returns does not of itself create a partnership whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.

(c) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but receipt of such a share or of a payment contingent on varying with the profits of a business, does not itself make him a partner in the business; and in particular –

(I) the receipt by a person of debt or other liquidated amount by installments or otherwise out of the accruing profits of a business does not of itself make him a partner in the business or liable as such;

(ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profit of the business does not of itself make the servant or agent a partner in the business or liable as such;… ”

From the foregoing, it is clear that partnership is a question of express agreement between the partners because the law will not ordinarily presume the existence of partnership between persons doing business together. It then suffices to say that: a mere contract made with a servant or person for remuneration or sharing of company’s profits does not ipso facto make such servant or person a partner.

It is noteworthy to state that C’s case falls within the contemplation of Section 4 (c) (ii). The legal implication of this is that C was a servant of the company who was entitled to share out of the income of the company. But he was not a partner in the strict legal sense.

3. Whether C was an employee or worker in the company:

It is imperative to examine first the Labour Law angle of the relationship that existed between the company and C before considering the strict contractual aspect of the relationship. Accordingly, Section 91 of the Labour Act, ‘contract of employment’ means an ”agreement, whether oral or written, express or implied, whereby one person agrees to employ another as a worker and that other person agrees to serve the employer as a worker”.

In the same vein, the Act defines a worker as ”any person who has entered into or works under a contract with an employer, whether the contract is for manual labour or clerical work or is expressed or implied or oral or written, and whether it is a contract of service or a contract personally to execute any work or labour… ”

In the case of Iyere v. Bendel Feed & Flour Mill Ltd., the Supreme Court of Nigeria described a contract of employment as follows:

”… a contract of employment connotes a contract of service or apprenticeship, whether express, or implied, and if it is express, whether it is oral or in writing”.

Hence, C was a worker or an employee of the company because he was indeed working for the company. In other words, there were enough instructions and directions given to C which point to the fact that C was working for and on behalf of the company when he worked as the DBD of the company.

From another point of view, the facts at hand can also be addressed from the strict contractual agreement sense. It is trite in law that parties are bound by the terms of their agreement. In the case of Akanmu v. Olugbode, the Court held as follows:

”The elements of a valid contract are offer, acceptance, consideration and intention to enter into legal relations… Once the offer is unconditionally accepted, a valid contract has come into existence”.

Also, in the case of Dragetanos Const. (Nig.) Ltd. v. F.M.V. Ltd & Ors., the Court of Appeal held as follows:

”… it is appropriate and necessary to restate the time-honoured principle and ingrained in the Law of Contract that, ‘pacta conventa quae neque contra leges neque dolo malo inita sunt, omni modo obsevanda servanda sunt’, in order words, contractual agreements which have neither been fraudulently nor illegally entered into by parties, must in all respects be observed or enforced”.

Also, in the case of Nicon Hotels Ltd. v. Nene Dental Clinic Ltd, the Court of Appeal held as follows:

”An agreement voluntarily entered into must be honoured in good faith. Equity looks at the intent and not forms and will always impute an intention to fulfill an obligation”

In the light of the foregoing, it is safe to assert that a contract can be established between the company and C as evident in the various instructions given to C by A, the Managing Director of the company. Of course, the actions of the parties show clearly that there were offer, acceptance, consideration and intention to create a legal relation among all the parties. Hence, the decision of the company and the subsequently joint efforts made by all the parties in securing a contract constitute a subsisting and enforceable contract among the parties.

4. Whether C was entitled to share in the income made by the company:

This issue deals primarily with the determination of remuneration of C. Though, the friendly oral understanding between the parties about profit sharing was not contained in any written ‘Profit Sharing Agreement’, profits shall be shared equally because parties had orally agreed it to be so shared. However, it is to be noted that there may arise an evidential issue if A and B deny their oral agreement. It is also imperative to add that: assuming without conceding that there was no agreement (oral or written) among A, B and C, equity will still allow C to share in the profits based on C’s sweat equity.

Therefore, it is safe to say that C is entitled to his own share of the company’s income because of his sweat equity (he contributed actively in the contract from where the company made N60m). It was indeed wrong for A and B to solely convert all the income made by the company.

ADVICE FOR C

In the light of the foregoing, C can either sue for breach of contract of employment, or breach of contract simpliciter which can be deduced from the circumstances of both the actions and relationship of the parties. As answered by the statutory provisions above, the question of what constitutes a contract of employment is a question of law. Of course, the exact remuneration of C is equal proportion with A and C of the total profits made by the company from the contract carried out by A, B and C.

Conclusion

It is imperative to state that C’s case is standing on a very weak footing in partnership law, but he may have a remedy for breach of contract of employment because there was indeed an employment. More specifically as noted above, C can sue for breach of contract simpliciter because there was indeed a subsisting contact among the parties.

Using Kaizen to Lower the Risk of Mergers and Acquisitions Failure

The number of Mergers and Acquisitions (M&A) that end in failure is a matter of conjecture but it’s commonly estimated that over 50% of all M&A deals fail to achieve their intended goals. If true, that represents an astounding loss of investment dollars as well as the lost time, energy, reputations and everything else that goes along with closing an M&A deal. Lowering the failure rate by even a small amount has the potential therefore to save billions in lost dollars. While specific reasons are usually cited for individual failures, it’s difficult to generalize about a root cause of the failures that would allow investors to avoid or at least mitigate their investment risk. To find a global means of lowering the risk of an M&A failure we need to look for systemic causes of the problem.

By M&A failure I am referring to failures that occur after an M&A deal has been closed, not a failure to close the deal (a subject all to itself). The specific reasons cited for M&A failure usually include target business issues such as the lack of anticipated or promised performance, culture clash, management team and key employee loss, changes in the market… and on and on. But again, while these may be the cause of a specific failure, citing the cause of an individual failure doesn’t help us identify the systemic causes. For our purpose then, we will need to use a more generic definition of an M&A failure. To accomplish this, we can simply define an M&A failure as a merger or acquisition which, after 2-3 years, the investor wouldn’t do over if given the chance. I limited it to 2-3 years because after that there is a good chance the business failed for other reasons.

To find a systemic cause of failure, we must turn our focus to the M&A process itself. Dr. W. E. Deming was a mid Twentieth Century scientist who did much of the original research on quality assurance techniques. In his work he demonstrated that product failures resulted from the manufacturing processes that were used to produce the product and that, by improving the process, it is possible to reduce the resulting failures. More recently, we have seen this principal demonstrated by Toyota when they adopted the “Kaizen” method. “Kaizen” is the Japanese word for good or positive process change. To improve the quality of their cars, Toyota uses “Kaizen” to remove systemic manufacturing defects. “Kaizen” is now being applied in many other industries. While the M&A process is not a manufacturing process it is a repeatable process and by analyzing that process, it is possible to identify the systemic root cause of some M&A failures. We can then use a “kaizen” approach to modify the process to lower the M&A failure rate.

Overall, the M&A process is a methodical, legalistic process embedded with activities tied to letters of intent, the definition of terms and conditions, the creation of an acquisition agreement and other documents needed to transfer ownership of the target business in a diligent manner. Activities like negotiating the terms of the agreement or preparing the transfer of document can be tedious but they have exacting results and are generally not the cause M&A failures.

Due diligence by contrast is the most subjective step in the M&A process. Many investors don’t fully understand the role of due diligence and begin with only a notional understanding of what they hope to accomplish. This gives us the first clue to the cause of many M&A failures.

To understand the problem, lets break the M&A due diligence process down a little further. To be effective, due diligence should assess three distinct facets of the business; legal, financial, and operations, and these should be performed with equal effectiveness. Most investors do a good job at legal and financial due diligence but fail to perform an effective operations due diligence. This is due to the fact that legal and financial due diligence rely on the frameworks of law and accounting as their guiding principles and, assuming that the investor has a competent attorney and accountant, there is little reason not to perform these assessments effectively. Operations due diligence is a different story. There is often confusion regarding exactly what needs to be assessed during an operations due diligence or how to measure and report on the results. To understand the nature of this problem, this would be a good time for the reader to take a moment to write down what you think constitutes an effective operations due diligence. Later we will see if your definition has changed.

While not totally accurate, it is fair to say that financial due diligence is primarily looking at the past performance of the business while legal due diligence looks at the current state of the business (at the time of closing). Operations due diligence on the other hand is trying to discover potential problems that could impact the future operations and sustainability of the business. If an operations assessment determines the likelihood of a negative future event occurring than, by definition, operations due diligence is a risk assessment. Specific failures, such as cultural mismatch, missing the market, and the loss of key clients are examples of events that have the potential to negatively impact the future operations of the business. If the definition you wrote down didn’t have the word risk in it than you have not fully understood the role of operations due diligence.

What about events that have a positive impact on the business? Is there, for instance, an opportunity for the business to improve its sales after the merger? Risk and opportunity are often described as “two sides of the same coin”. An operations due diligence should also be an opportunity assessment. Opportunity is the likelihood of an event that will positively impact the future operations of the business. If an operations assessment discovers that the business has a great product but sales are weak because the sales group is immature and the acquiring company already has a strong sales organization than an opportunity to improve sales has been discovered. Not capturing potential opportunities is also a cause of M&A failure because the business will fail to achieve its full potential.

Operations due diligence needs to be an enterprise wide assessment. When asked, most people name only one or two key functions to be assessed and fail to provide a holistic, enterprise wide answer. “Operations” is a very broad term and potentially covers a wide range of operating functions. Without an established framework similar to that of law or accounting, the enterprise framework tends to be an ad hoc list of functions. Standardizing a framework that defines the enterprise therefore is crucial for reducing failures. Processes that do not produce repeatable results are prone to error. Without a clearly defined, consistent framework the results are not repeatable and increases the chance of an M&A failure.

Investors rely on their CPA and attorney to establish the financial and legal framework but who do they rely on to perform an operations assessment? A CPA can tell you the financial maturity of the business but how do you determine the maturity of the operations infrastructure of a business? The tendency for most investors is to “go it alone” by focusing on only one or two areas. “It was a software company so we had an engineer look at the code”. The lack of a consistent operations framework, or established practice that defines one, re-enforces the potential that operations due diligence is the weak link in the M&A process due to the potential to overlook business functions during the assessment.

Operations due diligence needs to be performed as an enterprise wide assessment that spans the entire operations infrastructure of the business. There may be more understanding of the operational needs during a strategic acquisition over a purely financial investment but my experience is that a “go it alone” approach during a strategic investment tends to overlook key operations areas. Without a guiding framework, it is difficult to determine what constitutes “complete” and without a framework to use as a guide, the potential to miss an operations function is great and therefore so is the risk that you will overlook the potential cause of an M&A failure. An operations assessment must cast a wide net in order to keep potential risks from slipping through and the lower the risk of an M&A failure. Treating operations due diligence as an enterprise wide risk/opportunity assessment based on the development of a holistic framework and a constant M&A process improvement program is a clear way to lower the M&A failure rate.

Improving the way operations due diligence is performed demonstrates how “Kaizen” could be applied to the M&A process. “Kaizen” requires a continuous process improvement program that continues to remove defects over time. The examples given here are just a first step. Applying a “Kaizen” approach would mean continuously revisiting the operations framework to better identify latent operations risks and opportunities. To accomplish this, we would need to look at the specific causes of M&A failure and constantly ask, would this problem have been discovered during our operations assessment. If the answer is no, then the operations framework needs to be further improved. Continuous process improvement requires resources. Investors that are continuously involved in the M&A process will gain the most from this type of program. The benefits that this type of process improvement program provides by lowering investment risk should justify the commitment of those resources.

Top Reasons for Online Business Failure

Starting an online business does not give you an express ticket of being successful in this field of entrepreneurship. In fact, launching your business on the online platform might mean even working harder unlike in offline works. While chances are that your internet based business can still fall, you should not condemn yourself as being a bad owner. This is due to the simple fact that not everyone who starts his work from home business is destined to be successful. In case it turns out against your expectations, you need to rethink about your ideas and the various strategies and techniques you are using to man it. Nevertheless, there are various circumstances in which your online business can be very far away from being successful such as:

Wrong business tools and lack of determination

To keep things simple and clear, employing the wrong business tools including technology and techniques might mean a direct failure of your business. This also factors in advertising and marketing tools as well. There are some people that simply launch their internet businesses without having an idea of exactly what they are getting themselves into. As such, they lack the much needed drive, focus and motivation that can lead to the road of success. Having the determination to succeed in business is important as it gives you the will power to face and conquer the many obstacles that come along the way.

Wrong choice of a business idea

Your choice of home based business idea has a lot to do when it comes to the success of your business. Most online entrepreneurs have no confidence in their selected online opportunity and this really narrows their chances of being successful. Regardless of which business idea you decide to exploit, the most important thing is that you are optimistic in what you are doing and believe in the beauty of your dreams. In fact, there is no any online business model that can be regarded to be successful but it all depends on how passionate is the owner in seeing his or her business flourish and become more competitive.

Lastly, most online businesses fail as they do not spare sometime to research and get more information regarding their industry. Even as you research, it is essential that you are able to differentiate between facts and opinions regarding your business and only applying good and helpful information while ignoring bad information that can jeopardize your chances of success.