The investor as a member of a company : a reflection on misused concept

• Pages: 1-32
• Published date: 01 January 2013
• DOI: 10.10520/EJC177236
• Date: 01 January 2013

THE INVESTOR AS A MEMBER OF A

COMPANY: A REFLECTION ON

MISUSED CONCEPT

Anthony O. Nwafor

Abstract

The company as a statutory creature relies mostly on

investors for its finances and daily business activities.

Obvious though this may seem, but it is not clear who these

investors are as in some cases those who are referred to as

investors are actually creditors having rights against the

company as distinguished from members having rights in

the company. The interests of the former may not withstand

the true tests of an investment as much as the latter. In

similar vein, the terms ‘member’ and ‘shareholder’ are

indiscriminately applied in describing those with interests

in the company. These terms are seen in some quarters as

synonymous, but this paper reveals that that conception is

misleading as shareholders are not members of the company

in all cases. The act of shareholding, in companies that issue

shares, is only one of the two important criteria by which

the status of membership of a company is attained. The

second is registration, which shareholding alone does not

fulfil, and which in some cases is seen as more important in

defining membership of a company than shareholding.

1 Introduction

Companies are creatures of the general law which in most

jurisdictions are known as Companies Act. Such companies attain

* LLB Hons (Unijos), BL, LLM (University of Nigeria), PhD (Unijos), Professor of

Law, School of Law, University of Venda, South Africa. Email:

drtonynwafor@yahoo.com.

2 The Investor as a Member of a Company

the status of corporate entity through the process of registration as

provided in the enabling statute. There are also other companies

that are specially created by specific Acts of Parliament mostly for

public or governmental purposes. The first group of companies are

however dominant largely because they act as flexible tools for

carrying on business whether for profit or non-profit purposes.

1

“Companies are used as business vehicles from the smallest, one-

person business, to the largest, multi-national undertaking”

2

whose

business activities transcend the boundaries of their countries of

incorporation. Since the enactment of the UK Joint Stock Companies

Act of 1844, companies have continued to attain the status of legal

personality by mere registration. This statutory position was

strengthened by the House of Lords decision in Salomon v Salomon

& Co Ltd

3

where Lord Macnaghten held inter alia:

The company is at law a different person altogether

from the subscribers…; and, though it may be that

after incorporation the business is precisely the same

as it was before, and the same persons are managers,

and the same hands receive the profits, the company

is not in law the agent of the subscribers or trustees

for them. Nor are the subscribers, as members, liable

in any shape or form, except to the extent and in the

manner provided by the Act.

A distinct feature of a company lies in the distinction between the

company and its members. This feature ensures that the company

survives well beyond the life span of its founders. However, the

company as a creature of statute still relies heavily on the investors

for its capital and the conduct of its daily affairs. The paper seeks to

1

Paul L Davies (QC), Sarah Worthington(QC) and Eva Micheler, Gower & Davies

Principles of Modern Company Law 9th ed (London: Sweet & Maxwell, 2012) at 1.

2

Ibid.

3

[1897] AC 22 at 51 (HL). See also the other important early common law decisions on

this concept: Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL) at 633 per

Lord Wrenbury who said: “the corporator even if he holds all the shares is not the

corporation, and that neither he nor any creditor of the company has any property legal or

equitable in the assets of the corporation.” Lee v Lee Air Farming Ltd [1960] 3 All ER

420, [1961] AC 12 (PC) at 26 per Lord Morris of Borth-y-Gest.

LLJ Vol. 20 No. 1 & 2 3

discover who these investors are, whose investments sustain the

company, and in the process provides an answer to the

indiscriminate applications of the terms ‘member’ and ‘shareholder’

to describe persons who have invested in the company.

2 Who is an Investor

It could not be found in any jurisdiction where the term ‘investor’ is

specifically defined in the Companies Act. The reason is not far-

fetched. The word ‘investor’ is a vast term that transcends the scope

of the internal operations of a company.

4

It applies to different

persons in different circumstances. It is the personalised derivative

from the transitive verb ‘invest’ which is indicative of an act, and

the resultant effect of such act is known as investment. In ordinary

terms therefore, an investor may be said to be that person who

invests in an investment. The key terms to the discovery of who an

investor is lie in the proper contextual definition of the scope and

import of the words ‘invest’ and ‘investment’. Both terms are found

to have been employed interchangeably by a Nigerian investment

statute without any distinction drawn thereby. For instance, section

32 of the Nigerian Investment Promotion Commission Act

5

provides that ‘investment’ “means investment made to acquire an

interest in an enterprise operating within and outside the economy

of Nigeria.” A literal reading of this definition does not make much

sense. The meaning of investment must be something other than

4

See for instance, article 1(2)(b) of Ukraine-Lithuania Bilateral Investment Treaty

(BIT) 1994 which defines investor, in the context of international trade relations

between the two countries, as “any entity established in the Republic of

Lithuania in conformity with its laws and regulations.” This definition does not

just deal with the operations of the company but sees the company itself as an

investor. See Tokios Tokeles v Ukraine 11 ICSID Reports 313 29 April 2004 also

available at http://italaw.com/documents/Tokios-Jurisdiction_000.pdf the

Tribunal defined entity as used in that provision as “[a] thing tha t has a real

existence.” See also The Energy Charter Treaty of 1991, art 1(7)(a)(ii) which

defines investor as “a company or other organization organized in accordance

with the law applicable in that Contracting Party.”

5

No 16 of 1995.