By Barrister Divine Afuba

1. Introduction

Money is the lifeblood of a commercial company. The very raison d’être of a commercial company is to make money – dividends, that are distributed to the shareholders/investors of the company.

In order to make money, you have to sell a good or a service to a given market.

But before getting to the point of selling goods or services, a company needs money to be created, to run its operations and to expand its activities.

This paper examines the two main ways in which commercial companies raise funds in the central and west African countries where OHADA law applies, using Cameroon as a case study. These are equity finance and debt finance. The paper also discusses the legal pitfalls involved in these different modes of fundraising.

2. Equity finance

Equity financing means a company raises capital by selling shares of ownership, called equity, to investors, rather than borrowing money. This provides the company with cash in exchange for giving investors a stake in the company.

2.1. Equity finance at the time of company creation

There is equity finance at the time of company creation, where the company is created by investors who invest money in the form of paying up the company’s registered capital.

2.2. Equity finance during the lifetime of the company

There is also equity finance during the lifetime of the company where the company decides to increase its capital by issuing new shares to existing investors (shareholders) or to new investors(new shareholders).

2.3. What are the legal implications of equity finance?

The legal implications of equity finance are set out in article 53 of the OHADA Uniform Act on commercial companies. An equity investment confers on the investors two types of rights: economic rights and political rights.

2.3.a. Economic rights

These economic rights are the following:

• a right to profits made by the company; and,
• a right to the net assets of the company at their distribution and at the dissolution of the company.

Economic rights also come along with certain obligations, such as the obligation to contribute to company losses.

2.3.b. Political rights

Political rights include the right to participate in, and vote on shareholders’ decisions.

2.4. What are the legal pitfalls in equity finance?

2.4.1. When a company raises finance by issuing equity, and this results, or has as result, the fact that the company will be majority-owned by foreigners (non-Cameroonians), such a company will be considered a foreigner, and must obtain an authorization from the minister of trade before commencing commercial activity.

This once easy process has now become quite long. In fact, the 2025 Cameroonian Finance Law has instituted fees to be paid for the processing of applications for this ministerial authorization: 1 million F CFA  for a private limited company, 1.5 million F CFA for a public limited company and for a simplified public limited company. Nothing is said in the finance law about the other forms of companies: the general partnership (société en nom collectif) and the limited liability partnership (société encommandite simple).

This fee is renewable once every three years.

Where the company fails to obtain this authorization, it shall be liable to pay a fine of 10% of its turnover.

The authorization can be obtained before or after company creation. But as per the 2025 Finance Law, if the company applies for the authorization after its creation, it shall pay a penalty of 250 000 F CFA. This means that the rule is that the company promoters should apply for the authorization before company creation.

To conclude on this point, note the foreign nationality of a company incorporated in Cameroon could have other consequences, such as in the areas of access to land and public contracts.

2.4. 2. Where the investors who are buying equity in the company are resident outside the CEMAC region, the acquisition of equity is considered a foreign direct investment (FDI) under the 2018 CEMAC exchange control regulation. This FDI must be declared 30 days before company creation, and 30 days after company creation, to the ministry of finance, and to the central bank (BEAC).

At the ministry of finance, the declaration is subject to the payment of a fiscal stamp of 25 000 F CFA.

Until last year, the filing of the declaration to BEAC used to be quite simple and straightforward. But now, the filing process has been digitalized, and there is an obligation to file the declaration in a BEAC online platform through commercial banks.

This new filing systems has generated its own problems.  For instance, a commercial bank will be reluctant to file the declaration for the equity investor, if this investor is not a client of the bank. Furthermore, in our experience, some of the officials at BEAC do not have a clear understanding of the obligation to file the declaration. Some believe that the declaration should only be filed after the company has been created.

Note that a failure to file this declaration has consequences. First, the company will be fined 7% of the amount of the equity investment. Second, without proof of filing, the company may not be able to repatriate dividends to the equity investor who is based outside the country.

2.4.3. Equity finance also occurs during the life of the company where the company decides to increase its capital. In such a case, it is important to ensure strict compliance with the legal cannons of capital increase (for example, the waiver of pre-emption rights by existing shareholders to allow new shareholders to make an equity investment).

2.4.4. It is important for the company or company promoter to clearly understand what the investor wants in return for investing in the company. An investor may want preference shares, for example, in exchange for his investments. So, there must be a clear understanding as to whether the target company can issue preference shares (a private limited company cannot issue preference shares). Therefore, the right choice of company is very important, where company promoters plan to raise money through equity finance.

2.4.5. Where the company operates in a regulated sector, such as the micro-finance sector or the banking sector, equity finance will require the approval of the regulator of that sector. Sor for instance, if a bank seeks to increase its capital, it must first obtain authorization from the Central African Banking Commission (COBAC).

3. Debt finance

Debt finance, also known as debt financing, refers to the process where a company borrows money from external sources like banks or other lenders, to fund its operations or investments. The borrowed money, or debt, is then repaid over a set period, typically with added interest.

3.1. What are some of the things to be mindful of when getting into a debt finance transaction?

First, where the lender is resident outside the CEMAC region, the borrower/company that is resident in the CEMAC region must declare the loan agreement to the central bank (BEAC) and to the ministry of finance of the country in which it is based. The declaration is done before the loan is contracted and after the loan is contracted. So there are two declarations to make.

Second, the lender will usually request the borrower to provide security interests over the borrower’s assets in order to guarantee the repayment of the loan. In Cameroon, banks and micro-finance institutions have a great preference for land as security.

Third, as a borrower, when entering into a financing agreement with a credit provider operating in Cameroon, it is capital to comply with contractual obligations to avoid a default on a loan. The legally binding nature of financing agreements (article 1134 of the Civil Code) means that a breach of the financing agreement will have legal consequences. For instance, there will be reputational damage if the borrower fails to comply with contractual commitments.

Also, where a borrower defaults on a loan, the default could give rise to a ban on credit, issued by the lender. The ban on credit also entails a ban on the conclusion of a credit transaction with any other credit institution.

In addition, it is a criminal offence under Cameroonian law to, in bad faith, default in paying loans. The natural person could face imprisonment for between 6 months to 5 years, and fine of between 100 000 F CFA to 100 000 000 F CFA. Corporate entities are criminally liable for the offences commitments by their managers or employees. The penalty of such corporate entities are fines.

It is also a criminal offence in Cameroon to use or attempt to use false documents to conclude a credit transaction, in order to infringe the rights of a credit provider.

Fourth, attention should be paid to the terms of the loan agreement. Particular attention should be paid to certain specific clauses of the agreement, for example:

• The Facility clause: this clause specifies the amount of the loan
• The Purpose clause: this clause explains what the money borrowed must be used for
• The Repayment clause: it lists the conditions of repayment
• The Interest clause: it deals with the calculation of interest, the payment of interest, default interest, changes to the calculation of interest, etc
• Cost and Expenses clause: this clause will stipulate that the Borrower shall pay for all costs and expenses incurred by the Lender in the negotiation, preparation, execution, etc, of the loan (such as legal fees, stamp duties and registration duties, fees for the perfection of the security interests, etc)
• Representations made by the Borrower (status, non-amendment of its constitutional documents, binding nature of the Facility Agreement, non-conflict with other obligations, power and authority, insolvency, no misleading information, etc)
• Information Undertakings by the Borrower: This clause will oblige the Borrower to provide certain pieces of information to the Lender over a given period of time (financial statements, progress reports on how it uses the borrowed money, etc)
• General Undertakings by the Borrower: This clause will oblige the Borrower to do certain things (undertaking to comply with all applicable laws, undertaking not to pledge its assets to a third party – negative pledge clause, undertaking not to change its business or to merge or enter into a joint venture, etc)
• The clause on the non-distribution of dividends – Until the loan is repaid in full, the company/borrower shall be prevented from distributing dividends to its shareholders
• Events of Default: this clause will list the circumstances or events that will means that the Borrower has defaulted under the Facility Agreement, and will also list the consequences of such default (non-payment, misrepresentation, insolvency, cessation of business, failure to comply with court judgement or arbitral award, nationalisation/expropriation, etc)
• Acceleration: Default leads to cancellation of the commitments to lend, and to the obligation to immediately repay the loan
• Language clause: the language of communicating documents under the financing agreement (plus obligations to translate)
• Notices clause: This clause indicates addresses (physical, e-mail, etc) where notices under the financing agreement are sent
• Governing law clause: It indicated the law that governs the contract
• Dispute resolution clause: arbitration clause/choice of court clause (asymmetric choice of court clause)

4. A mix of equity finance and debt finance: convertible bonds

The 2014 revised OHADA Uniform Act on commercial companies makes it possible for a public limited company to issue convertible bonds

A bond is a negotiable debt instrument issued by companies or public bodies (such as the State) to lenders, and whose par value at the time of the issue corresponds with a fraction of the total amount of the loan.

Convertible bondsare bonds that may, if the bondholder so wishes, be converted into shares of the company that issued them, during a given period of time, or at any time during the lifetime of the bond. Some advantages of convertible bonds are listed below.

First, it is an alternative method of financing: the company no longer needs to take a loan with a financial institution.

Second, if the bonds are converted into shares, the debt of the issuing company towards the bondholder is reduced.

Third, the investor is given time to consider whether it is the right time to acquire an interest in the capital of the company (and we all know that time is very important in business, especially in deciding on whether or not to invest).

5. Conclusion

We can conclude by highlighting a number of lessons.

5.1. If a company wants to raise money, either through debt finance or through equity finance, it should understand thatthere is a price to pay. It is important to understand the full extent of that price, before entering into a legally binding agreement.

5.2. Corporate and finance lawyers are indispensable in any fundraising initiative. It is not every lawyer that can competently advice on the legal aspects of fundraising. So the choice of lawyer is vital to the proper prosecution of the fundraising transaction.

5.3. Legal due diligence is key to fundraising. So companies should always get all their company documents and other vital documents in order before commencing any fundraising initiative.

Usually, it is the investor who carries out a due diligence on the borrower. But nothing stops the borrower to do a minimum due diligence on the investor:

• who is this person?
• why does he want to invest in the company?
• where did he get the money from?
• if this person is a corporate entity, do its constitutional documents allow them to grant money?
• Is this person/investor under any sanction of any kind? There are some companies in Cameroon that have been blacklisted by the government, for example, for failing to comply with the terms of a public contract.

5.4. Different funders may have different requirements, so flexibility in approaching the transaction is important.

Dayspring Law Firm, a full-service bilingual and bi-jural commercial, corporate and investment law firm, has the required expertise to advise local and foreign companies on fundraising initiatives. Feel free to contact us.