Whistleblowers in Nigeria- Myth or reality

 

What is Whistleblowing

There have been various definitions for the phrase whistleblowing, however we can generally define whistleblowing as:

“the disclosure by organization members (former or current) of illegal, immoral or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action.” ¹

Simply put, someone blows the whistle when they tell their employer, a regulator, customers, the police or the media about a dangerous or illegal activity that they are aware of through their work.

We can draw out two key points from the foregoing definitions. The first concerns the topics ripe for whistleblowing. We can define it as wrongdoing (an illegal, immoral, or illegitimate act) which is liable to cause harm to persons outside of the organization from which the wrong emanates. Thus, purely internal matters would not tend to be ripe for whistleblowing, i.e. under this definition, one could not properly be said to be blowing the whistle on a manager who is engaging in workplace human rights violations. While this seems simple enough in practice, it does raise questions. For instance, surely at some point a department’s human relations climate becomes part of the public interest? There have been various cases of fraudulent practices as such; could an employee legitimately blow the whistle in such an instance?

Secondly the notion that whistleblowing must be directed outside an organization has a strong pedigree. Ralph Nader, for example, argues that the heart of the issue in whistleblowing is determining “at what point should an employee resolve that allegiance to society -must supersede allegiance to the organization’s policies -and then act on that resolve by informing outsiders or legal authorities?”³ In Nader’s understanding, whistleblowing is an activity which necessarily gives rise to a major ethical conflict -the decision about when one ought to turn against their employing organization in order to preserve the ‘public interest.’

The Employment Relationship

Duty of Loyalty

The common law holds that there is an implied terms of contract between employee and employer which set out “judges” prevailing conception of what an ideal employment relationship should be. One of the implied terms of the employment relationship, the duty of fidelity (or loyalty) is “the cornerstone.” It enjoys this central role as it allows employers to maintain control over their employees the duty holding “that within the terms of the contract the employee must serve the employer faithfully with a view to promoting those commercial interests for which he is employed.” In short, it is the employees’ job to do the job as asked, not to criticize.⁴

As it dates from prior to the Industrial Revolution, it is not surprising that the duty of fidelity has been moderated over time, no longer extending indefinitely. The bearing this process of limiting has had on whistleblowing stems from the notion, first enunciated in the mid-nineteenth century,

that confidential communications involving fraud are not privileged from disclosure…. The true doctrine is, that there is no confidence as to the disclosure of iniquity. You can not make me the confidant of a crime or a fraud, and be entitled to close up my lips upon a secret which you have the audacity to disclose to me relating to any fraudulent intention on your part; such a confidence can not exist.⁵

Thus, there is a whistleblowing exemption to the common law duties which emerge from an employment relationship. The question facing us is what sort of wrong gives rise to the exemption? Clearly the Gartside measure cited above is one of fraud. Perhaps the high-water mark for this expansion has been set by Lord Denning, who wrote that an employee may disclose “any misconduct of such a nature that it ought in the public interest to be disclosed to others.” Though the exact nature of what constitutes “the public interest” has proved to be of concern to numerous courts, some judgements have stated in dicta that the public interest exception “should be restricted to instances of wrongdoing of grave public importance.” The Law Reform Commission in England notes that the success of a common law whistleblowing defence to a breach of confidence is dependent on both the evidence backing the disclosure, as well as to whom the disclosure was made. With respect to what sort of evidence warrants disclosure, the Law Reform
Commission argues that there is minimal guidance from the Courts. However, authorities point to two considerations: (1) a disclosure is justified only if the whistleblower has a reasonable ground for believing that a crime or civil wrong has occurred or will take place, and (2) that good faith on the part of the whistleblower must be proven.

SPECIFIC CASES OF WHISTLEBLOWING

Corporate Nigeria has witnessed in the last five years a series of cases involving whistleblowing in blue chip companies, the most outstanding occurred in October 2006 when the board of Cadbury Nigeria PLC notified the world, which include its stockholders and regulatory bodies of the discovery of “Overstatements” in her accounts, which according to it, has spanned many years. The company in its release stated that the overstatements could be between N13billion and N15billion

In relation to the scandal, Mr Bunmi Oni, The Managing Director, and Mr Ayo Akadiri, the Finance Director, were relieved of their employment. Following suit, the Council of the Nigeria Stock Exchange barred the duo from running any publicly quoted company for life, whilst the apex regulatory body, The Securities and Exchange Commission, we understand is still undertaking a detailed investigation of the matter.

It came as quite a shock that a discovery of this magnitude occurred in a Company that prides itself with high corporate governance practice and standards. It is useful to point out that, these “Overstatements” were only discovered upon due-diligence undertaken at the prompting of Cadbury Schweppes PLC, the London confectionery giant, when it increased its stake in the company from 46% to 50%. ⁷

Another case that shocked the world was Enron. In just 15 years, Enron grew from nowhere to be America’s seventh largest company, employing 21,000 staff in more than 40 countries, but the firm’s success turned out to have involved an elaborate scam. Enron lied about its profits and stands accused of a range of shady dealings, including concealing debts so that did not show up in the company’s accounts. As the depth of the deception unfolded, investors and creditors retreated, forcing the firm into bankruptcy.

CONCLUSION

With the growth that has been experienced in Corporate Nigeria through the various restructuring programmes carried out by the last administration, many blue chip companies and financial institutions have published various incredible financial results which make one wonder; do we have another WorldCom or Enron in the making in Nigeria?  It is therefore suggested that regulatory bodies like the Securities and Exchange Commission, Nigeria Stock Exchange, Central bank of Nigeria and other bodies direct that all public quoted companies and financial institutions should have whistleblowing policy which would ensure that:

a. staff are aware of and trust the whistleblowing avenue;  b. make provision for realistic advice about what the whistleblowing process means for openness, confidentiality and anonymity; c. continually review how the process works in practice ;and d. regularly communicate to the staff the avenues open to them.

It is also suggested that the federal laws be passed which would provide the whistleblower protection from victimisation, countries like United Kingdom and the United States, laws have passed laws which provide legal protection for whistleblowers. It is therefore submitted that without a legal framework protecting whistleblowers, the fear of intimidation or victimisation would certainly override the moral duty to the society.

List of referrals

1.Janet P. Near & Marcia P. Miceli, “Organizational Dissidence: The Case of Whistle-Blowing”(1985) 4 Journal of Business Ethics 1 at 4.

2.Harry Arthurs, Richard Brown & Brian Langille, Labour and Employment Law, 6th ed.(Kingston: Industrial Relations Centre, 1998) at 106.

3.Ralph Nader, “An Anatomy of Whistle Blowing” in Ralph Nader, Peter J. Petkas & Kate Blackwell, eds. Whistle Blowing: The Report of the Conference on Professional Responsibility (New York: Grossman, 1972) 3 at 5.

4.Harry Arthurs, Richard Brown & Brian Langille, Labour and Employment Law, 6th ed. (Kingston: Industrial Relations Centre, 1998) at 106.

5.Gartside v. Outram (1856), 26 L.J. Ch. 113 [Gartside].)

6.Corporate Governance Issues in Financial Reporting-The Cadbury challenge By Oladele O Solanke paper delivered at the Nigeria Bar Association Business law Section workshop

LEGAL CONSIDERATIONS FOR START-UP COMPANIES IN NIGERIA

One of the most paramount questions on the mind of every entrepreneur on the
verge of starting their own business or intending to expand their business is how
to raise capital. This article seeks to consider the various types of financing
options an the legal considerations that are available to start up businesses and
companies with the desire to expand in Nigeria.

Types of finance
Investing in a relatively new company is a risk which may deter some traditional
forms of finance. It involves investors taking a longer term view on their
investment, particularly where there is a large amount of research and
development to be funded, before any income will be received.

Finance falls into two main categories:
• Equity financing
• Debt financing

Whatever the type of finance given, investors will want to carry out appropriate
financial and legal due diligence to check the company and its affairs are in
good shape. This will include checking the appropriate paperwork is in place,
filings have been made at the Corporate Affairs Commission, intellectual
property rights are properly vested in the company, key contracts are properly
documented, there are suitable employment contracts for key individuals etc.

What is equity financing?
Equity finance is the most common source of funding for small companies. The
person starting the business will normally introduce equity capital, but equity
capital can also be raised from external investors like friends, family and venture capitalists. If the business is a company, the equity is invested in exchange for an
interest in the company (shares). Investors also expect a portion of the business’s
profit, which in the case of limited companies takes the form of dividends. Equity
finance is more risky than debt finance as shareholders are paid back only after
other creditors in any insolvency of the company. Investors will also be looking for
a good return when they sell their shares. Equity is best suited, therefore, to
businesses that expect to grow quickly.
The distinction between debt and equity is further blurred by the use of
instruments such as convertible loan stock which is a form of debt that is
convertible into equity on certain terms.  Some Important Considerations

1. Share Price – Valuation is key to determining the number of shares that would be allotted to the Investor.

2. Board representation – The Investor may also require a representation on
the Board of the company essentially to protect the Investor’s interest.
Ideally any board member should add value to the company by way of
knowledge, experience and contacts, and not merely act as an observer
for the investor.

3. Share structure – Investors commonly want a substantial minority (ie, less
than 50 per cent but greater than 25 per cent) which enables them to
block a special resolution (many key decisions require the consent of 75
per cent or more of the shareholders). Consider which shareholders, or
which combinations of shareholders voting together, can pass ordinary
resolutions which require greater than 50 per cent of voting shares.

4. Preferential return – Investors often want a priority return on their
investment either through the use of preference shares with a priority
dividend or more commonly through “A” ordinary shares which have a
priority return on exit events, usually a sale, float or liquidation of the
company termed a “liquidation preference”.5. Veto rights – investors often wish to enhance their position as minority shareholders through veto rights on key decisions for example:

a. changes to share rights;
b. changes to Memorandum and Articles of Association;
c. expenditure over certain thresholds;
d. issue of further shares or options;
e. disposal of assets;
f. employment of staff or staff over a certain salary;
g. changes to terms of directors’ employment(including salary);
h. changes to the nature of the business;
i. capital expenditure over a certain threshold.

6. Equity investors will also want to see a clear route for ‘exit’ – a realisation of their investment usually within Three to Five years. The usual means of achieving this are seeking a listing of the shares on a recognised exchange, seeking a trade sale or carrying out a refinancing. The investors’ desire for an exit may not always entirely coincide with the directors’ views of the direction the company will take.

What is debt financing?
Debt finance could usually be short term or long term. Debts are repaid over a
period of time, at fixed or variable rates of interest. The lender has no equity
stake in the company although a lender may require the ability to convert debt
into equity on the occurrence of certain events.

The lender will usually require that the debt be secured by a business or personal
asset. Terms can vary in length from one year to 25 years, and will usually be
determined by the asset that is being financed. The interest rate will reflect the
lender’s perception of the risk in providing the debt. Short term Debt financing
can be provided in the following ways:1. An overdraft is money that a business can borrow from a bank up to an agreed limit. It provides a business with short-term financing, effectively by
running a negative balance on the bank account. This is a particularly
good way of funding short-term requirements, such as providing working
capital during the course of each month.

2. Term loan is a fixed sum is lent for a fixed period, usually repayable in
installments, but once repaid cannot be redrawn.

3. Revolving credit is a fixed sum is lent for a fixed period, but is available in
tranches which can be repaid and drawn down again, giving greater
flexibility.

4. Loan note/bond is a fixed sum advanced for a fixed period, but the
holder of the note or bond can transfer the benefit to a third party.
Lending may be secured or unsecured. Secured lending involves the lender
taking a charge over certain assets of the borrower. This means that if a
company defaults in repayment of the loan the lender can have recourse to the
secured assets in order to satisfy the debt. The lender will rank ahead of
unsecured creditors, such as trade creditors, and there is therefore a
considerable advantage to it in taking security.

As a result, secured lending will typically be at a lower rate of interest to unsecured lending.

Secured lending is more difficult for early stage companies as there are often very few assets of value in existence at that point.

Some important considerations

The precise terms of the lending should be carefully checked to consider issues
such as:

1. The terms of repayment – can the company afford the repayments based on the income projections in the business plan?

2. Interest payable – what is the rate and is it in line with the market?

3. Right to repay early – are there any penalties for repaying early, for instance on a disposal or if you want to change banks?

4. Remedies for default – in what circumstances can the lender claim repayment?

5. Any ability to convert the debt into equity.

6. Covenants – are there restrictions on what the company can do without the bank’s consent?

Key steps to take
• Consider the appropriate level of investment you require.
• Make sure your business plan is up to date and complete.
• Consider what level of investment is required and from whom (i.e. family, friends, banks or venture capitalists).
• Appoint legal advisers at an early stage. As well as drafting any relevant
documents they can assist with contacts and advise on the contents and
circulation of business plans and help in negotiating the heads of terms.

For more details please contact:
Oluseun Sodunke on 234 1 738 8369, 234 1 791 07 02
Email: oluseun.sodunke@bloomfield-law.com

Kunle Obebe on 234 1 738 8369, 234 1 791 07 02
Email: kunleobebe@bloomfield-law.com