Funding a Trust with Shares

A certificate is a receipt for a shareholding. The register of members is the shareholding.

Land teaches the discipline the hard way. Consent takes months, the fees are visible, the registry queue is a physical queue, and a settlor who skips a step generally knows he has skipped it. Shares teach nothing, because nothing about the transfer feels like an obstacle. The settlor signs a transfer form at his own dining table, hands over a certificate that has been in a folder since incorporation, and considers the company settled.

What has actually happened is that he has executed an instrument. The company has not acted on it. Its register of members still names him. Its annual returns still name him. Its filings at the Corporate Affairs Commission still name him, and will continue to do so until somebody files to say otherwise. If he dies that night, the shares are in his estate, and the trustees hold a piece of paper evidencing a transaction the company never completed.

The distinction that governs this essay is between title and evidence of title. In a company the register of members is title; the share certificate is evidence, and evidence of a state of affairs that may since have changed. Families reverse this instinctively, because the certificate is the beautiful document with the seal on it and the register is a spreadsheet kept by a company secretary who may or may not still be instructed. The reversal is the source of most of the failures in Act Five.

There is a second reason shares deserve their own determination rather than a paragraph inside a general funding essay. Land answers to the state. A share answers to a private constitution — the articles of the company, and often a shareholders' agreement sitting behind them — which may restrict transfer, require the offer of the shares to existing members first, give the directors a discretion to refuse registration, or convert a family settlement into a trigger event that lets somebody else buy the company. Nobody discovers these clauses at the point of transfer unless somebody reads for them at the point of planning.

A share is not a slice of the company's assets. The company owns its assets; the shareholder owns a bundle of rights against the company — to vote in the manner the articles allow, to receive dividends if and when they are declared, to receive a proportion of what remains on a winding up, and to the information the Act and the articles provide. It is personal property, transferable in the manner the articles prescribe. A settlor who tells his trustees he is giving them a warehouse when what he is giving them is forty per cent of the company that owns the warehouse has described a different asset with a different risk profile, and the trust deed should say which one it is.

Two threshold classifications decide everything that follows. The first is whether an interest in a company exists at all. A great many Nigerian family enterprises are not companies. They are business names, enterprises or informal partnerships, and a business name registration confers no shares and creates no separate legal person, so there is nothing to assign into a settlement. The asset in those cases is the trade itself and the property it uses, and the correct sequence is to incorporate first and settle afterwards, which is a project of months and not a clause.

The second is whether the company is private or public, because the mechanics diverge completely. A private company is required by the Act to restrict the transfer of its shares by its articles, so a restriction always exists and the only question is its shape. A listed holding is dematerialised and sits in the depository through a stockbroker; it moves by instruction through that broker and settles in the depository's records, not by a transfer form passed across a table. A settlor holding both, as many do, is running two different procedures and should not assume the one he completed successfully tells him anything about the one he has not started.

One further characteristic of shares has no analogue in land and is regularly missed. A share may be partly paid, and a partly paid share carries a liability: the company may call for the balance, and it calls on the registered holder. Trustees who accept partly paid shares have accepted a contingent debt of the trust. Where the shares are not fully paid, that fact belongs in the trustee minute, in the asset schedule and in the settlor's conversation with the trustees before anybody signs anything.

The sequence again, and again the order is load-bearing. Two of these steps are performed by people who are not the settlor and not the trustees — the directors and the company secretary — which is why a share transfer can be executed perfectly and still fail.

The file for a shareholding contains the certificate of incorporation and the articles in force at the date of transfer; the register of members before and after; the pre-emption waivers and the board resolution approving the transfer; the executed and stamped transfer form; the cancelled certificate and the new one; the receipts for duty and any tax assessment; the certified extract of the register showing the trustees; the filings made at the Commission and the updated significant-control disclosure; the trustee minute of acceptance; the asset schedule entry; and the first year of dividend mandates, meeting notices and resolutions in the trust's name.

The adversarial question is the same as it was for land, and it is worth asking in the company's own terms. If the settlor's estate asserted tomorrow that these shares never left him, could the trustees prove the contrary from the file, without the cooperation of the company secretary and without oral evidence from anyone still living? The register extract answers most of it. The waivers and the board resolution answer the objection that the transfer was irregular. The dividend mandates answer the objection that it was never meant seriously.

There is a practical reason to hold this file to a higher standard than the land file. Land sits still. A company moves — it allots new shares, it changes its articles, it converts, it merges, it is restructured for an investor who conducts diligence on precisely this chain of documents. A trust that cannot evidence how it came to hold forty per cent of a family company will discover the deficiency at the worst possible moment, which is the moment somebody wants to buy it.

The failure modes are specific to the asset, and none of them announces itself.

The unregistered transfer is the commonest and the quietest. Everything was signed and nothing was lodged, or it was lodged and never entered. Legal title stayed with the settlor. At best the trustees hold an equitable interest they must litigate to perfect; at worst the estate disputes that any transfer was intended, and the only witness who could have said otherwise is the person whose estate is disputing it.

The informal nominee arrangement is the most seductive, because it looks like sophistication. The shares stay in the settlor's name and everyone understands that he holds them for the family. Nothing records the arrangement, the register shows an outright holding, and the understanding dies with the person who held it. A holding described as being held for the trust, without an instrument and without an entry, is a holding in the settlor's estate with a story attached.

The refused registration is the failure the settlor cannot fix alone. The directors exercise a discretion the articles gave them and decline to enter the trustees. Where the settlor is not the controlling shareholder, this is a real commercial risk that has to be cleared at Step 02 or planned around entirely. Where the settlor is the controlling shareholder, the risk is deferred rather than removed: the discretion passes to whoever controls the board after he is gone, and that may be the person the trust was designed to constrain.

The breached pre-emption right converts a succession plan into litigation between shareholders, often between siblings, and often years later when the shares have become valuable enough to be worth the fight. The trigger clause does something worse: a change-of-control provision in a shareholders' agreement can give a co-shareholder the right to buy, or force a sale, precisely because the settlor did the responsible thing and put his shares into a trust. Both are found by reading in Step 01 and by nothing else.

The sham allegation returns in company clothes. The settlor transfers the shares, then continues to vote them, take the dividends, appoint the directors and describe the company as his in every dealing he has with a bank. The register says one thing; the conduct of the company says another; a court asked to decide which represents the parties' real intention has been given its answer by the settlor's own signature on five years of resolutions.

The undisclosed control position is the newest and the least understood. Families sometimes settle shares in the belief that a trust removes the company from the beneficial ownership regime. It does not. It changes who must be disclosed and on what basis, and a disclosure made late or made wrongly is a compliance problem that attaches to the company the family was trying to protect.

Shares enter a Nigerian trust by an instrument of transfer to the trustees, cleared in advance against the articles and any shareholders' agreement, approved by the board where approval is required, stamped, entered in the register of members, reflected in the company's filings and its disclosure of significant control, and thereafter administered by the trustees who vote them and receive their income. The entry in the register is the transfer. Everything before it is preparation and everything after it is proof.

The refused neighbours are named. Whether the family business should be held through a trust at all, rather than a holding company or a shareholders' agreement between the children, belongs to the family business succession essay. What the trust deed must say about a controlling shareholding — voting, deadlock, whether trustees may sell the company — belongs to the clauses essay. How trustees behave once they sit on a share register belongs to the administration essay. Two neighbours sit close enough to be worth separating by name. Where the shares are the family enterprise rather than an investment, the prior question is whether a single transferable interest exists at all — an unincorporated business has none, and incorporation is itself the funding step: the essay on funding with a family business. And where the holding is one of several classes being settled together, the sequence continues in the essay on funding with insurance, the essay on funding with cash and the essay on funding with digital assets, each putting this same question to its own institution. This page decides one question: how the shares get in.

Land is transferred against the register of a state; a share against the register of a company. In both, the family owns what the book says. The deed records only what they meant.

A share is not moved by handing over the certificate. It is moved by the company writing a new name in its own book.