Legal Backlashes Threatening Nigerian SMEs and How to Avert Them

In 1999, Virgin Enterprises Ltd (a member of the Virgin Group of Companies) registered the trademark “VIRGIN” to trade aerated water and other non-alcoholic drinks in Nigeria.

A couple of years later, Richday Enterprises, a Nigerian company, applied to the Federal Ministry of Commerce and Tourism alongside National Agency for Food and Drug Administration and Control (NAFDAC), to register “VIRGIN table water”. Not minding the discrepancy between the former and latter companies, Richday was issued an acceptance letter and began selling its product in the Nigerian market.

However, a twist of events occurred in 2005. Virgin Enterprises Ltd filed a lawsuit against Richday and on May 22, 2009, the court granted an injunction that restrained Richday, its directors and agents from infringing on Virgin Enterprise’s registered trademark through the use of the word VIRGIN in connection with the production and sale of bottled water.

The scenario that played out in the case of these two companies is rather unfortunate. Richday must have incurred a lot of expenses before being pulled down over trademark infringement.

Could this dilemma have been avoided? Absolutely. If only Richday had fulfilled its due diligence to research thoroughly. This is the same underground works many recently emerging businesses tend to ignore.

Admittedly, it takes a lot to start a business. Besides battling with securing affordable office space, getting investors for your business, building a solid team, etcetera, dealing with legal issues in business remains a constant variable for most SMEs in Nigeria today and Africa at large.

However, if you’re able to set straight every legal pitfall your business could have right from inception, it will save the organisation a lot of cash and headache moving on. In a bid to proffer solutions to some top legal issues facing most SMEs in Nigeria — which some businesses may be oblivious of — we had a chat with a Legal Practitioner, Sanni Abiodun.

Sanni Abiodun started his legal career with a foremost commercial law firm,  Jackson, Etti, and Edu in Lagos Nigeria. Thereafter, he acted as Company Secretary to Navigant Consulting Limited.

He left the Law practice shortly to serve as the Regional Manager – Ibadan for a global e-commerce company, Kaymu, now Jumia Market. He resigned in December 2015 and co-founded Audrey Law. Sanni’s reason for his career shifts isn’t as interesting as his journey post-Audrey Law, especially as it concerns SMEs.

It is no news that many emerging businesses –especially micro and small ones– do not appreciate the need for proper business incorporation.  It is more disturbing that many small business owners consider incorporation as merely “ assisting a government that has not provided a friendly ecosystem for them to strive”. This according to Sanni is an illegal act.

Let’s begin with the Fundamentals

Fundamentally, all businesses operating in Nigeria are expected to be registered with the Corporate Affairs Commission (CAC). According to Sanni, not doing so makes the business illicit.

“While that is not a “big deal” in practice, it doesn’t change the status of the business and this goes all the way down. For every pepper seller or undergraduate selling shoes from car trunks, the law requires that the business is registered”.

Sanni points out a more interesting fact. Whether or not a business is registered with the CAC, business owners are required to pay taxes. Unfortunately, this is unknown to many.

There are so many downsides to running an unregistered, otherwise known as “illegal” business. Besides being cut off several opportunities — apart from the 3 F’s (family, friends and fools), nobody really takes an unregistered business seriously. From getting investments to, growth options, tax reliefs, grants, expansion options, etc — illegal businesses are liable to regulatory punitive measures.

“The government can, at any time, pick up the proprietors and mete out huge sanctions on them” — Sanni explains

While this is a basic issue, there’s another largely ignored business fundamental.

Staff policy

Crucial as it seems,   what most small businesses don’t know or care about, is staff policy. There are legalities in drafting staff policy documents. According to Sanni, a major document every employer should issue out is the ‘Letter of employment’. This is a statutorily required document. Moreover, the Nigerian law leans in favour of the employee in most situations. As such, employers are advised to adhere to handed employment letter which is to state the employment regulations, terms of engagement, remuneration, the role of the employee, etc.

Another set of documents advised for an organisation is the ‘Staff Manual’ and ‘Code of Conduct’ for employees. Sanni explains with a recent practical scenario.

“A client we recently advised had an employee who refused to put his photo on an ID card because his religion does not permit him to take photos. While the Nigerian law mandates the freedom of an individual to practice any religion of choice, an employer could have avoided such “dramatic” situations by clearly stating in a letter of employment or employee staff manual, what the company policies and expectations from each employee are”.

Worthy of mention is the benefit of having these documents in place. The employer has a chance to spelt out from the onset what the organisation’s expectations and goals are, and an employee taking the employment is compelled to agree to these terms by signing the documents. Consider it as an insurance.

Sanni however, gives the final stamp.

“An advice, employers should provide these documents to employees before they resume work and not after there have been violations of company expectations. The usual challenge with employees is clashing expectations without anything clearly stated. Contemporary employees are knowledgeable enough to push the limits”.

Communication on social media and competition

“Where there is no law, there is no offence”

We will be hitting the nail on the head by saying social media has created an avenue for academic and intellectual cowardice. We are all free to express ourselves and this is fine in the face of the law. However, where we cross the line and incur potential legal liabilities is to write/tweet/blog unverified information.

People affected by this information are legally at liberty to file a lawsuit which could mean serious liability for the person who provided the inaccurate information.

A general rule states; the less you say, the safer you are. The old saying that we have two ears and one mouth so that we should hear twice as much as we say or talk half as much as we gather information, applies here too.

The internet never forgets. Information given on social media platforms this year can be dug up five or more years from now and used against an individual or his/her business.

Sanni gave two cases on the issue of social media and undiscriminating posts

“The law provides for the freedom of information. And this is a fundamental right. However, each individual’s rights stop where that of another individual begins. Case in point, US President Donald Trump was said to have tweeted many years back that Republicans were dumb and he could contest as a Republican because they would believe anything. Years later when he tried to contest as a Republican, that tweet was dug up. Although fate helped him out, many people in businesses are not that lucky”.

“Another instance is Kylie Jenner’s post – “do people still use Snapchat” which cost Snapchat millions of dollars. Imagine the setting was Nigeria and Snapchat found a good Babalawo. I’m sure you know where Kylie would be now”

The more reason to be careful is that the penalty for libel is not dictated based on the offender’s capacity but based on the degree of damage to the aggrieved party.

“In most cases, the consequence or levied fine is more than what the individual or his business can even afford. An extra issue to note is that what goes around comes around. The internet is available to everyone. When an individual slanders or libel against someone else, his business is exposed to scrutiny. And any mistake made is accentuated”.

The copycat  

The world has indeed become a global village and it’s becoming increasingly impossible to reinvent the wheels. The downside to this is the pervasive copycat syndrome amongst emerging businesses. Our conversation with Sanni revealed how complications regarding similar ideas or competitive products could be avoided.

Also on the, First, issues relating to of patent, copyright or trademark should be well researched and taken before the business starts or as soon as it can be afforded.

“Once your name, idea, logo, brand, etc goes public, you are at risk of it being registered by someone else. And the first person to register it owns it. Even if it is your best friend or business partner or associate that registers it before you do, they own it. Many businesses have lost millions just by being slow”.

On getting investors

There are certain documents that businesses need to present to secure the interest of investors. Among them is an MOU – Memorandum of Understanding which helps both parties understand the expectations of the other party as well as requirements for getting into the collaboration”.

The MOU in plain terms clarifies each person’s understanding of the investment.

“After that, the nature of the investment will determine what documents to invest. If it is portfolio investment (equity) i.e. the investor is taking shares in the business, then a shareholders agreement will be necessary. If it is a direct investment (debt), then an investor’s agreement will be necessary”.

What is most important however is that the terms of the investment are clearly stated so that the entrepreneur does not lose his entire business to the investor.

“For instance, some investors include in the agreement that “once we are no longer in the business, the business must fold up. You can’t be there too”. I paraphrased that, but there are clauses like that in agreements. They are called “drag along” clauses. Watch out for them”

Let’s talk taxes

For the average business owner, taxation isn’t often an interesting topic to discuss. In the business sense, many SMEs shy away from remitting taxes to the appropriate authorities, due to reasons best known to them. But as Sanni points out, it needs to be given attention.

“In   September 2018, the government closed down 13 bank branches in Ibadan for failure to pay a particular tax. If the government can do that to banks, there is no business that is immune”.

One critical aspect is the Annual returns filing. It is a requirement for all businesses in Nigeria to file annual returns with CAC every year as your way of telling CAC that you are still in business.

“Many businesses don’t do this, either as an error by omission or commission. If this is not done, whenever you need anything from CAC (and this can happen at any time), they demand evidence of filing annual returns. And to rectify this, penalties will be paid for every year of default”.

There are also sector-specific regulatory bodies that have requirements that should be followed (based on the line of business).

Finally, for business owners who have products, it is advisable they obtain approvals from Standard Organisation of Nigeria (SON) NAFDAC (where applicable).

“There are basically insurances that you do today to avoid major problems tomorrow”.

You can reach Sanni’s firm on their  Instagram page where free legal advice and tips are dished out every day.